Cochlear Plc Ord

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.

Good morning. Thanks very much for taking my questions. If we look at the second half growth rate for CI, particularly the US, just what read-through you're taking from that in terms of your efforts to grow the market, and I guess how those investments are being placed, just trying to get a bit of interpretation around that particular number.

Yeah, yeah. So certainly, Andrew, continue to see good growth in developed markets and in the US through the second half. Obviously, we had a higher comparable. If you remember back to 23, we had a stronger second half than first half, so the comparable was up, but we continue to see good growth rates through that half, and again, particularly in the adults and seniors. So we saw the children revert back to normal. So in a sense, sort of the half-on-half, that was a drag on the... Age two, my child was a bit of a drag on growth, but the underlying seniors and adults, we continue to see that progressing well.

Would it be fair to say some of the sort of growth over the last couple of years might have been attributed to a COVID sort of recovery and I guess we're more normalising now?

I think certainly in the earlier, if you go back, we saw a bounce in 21 coming out of 20. Then they had hospital capacity constraints in 22. We saw them opening up towards the end of 22. And so certainly through into 23, we saw some backlogs being worked through in some areas. I think, yeah, I think there are not lingering COVID effects now. Perhaps possibly in the UK, there's still backlog there. So I think we're seeing a normalisation. What we are seeing, we've seen a bit more, is as the therapy area grows, which it is, we've got to expand capacity across the whole value chain audiology surgery. And we do see some bottlenecks, as I talked about, in the audiology side.

And just a quick follow-up one for Stu. Just the Oticon integration expenses, just any flow through into 25 with that?

No, we're expecting it to pretty much wash out the result in 25. There's definitely integration costs associated with onboarding the staff and some changes that were made in Belarus. But from 25, we expect business as usual for each of our functions and regions.

And just ballpark the cost of opening up Chengdu or the cost that you've incurred that wouldn't be normal?

So we've put about $90 million to the Chengdu site. I just appreciated that now we're in production.

Okay. But now it's sort of one-off costs in this last 12 months that you describe as sort of just getting doors open that weren't capitalized? Okay. No worries.

Thank you. We're starting from zero volume a year ago. We're getting it up to speed, but it'll take three or four years to get full capacity.

Thanks very much.

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

Thanks very much for taking my questions. I might stay on the same topic that Andrew started with. Could I get you to talk a bit more directly about what assumptions you've made about bottlenecks in the system? Given the senior segments growing 15%, it strikes me that Double-digit growth in developed markets is achievable if there isn't bottlenecks. And if I could get you to expand into developing markets as well, given there's a lot of timing issues there, it seems a bounce-back would be a reasonable assumption, responding to what you're thinking there, please.

Yeah, Andrew, I think I understand the question. Certainly we've seen in adults and seniors double digits growth continue for a few years. We expect that to continue and we see that there is capacity there to deliver that. I think there are hospitals and clinics where there is less capacity. That's certainly true. But overall we think there's enough capacity there to maintain that capacity. that's a level of growth for the adults and seniors.

I'm not sure if that answers all your questions, but I think... The other one was the emerging markets, given they were very... Does that recover?

Yeah. Yeah, so... The big impact there was in India, where there's a reasonable amount of volume that just didn't occur at a pretty low price. So you have some revenue there that didn't occur, but certainly brought our unit number down. We'd expect that to come back in through this year, but it doesn't really make a huge impact on our overall numbers. We'd like to see good growth there because they're helping lots of children and they're lifetime customers, but in terms of the overall financial impact, it's not all that significant. And we've said over time that We do see a great thing about health care, which you all know, is that certainly in the developed world, it's pretty immune to macroeconomic conditions. But in emerging markets, we see much more impact from both macroeconomic conditions, but also from political cycles.

Okay, thanks for that. Just a couple of other quicker ones, I hope. The acoustics market, you said that it's a similar sized opportunity to cochlear implants, which if I knew that, I'd forgotten. Where are we at in terms of the level of penetration? Maybe you could give us something around volumes versus cochlear implants so we could assess sort of how big an opportunity that is, perhaps in dollars as well as volumes, please.

Yeah, so I think in terms of absolute numbers, very similar to cochlear implants and it's a less developed market, so it's even lower penetration, so under 5%. It is at a lower price point than cochlear implants, so in terms of absolute dollars, it's probably half the potential or something like that or a bit less than half. We're far more advanced in cochlear implants on standard of care in terms of the evidence, the awareness, and there's still clearly a long way to go. In acoustics we've been working on standard of care. We've got a global advisory body of professionals that work with us to understand what's the evidence that would help us open up the market more. What a lot of people would do who have been through acoustic implants, they're getting hearing aids or they have something like chronic otitis media so that they've actually got an ear that hurts, it's uncomfortable and the treatment is more about the pain than it is about the hearing. And now what we want to do is make sure that there's a follow-up to get the hearing solved and there's often a lot of reconstructive surgery done in this area too which, when it works, is fantastic, but has a pretty high rate of not working, and that's where one of the big opportunities for acoustic implants are. So it's a long-run program to build that evidence, to build the awareness, and we've still got geographic expansion, as well as you saw from the detail on the ASX release and the countries we've added. This year, there are still countries that don't have good access to good reimbursement to acoustic implants.

I'll leave it there. Thanks very much. Thanks, David.

Thank you. The next question comes from Sol Hadasan from Baron Joey. Please go ahead.

Thanks. Good morning, D. Good morning, Stu. Maybe just a question on unit sales growth and your guidance for FY25, that sort of 10% range. I just wonder if you think that is consistent with market growth or industry growth or whether you think you'll be taking some share in FY25 consistent with sort of what you've seen in the last couple of years?

Yeah, I think it's consistent with our expectations for market growth. We've taken a level of share over the last few years for a whole range of reasons, but largely on the back of the strength of our product portfolio and the reliability and quality of our products. As we always say, there's far less opportunity for that, so it's much more about a market growth focused... Our run rate much more in line with market growth is our expectation.

Great. And then, Dick, just on the services commentary, you know, slowing revenue growth, not unexpected as it relates to where you are in the cycle of the N8 upgrade, but historically there's been some commentary from Cochlear about trying to smooth, you know, the upgrade revenues through mid-cycle technology upgrades or the CANZO, et cetera. Just your comments on the ability to, as we look forward into the next cycle... What is the ability of you guys to actually try and smooth that so you don't see sort of negative revenue growth in a particular year?

Yeah, look, we are working very hard on that. And I think if you look back as long as you would have over time, you've seen that it is smoother than it used to be, but there is still faster and slower growth rates. Yeah, as you say, look, things like... more frequent launches with the off-the-air and the BTE combined. That's obviously a change in the last, well, since 2016 when we launched Tanto that wasn't there. So we're working hard at doing that and I think we can do better at it, but there's some progress made, more to be done. And I think part of this too, if you remember, there is often a bit of a trade-off between copper implant and upgrade growth. Sometimes that's budget-related, sometimes it's clean capacity, sometimes it's our capacity. And so those two things, if you look back in time, they often leave a little bit out of sync just because there are resource trade-offs at a number of levels.

Great, thanks. And just if I could squeeze one more in for Stu. Stu, you mentioned the call just with the cloud-based expenses coming through. I think you said $30 million to $38 million, roughly, per year, the next two years, you've guided to $34 million for FY25. If I add up all the expenditure today, that gets me to just under $130 million. So for FY26, is the expectation then that the whole program exceeds $150 million? Because otherwise I would have thought it's about a $20 million expense that you're facing in FY26.

Yeah, we're still looking at the plan currently about $150 million. We're about $90 million. So we think... So in that sort of 30-year-old range for the next couple of years, the exact number will move around a bit based on what we can sort of productively spend in-year, but still using plan today, $150.

And does it drop away meaningfully then once that $150 is complete, or does it again depend on where you are in the cycle of SaaS investments? In other words, it could linger for an extended period of time?

The plan is it'll ramp down at that stage. Obviously, there'll be some... Because by that, we should be through the bulk of the transition, and that's really going from old... It's really the cost of going from the old systems and processes to newer ones and better ones. That will bring with it... We're largely shifting to cloud-based services, but we want to be able... Our plan is to absorb the ongoing running and improving costs of those in... in our standard sort of profile in the P&L for the Civic car, getting 18 at the bottom, pre and post car by that stage.

All right. That's all I had. Thank you very much. Excellent.

Thank you. The next question comes from Steve Ween from Jarden. Please go ahead.

Yeah, good morning. Follow-up question on the services side. The second half, the revenue went... It was basically flat, just a little bit under flat. And as a result, is that deceleration in the services perhaps a little bit faster than expected? And I wonder if you could just touch on that, maybe explain that. Is there any affordability type issues emerging? And what sort of penetration of the install base that are due an upgrade would you say you've reached? in the first 18 months since you've launched the N8. Thanks.

Yeah, yeah, Steve. All good questions. So that slowdown was sort of broadly in line with where we thought it would be. In terms of affordability, so they've certainly used the copay in the US and in a few other markets and, you know, as with the inflation and tightening macroeconomic conditions, that possibly has some impact. Now, the way we pick that up is we look at people who are dropping out because of the waiting time between asking for one and getting insurance approval or finding out what they'll have to pay. We're not seeing, at this stage, a pick-up in that drop-out rate, but it's certainly something we are monitoring carefully and it's been a while since... We've been through a cycle with higher inflation and some of those economic pressures to understand what that would mean. So we're learning a bit as we go. In terms of penetration, there's still plenty of scope. There's still lots of opportunity to upgrade people and it's on us, which we're doing, to be able to help identify who can upgrade and be able to increase their awareness of upgrades And as I said, there are some clinic capacity bottlenecks and clinics, as we want, will prioritize new implants over upgrades. And that makes perfect sense of what should happen from a societal perspective is what we want to happen too. So there's a number of moving pieces. on the services, but it's sort of planning out broadly in line with where we'd expect it to be.

Great. Thanks, Dig. And, Stu, just wanted to reconfirm, I didn't quite hear your comments on working capital, in particular the inventory balance. Are you saying that that's the sort of level that you would expect to maintain, or can that come down now that we are seeing that slowdown in the upgrade cycle? that you're anticipating in the nuclear state?

No, I think that level, we're not looking at that feeling too high, given the growth. And what we're seeing is demand is a bit more volatile in terms of specific products and the mix, and that big mix chip we saw in the emerging markets is an example. I think we're pretty comfortable with it where it is right now.

Great. Thanks, guys.

Thanks, Dave.

Thank you. The next question comes from David Stanton from Jefferies. Go ahead.

Morning, team, and thanks very much for taking my questions. Look, I'd like some more colour on what you're calling out in terms of surgical constraints. You know, what's driving that? Is there a focus on sort of other more emergency surgery that's emerging, particularly in the developed markets, please?

To where we're seeing surgical constraints, first of all, constraints, we're seeing audiology as more of a bottleneck than surgery. Where we do see surgery constraints, it's more people-related. So from what we're hearing from anesthetists being in short supply, what we're not hearing, not many places where we're hearing we're being deprioritized against other therapies. There's a couple of areas where backlogs are long. You know, they can... So the operating theatre is used to do three sets of grommets in the time it could be doing one CI. So, you know, where there's a few, but that's not significant across the globe. But, yeah, much more of the other theatre staff needs to test where we see it. And I think it's just natural as we grow. as the therapy area grows the capacity has got to expand and either it expands or something else has got to get pushed a bit, pushed out of the way and we've got a compelling case which helps us but we've got to work that through hospital by hospital but audiology is the one that's more restrictive Understood, thanks and I guess a follow up in terms of second half F24 you talked about

in the emerging markets, some tender delays. I mean, are they delays or do you think, you know, is your understanding that there may be cancellations being given? I mean, I guess the question is, are they delays or do you think you can get that volume back in time?

Yeah, we think it'll come back. Certainly the children are definitely there. The money is there. we expect that those tenders will come back over time rather than canceling.

Understood. And final one from me, if that's okay. Cochlear used to talk to 55% to 60% penetration with a new implant into that upgrades market. Are we around that, topping out around there at the moment, or is there more to go? I guess it's a follow-up to Steve's question.

Yeah, we're short of that level of penetration, so that's why we think there is more opportunity. And as we talked about, we measured our opportunity more about now in a year, how many people are eligible for an upgrade in terms of their reimbursement, how many of those people are aware and how many can we get. But there's still definitely more opportunity. Yeah, and that's over the whole life of a... a sound processor until we launched the new one. And that was back in the days where we only had the on-the-ear version. We're only sort of 18 months to two years into that. It's typically more like a four or five-year cycle.

Thank you. Understood.

Thank you. The next question comes from Gretel Janoo from E&P. Please go ahead.

Thank you. Good morning. I just want to go back to Saul's question on the CI units. You've historically always said market growth was high single digits, and now you're guiding to CI unit growth of 10%. So I guess what has really changed here is that you now have the increased confidence to guide higher from a market growth perspective, and do you expect that acceleration in market growth to continue past FY25 into the medium term? Thanks.

So... No, I think what's happening here is you've got to think about it as developed markets, emerging markets, and you've got to think within the segments of children and then adults and seniors. We have seen a lift in the growth rate over the last few years, as we've talked about, and I think that's the astrology working. You know, when we look at saying around 10% this year, obviously there's not a lot of difference between 10 and high senior digits, but... But we think that's where the market is.

Okay, so do you expect that 10% to continue more into past 25, I guess? Or is it just more of one-off factors that have led to the 10%?

Yeah, we do expect that to continue. And remember, too, as the number of adults and seniors comes through, the proportion of children in the developed world continues to reduce significantly. And that's the part that's not growing. So just on the maths of that, the growth rate should improve very gradually over time if we can keep driving the number of adults and seniors coming through. But I don't think our outlook is substantially different to what we've seen in the past.

Great. Understood. Thank you. And then just in terms of capital management, you've announced that $75 million buyback. That's not really going to make a dent to the cash balance. So I just think, what is your long-term thinking about capital management here and what would make you increase the buyback, understanding that you do want to keep reinvesting back into the business?

It is a long-term buyback. Up to $75 million is one year. What we said at the outset and what we're going to continue to do is do this over the long term. We don't think it's in the interest of our shareholders to bring our cash down to the level we think it could be at and do that all in one year.

Understood. Thanks very much.

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

Yeah, thanks. Morning, Digg and Stu. Some questions there just around the industry growth rates. Just interested in your views on the competitive dynamics at the moment. Obviously, some market share gains have come through in more recent years, but what are you sort of seeing at the moment? And then just given some of the updates coming through from peers, new technology from Sunova and Tiki from Med-El. Just thoughts around market share opportunities from here.

Yeah, so first of all, we have a very strong market position and a very strong product portfolio. We are in a competitive market. We talked before, Med-El are working on a Tiki and a Drago leading electrode. We are doing both those things as well. Yes, NAVA recently announced their deep neural network for noise reduction in hearing aids, and I think probably they'll probably bring that into CI in time. A few comments on that one. First of all, the constraint on hearing performance for a cochlear implant, we believe, is the electrode neural interface, the interface between the electrode and the hearing nerve. and that's where 21 of the significant areas of our investment in our R&D. But as we've talked about before, too, with our scale of R&D, we work across all elements of the system. Signal processing in the externals remains an opportunity for improvement. The potential for deep neural network is well-known and has been known for a while.

Great. Just on the coach trial, just can you give us some reminders as to the recruitment for that one? I couldn't see on the website and potential timing for that one.

It's running well behind where we wanted it to. So we kicked this off pre-COVID and then being in the UK... got hit by COVID impact on the NHS. Even coming out, we continue to see delays in recruiting. So that's disappointing for us. We do want this data of head-to-head hearing aid versus copper implants. So it'll happen, but it's going to happen later than we wanted. But I think the data we are getting, which we've talked about, is this data on hearing aid and what the ageing and the study on CI and cognition in Australia, they're at least as valuable as COACH. So we'll get COACH in time, but later than we wanted, but there's a lot of evidence coming through and we continue to work hard to try to get more. But again, we're disappointed by the progress of the COACH study, that's for sure. It's one of the things that it's got to be arm's length for us. That means we also can't get involved in trying to speed it up.

Understood. And then just a quick one for Stu maybe, just the impact of currency for 25. So obviously the currency is looking pretty flat in terms of your guidance, but thinking through hedge movements, just your thoughts on what that could mean for earnings, either pre-tax or post-tax earnings for 25?

Look, if I could forecast currency, I wouldn't be sitting here. We haven't changed our hedging policy. We're sort of 80% plus hedge for six months and then decreasing in sort of six-month trusses going out. And that's really just to try and provide a bit of buffer and smoothing to the results. If there's a big swing, it's not coming through as a big shock. Don't want to get into trying to predict it. There was obviously, we benefited a bit last year We're not assuming that that continues, but I'd love to have a reliable forecast on currencies.

Thanks very much. Thanks, David.

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

Good morning. Thanks for taking my question. Just coming back to the surgical capacity constraints tenders. Just trying to understand how big a headwind was that in FY24 and are you expecting that to subside and essentially unwind in FY25 or is this kind of a multi-year journey? You're on there.

Yeah, I think the way to think about surgical capacity is a multi-year journey. There are always going to be some capacity constraints somewhere and the key is that we keep driving demand. moving those constraints and we keep driving demand in. So I think those constraints didn't have a significant impact on our F24 result. The consent of tenders, it did at least, but as I said, it's more on reducing just the overall CI growth rate, not a huge financial impact. And again, that probably will return in 25. If it does, it would lift that CI growth rate number a bit further, but again, not a huge financial piece.

Yeah, that makes sense. And you also said direct-to-consumer is about 30% or greater than 30% of cochlear implant surgeries. Just trying to understand what that was historically and what you think it could grow to. Also, is there an ASP or margin impact there?

Yeah, the way we think about that is it's a growing proportion of our surgeries. It should be because if we're investing in something to drive growth, we want it to grow faster than all of the surgeries. Otherwise, we're not going to think in growing growth. So rather than it was X percent and we've got a target of Y percent, what we're looking for is that as a proportion of our surgeries, it grows each year. because that's the measure of it was an effective investment. If it's going more slowly than our surgeries, we're probably better off putting the money into something else that's lifting referrals or awareness or expanding funding. Okay.

And sorry, is the ASP or margin impact there?

No. That's what we spend on our... On the DVC promotions there and our SG&A, it's not a huge number. We obviously monitor it carefully and we measure the returns. But if we slowed that down, we would spend more on something else to drive growth.

Yeah, OK, gotcha. OK, thanks.

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

Yeah, good morning. My question is just back to just looking at where the profit ended up this year. I mean, when you look back at what prompted you to guide, I mean, upgrade the guidance in February, what would you say would be the most important factor or upside component that you saw then that sort of show up and to explain where we ended up this year?

So I'm not quite sure what your question's saying. So we lifted the range of it in the last year. We landed in that range earlier. But if you're looking at the revenue, then 60% of our revenue is from copper implants. So that's the biggest driver of outcomes. I'm not quite sure what you're asking.

Oh, no. I guess when we looked at the top end of the revised guidance, let's say $400 million and past, Yeah, just trying to think through that. Because it seems most of the elements in terms of commentary have been reasonably in line. It's just trying to understand what you felt the biggest contributor to the delta in missing the top end was.

So first of all, we set a range. We're not going to be aiming at the top end. We're aiming in the range. I think the thing we did... That's another way to answer your question is We set out a certain set of assumptions at the half on growth rates and outlooks for each of the areas, but one of those that they all turned out as we expected, the only one that didn't was the emerging market growth rate and particularly those tenders in India. So that was lower than we expected. So if you're looking at what we think was going to happen over the last half, I'd say pretty much everything we thought was going to happen happened apart from those low-cost tenders not coming through.

No, that's exactly what I wanted to check. Thanks, Dick. That's all for me. Okay. Thank you.

Thank you. The next question comes from Craig Wong Pan from RBC. Please go ahead.

Thank you. Just on services, on a constant currency basis, the services revenue declined year-on-year in the second half. So I just wanted to clarify for your FY25 outlook, are you expecting negative services revenue growth in FY25 or just a lower level than the 12% growth you achieved for the full year of FY24?

A lower level. No, serviceable growth. We expect it to grow, but at a lower level.

Okay. And then just on the Otagon integration cost, I didn't quite understand if there's any more cost to come through in FY25 or not, or is that done now?

That's pretty much done now. So the cost... The team have been absorbed, predominantly in Belarus and a few others around the world, and they're now very much baked into the budgets of the countries and functions. And so we're back to sort of normal, I won't use the word guidance, but sort of normal guardrails of, you know, 10% top line long term, 25% COGS, 12% on R&D and then dropped 18% at the bottom. And as we talked about on the 18%, there's probably a couple more years left of the cloud investment. So we'll be targeting that 18% pre-cloud impact.

Okay. And then my last question, just on the CapEx, that 110 to 130, that's something that's going to Lane Cove and Malaysia. Just want to understand what those, that investment's going to be directed towards there.

Yeah, so it's all about adding capacity. So basically, we think about that in terms of floor plate for the building. Do we need more bigger buildings? We don't think we do in the short term. We do longer term. We then look at the infrastructure within the building. And that's really, in manufacturing, that's kind of three things. There's the clean rooms. So we have a very sterile environment, order of magnitude more sterile in an operating theatre, we actually make the implants. So we're expanding those. There's then the equipment within the clean rooms and within the other manufacturing premises to actually, you know, each stage of the process, to either be doing the activity or testing to make sure that the quality is remaining very high. So there's quite a bit of capex going into N25.

expanding clean rooms and more investment in plant and equipment and then obviously the labour force that comes with it, but that's not correct.

Okay, thanks. That's very helpful.

Thank you. The next question comes from Leanne Harrison from B of A. Please go ahead.

Yeah, good morning all. If I could come back to cochlear implants again, you know, developed market adults and seniors was quite strong for 14. at 15% growth, is that the sort of growth that we should be expecting or similar growth in 25 or is there a possibility it could track higher given what you're doing with direct-to-consumer and the increased rate of audiologist referrals?

No, I think that's a reasonable expectation for 25 to stick around there and the expectation that now children grows by sort of one or two

Okay, thank you. And then just one more on price increases. What can we expect for 25?

We don't expect price increases of significance through this year. We did on the back of Euclid's sake. We've done that with Ossia, where there's opportunity and we will obviously seek it. But in terms of looking forward this year, I'd hold it.

Okay, thank you very much.

Thanks, Leanne. Thank you. The next question comes from Matthew Chevrier from Citi. Please go ahead.

Yeah, good morning. Thanks for taking my question. I just had a last one on CapEx beyond F25. How should we think about it, given that it's been a bit higher than what we were expecting going into F25?

Yeah, like I said, we're just putting a bit more into more capacity. So, yeah, in that sort of 100, 120 range. And I think given that we are targeting that 10 cent growth, that's going to be an ongoing thing for us over the medium to long term.

Got it. So 100 to 110 is kind of the new CAU capex.

Yeah, about 120, I think.

Yeah, yeah, excellent. Okay, thank you so much. That's all I had. Thanks, Matthew.

Thank you. Once again, to ask a question, please press star 1 on your phone. The next question comes from Laura Suck from UBS. Please go ahead.

Hello, thank you for taking my questions. Could I just go back to Chengdu for a second? Just what you said today about gross margin impact for 25, impact any of your projections for when that turns from a headwind into a tailwind for you?

Not very much kind of what we expected with, you know, 2025 will be the first year we'll be sort of producing all year and certainly the count process is all year and implants hopefully for about half a year and we think, you know, sort of four to five year journey for that thing to get to full capacity. But that's very much where it's tracking where we expected.

All right, thanks. And then just one more. I was wondering if you could talk a little bit about what portion of seniors at the moment are receiving two implants or one and to what degree there's any focus on changing that versus trying to drive recruitment of completely new patients as you try and further penetrate that large senior population?

Yeah, it's about 15% of seniors are getting bilateral and both are opportunities, both bringing new people in. The thing sort of country by country helps us think that through is just what's the reimbursement. If there is reimbursement, the easier reimbursement for bilaterals, then we want to push that. If that's really difficult, we're just going to keep driving new. I mean, everywhere we're trying to drive, and get new people in, but there's favourable reimbursement and there's clear benefits of bilateral hearing. We want to promote that. And that's obviously only up to people who actually get internet in the first place and that's still a tiny fraction of the addressable.

And that's 50 and 15? 15, yep. Thanks very much.

Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Howard for any closing remarks.

Thank you all for joining and look forward to talking again in February. Thank you.