Cochlear Limited (COH), a global leader in implantable hearing solutions, has reported a strong financial performance in the first half, with a significant rise in net profit and Cochlear implant units. CEO Dig Howitt highlighted the company's successful strategies and investments, which have contributed to a 75% increase in net profit, amounting to $192M. The company also announced an uplift in its financial guidance and a strategic focus on increasing market penetration and long-term growth.
Key Takeaways
- Net profit soared by 75% to $192M, with a 14% increase in Cochlear implant units.
- Interim dividend increased by 29%, reflecting a robust financial position.
- Services revenue and Cochlear implant growth are key drivers of a 20% revenue increase in constant currency terms.
- The company is investing in cloud computing and operational processes to support future growth.
- Gross margin stands at 74%, despite slight headwinds.
- Increased selling and marketing expenses by 16% to drive market growth.
- R&D investment targets 12% of revenue, focusing on innovation.
- Guidance for NPAT raised to $385M-$400M for the full year.
- The company expects to face China manufacturing costs as a headwind for 2-3 years.
Company Outlook
- Cochlear aims for a net profit margin target of 18% in the long term.
- High single-digit growth is expected in the adult segment, with double-digit growth in pediatrics over the next 3-5 years.
- Revenue for Baha is projected to remain flat in FY '24 but may grow in FY '25.
- The company is expanding its Osia offering in France and entering new markets like Japan and China.
Bearish Highlights
- Gross margin slightly down by 1% from the previous year.
- Acoustics saw a decline, attributed to the slowdown in Baha 6 max upgrades and Osia 3 launch.
- Operating expenses have increased, with selling and marketing expenses up by 16%.
- Integration costs of $30M expected for the acquisition of Oticon Medical's Cochlear implant business.
Bullish Highlights
- Strong growth in developed and emerging markets, with a focus on increasing access to Cochlear implants.
- Operating cash flow has increased to $157M, indicating strong business performance.
- The company is well-positioned with $485M in cash reserves.
- Continued growth expected in the U.S. market with approximately 60,000 potential candidates for Cochlear implants.
Misses
- Gross margin was affected by headwinds from Chengdu and inventory write-downs.
- Revenue growth adjusted for ISP was at 3%, considering currency and deferred revenue impacts.
Q&A Highlights
- The company discussed transaction and restructuring costs, which are estimated to be around $30M.
- Growth in pediatric implants in developed markets was a topic of interest, with less than 1/3 of total implants attributed to children.
- Management addressed the impact of FX rates on NPAT, estimated at $2-3M for every cent movement.
Cochlear Limited's first-half earnings call revealed a company in strong financial health, with significant net profit growth and a positive outlook for future expansion. The company's strategic investments in technology and market development, along with its robust pipeline of products and services, position it well to capitalize on the growing demand for hearing solutions worldwide. Despite facing certain headwinds, Cochlear's management remains focused on long-term growth and market penetration, with the ultimate goal of making Cochlear implants a standard of care for severe profound hearing loss.
Full transcript - None (CHEOF) Q2 2024:
Operator: [Operator Instructions] I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.
Dig Howitt: Thank you all for joining, and good morning, and good to have you with us. We'll get underway with -- I will present 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 high level is a guide to our strategy, looking at the need to raise awareness and change our hearing losses treated and ensuring that we continue to innovate and support our customers throughout their lifetimes. Okay. 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 in services grew strongly as we expected close to the launch of Nucleus 8. But 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 impacts. 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. So, this led to a strong top line that carried through to our net profit, up 75% 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 organization 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 2 major systems, our human capital management system and our commercial systems, CRM and marketing. So, important milestones 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 and 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 are 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% ISP 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 volumes. So, in developed markets, we saw growth of around 15%, 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 analysis where we are much focused in developed markets. As we have talked about many times, there is a huge clinical need for Cochlear implants that there are many, many people with the severe profound hearing loss, who are using high-powered hearing aids or given up on hearing aids who would clearly benefit from our Cochlear implant. And our long-run strategy is aimed at raising awareness. It's building the referral parts, 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, as 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 have been hearing loss, 2 arms in the study. One of the harms when people got hearing aids, their cognition declined at a slower rate than the equivalent cohort who hearing loss was untreated. That study continues. And obviously, across the whole study, there was no difference, but across a cohort that was representative of the broader population. There was a significant difference. But those studies like that, are raising awareness within medical importance of treating hearing loss as people age. And when we look specifically at our programs at our DTC work to get referrals from the hearing 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 of those programs are working and that they are contributing to lift overall industry growth rate. We want to see that it continues 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. And 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 uplift in 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. So, just a few years ago, we got approval for the age of implantation in the U.S. to shift from 12 months to 9 months. And we know when we change indications, it can take some time to flow through. And 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 sort of normal time for 12 months were just after, and we've seen more happening at 9 months indicates a little bit of a pull forward and a double up there. We've seen some specific instances where they just audiology bottlenecks that have moved and across some a small number of clinics, but quite significant impact on surgeries of audiology bottlenecks going and a lift in surgeries. And the other thing is we believe we won some share in the pediatric 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. In the Central and Eastern Europe and the Middle East also grew well in the last half. And again, we see continuing long-run growth there. Turning to onto 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 installed base, which is the driver. And an indicator of that is if you look at the Nucleus 8 launch and the Nucleus 7 launch and you look at the last 2 halves, we've seen significant services revenue growth and both in the cities 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 a 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 there is, 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 well it 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. As we talked about going into the year, there's 2 things, 2 factors at work here. There's the Baha business and the Osia business. Now, within Baha, we have new Baha sales, and we have upgrades and they all go through this acoustic slide. We anticipated that the growth in Baha 6 max upgrades would slow this half because the product has been out there for a few years. Penetrations got higher. There are a few people in the queue. And that's certainly what we saw. So, we saw lower upgrades for Baha 6 max. With last year, we continue to see underlying growth. Now, obviously, it didn't grow quite as fast as we anticipated in the last half and the reason for that is the Osia 3 launch in the U.S. So, we got FDA approval. It was a few months between when we got approval and when we were shipping the product. Part of that is 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 Osia until they had the Osia 3 in their operating theaters. So, what we saw was very strong growth, very strong month in December for us here as that contracting came in place, and we expect that to continue through the second half. And with Osia, 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 proper pricing has to be a premium to the Baha 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 Osia. But where we do have the product in market, we continue to see outstanding feedback from surgeons and from customers. So, we remain confident of the long-run growth opportunity. Okay, with that, I'm going to hand over to Stu, to go through the P&L and the balance sheet.
Stu Sayers: Awesome. Thanks, Dig 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 ISP. Elsewhere in the materials, you'll see that headline ISP growth was 11%. That's abnormally high for us. A good amount of that is currency. So, on constant currency terms, at 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 in a launch, but we hadn't actually launched the product in America yet. And when we're in that window, a typical note is when a person is 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 would record the revenue for the implant, but we did defer the revenue for the processor until they come back and swap out if 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 million larger-than-normal deferred revenue balance at the end of December '22. When you back that out for this year for the ISP calc, the actual ISP growth was only 3%. The bulk of that is country mix, where we're selling more in places where the price is slightly higher, 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 ISP tailwind is helping there. The couple of headwinds of note, we've signaled about 0.5% gross margin impact from Chengdu. We are seeing that, and we expect 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, that is $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, were 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 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 say on admin expenses. I will just touch briefly on cloud. We spent just so 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 3 years in now to that sort of 4- to 5-year journey of $100 to $150 million 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 million to $150 million range. Lastly, on the P&L, just on the underlying NPAT margin. It's pretty much where we wanted it to be, 18%, excluding cloud, 17% pre-cloud. That's in reported. When you do a constant currency, it's pretty much flat on last year. So, if we move to the balance sheet, not much to say in working capital. We're up $24 million. 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 Nexo per 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 at December 31 price and a decrease in a clinical SEA, 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 share buyback, and I'll talk a bit more about that later. With access to cash flow. Operating cash flow of $157 million, up $68 million, very much reflecting the underlying operating performance in the business, which is SEA. CapEx were flat. That's a representation of spending less in Chengdu as we've pretty much finished the build there on that site is up and running. And pleasingly, we've started selling products out of Chengdu now we're selling sound processes that are manufactured there. We anticipate getting approval to sell implants out of manufacturing Chengdu by December. As that CapEx has ramped down, we have wrapped up investment to expand capacity at line curve, 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 million in half 1. If you remember this time last year, we talked about initiating a multiyear 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 1 of that program. We spent $73 million and of that $43 million 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 bond hold 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 Dig.
Dig Howitt: Thanks, Stuart. Let me just finish up with the [indiscernible] guidance. You saw on February 8, we've increased our guidance to $385 to $400 million 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 is 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 again just a year, just over a year into nuclear. There's still more upgrades coming. And we expect a good performance in the second half. And acoustics to be growing again this half as we had the Osia 3 rolling out so, the Osia was 300 implant rolling out and expanding the countries where Osia is available. We'll keep investing in R&D and particularly in our market growth, strategies is the long-run strategy there. While we've seen some improvements in awareness, you've got to keep that in context of the overall penetration is 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 favorable on the U.S. dollar. CapEx you spoke to and also the Board expects to maintain a 70% payout on the dividend. 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 million to $60 million as we get placed for and get more clarity, we're able to generate those costs down a bit further at which we have done. Okay. So, with that, we will go on to questions.
Operator: [Operator Instructions] Your first question comes from Andrew Goodsall from MST.
Andrew Goodsall: Just on China, thanks for the color on progress there. But could you comment around the direction of COGS and any sense of when it will no longer be a drag on GN?
Dig Howitt: Yes, 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 million, 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, yes, we think another 2 to 3 years of headwind, and then it eventually turns to a tailwind.
Andrew Goodsall: And how do your COGS compared to, say, Australian manufacturing or directionally and may go down further?
Dig Howitt: I think you got to remember that the components are identical. So, there's no different end components. And as Stuart is saying, it's the leverage of the overhead, again, overheads not very different. It takes time. So, to the extent there's a difference, it's really only going to be in labor cost differences, and there is a difference, but it's not a huge difference. So, as Stu said, it sort of over time, becomes slightly favorable for us, but it's not significant. And as we've said before, putting the factory in China is our 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 a share in that growth.
Andrew Goodsall: Just final one for me. Could you just 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 the integration costs once you get that settled and get underway? I know you've talked to the 30%, but just how that might split.
Dig Howitt: Yes, sure. Look, we've got a pretty modest amount of transaction costs in sort of single-digit millions, I guess, in terms of legals and other associated costs so far. We had guided for restructuring costs of we thought between $30 million to $60 million. 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 million range.
Andrew Goodsall: And will that be split over a couple of years or?
Dig Howitt: Yes, 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.
Operator: The next question is from Steve Wheen from Jarden.
Steve Wheen: Just wanted to ask about the Cochlear Nuclei 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?
Dig Howitt: As I said, yes, I mean the growth was strong in developed markets and across the range of developed markets. So, I think we're impending with this. 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.
Steve Wheen: I guess part of this question is predicated on the change to access that you're flagging through 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?
Dig Howitt: I think there's multiple factors. So, in the U.S. specifically, what we've seen over the last few years, the approval of funding for single-site indebtness. 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 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 U.S. on the CPNs we can measure, is driving faster growth in overall sales. So, what I can indicate is that we are learning. It's part of this was time and scale. Part of it is us learning the messages, the best way to sell the profile of the people who we can convince to prefer and we are learning as we go. And we're seeing that certainly in the U.S., we're also seeing that across the other larger developed markets, and we saw good growth in that last half. You've seen is pretty much right across all of the developed markets...
Steve Wheen: 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 contributor? Or is it just the nuance of a system number allowing us to see a little bit more of that operating leverage?
Dig Howitt: No, I wouldn't read too much into a half. We had this a couple of years ago, and when we get stronger rates, we want to make sure that we spend extra, but we want to make sure it's in areas that add value side does take us a bit of time to continue 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.
Steve Wheen: But would it be 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?
Dig Howitt: Look, at some level over a sustained period of time, that’s probably true, but we haven’t thought too much about that.
Operator: Thank you. The next question is from David Low from JPMorgan.
David Low: 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?
Dig Howitt: Yes. 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.
David Low: You just said low single digits. Is that what you meant?
Dig Howitt: Sorry, high-single digit. Thanks for correcting me.
David Low: The 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 and seniors, et cetera, that could give you hope or give us hope that perhaps stronger growth is something that could be maintained?
Dig Howitt: 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, it'll get discontinued and I won't put a number on it, but from more years into the future, then you get more confidence that it could be sustained, but we haven't seen that yet. We certainly haven't.
David Low: I guess we look at the metrics of 5% penetration. And so, the opportunity sets enormous. It just seems to me that our growth rates at a high single digit should be achievable. I'll leave it there because we can get that forward.
Dig Howitt: Just the thing to remember on that is, the proportion that in children, which did grow in the last half, but we know the incident children 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.
David Low: I'm going to leave the children's question to someone else because I'm sure it's coming. But just the other question I had was on gross margins. If we add that inventory right gone back, the gross margins look very strong. I mean 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 hit from China?
Dig Howitt: Yes. Look, 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 ISP tailwind there. And we now anticipate getting that every half or every year.
David Low: Presumably, it's now in the base as well.
Dig Howitt: Yes 75% remains where we think we can land.
Operator: The next question is from Saul Hadassin from Barrenjoey.
Saul Hadassin: Just a quick question, Dig, on the services revenue line and particularly the upgrades within that. You commented on expectations for the 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 the second half for those growth?
Dig Howitt: Yes. Look, I think I sort of had from here. I think we see that big step in the first 12 months and then you expect to sort of continue to run around the levels we are now.
Saul Hadassin: And, Dig, historically, I think Cochlear has said that there's been an attempt to sort of smooth the services revenue line, 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 NH processor? Or was that sort of a one-off in terms of that Kanso introduction?
Dig Howitt: I think the piece thing, so firstly, the smoothing is not so much our doing is just the size of the installed base and people's awareness of upgrade and upgrading eligibility. The second thing is with having an off-the-year process or like Kanso one behind the air like the Nucleus range. Obviously, 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, we're thinking about our R&D capacity, our capacity to market and sort of the market's capacity to absorb. And so, we certainly saw with Kanso 1 and Kanso 2, 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.
Saul Hadassin: And one last one for Stu. So, you just look at the cloud-based costs incurred over the last 3 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 2 years, i.e., fiscal '25, '26?
Stu Sayers: Yes. So, a couple of things there. So, as I’ve said, we were aiming for about $100 million, $150 million. 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. We do think last year and this year was probably the peak of that. So, those costs will drop down modestly until we get to the end of that sort of on north end of 100 to 150 range. And that’s when we expect we won’t be then quoting pre and post cloud NPAT margin numbers, we’re back to, hopefully, normal transmissions resumed at 18%.
Operator: The next question is from Sean Laaman from Morgan Stanley.
Sean Laaman: Yes, just to circle back on the pediatric question. Would you be able to remind us sort of where you sit in terms of percentages of implants going into paeds. And what sort of growth might you have seen in that market? And how sustainable do you think it is?
Dig Howitt: Yes, Sean. So, first of all, in developed markets, and it's children are now less than 1/3 of the total. And that varies by market. So, in Australia, in the U.S., children are 25% or a little bit less. Across Germany, it's the same across the rest of Western Europe, it's still more 50% 50% adults and seniors. But as a proportion, children will continue to decline in developed markets in terms of the contribution of 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 U.S. was certainly one. And given the size of the U.S., that has an impact on the total growth rate. But the reasons I've said earlier were in the U.S., the indications issue, both with 12 to 9 months, possibly a little bit of a single site of DESNOS is supporting children there as well. And obviously, I think those things will wash through, certainly, the pull forward and 4 to 9 months is the one-off. In terms of backlog, that's the interesting thing as we sort of 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 all the audiologist 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 [indiscernible] partial contributor there, too. And the third one is we're pretty sure we've won some market share in to 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.
Sean Laaman: Dig, I think there's a little bit of a change in your view of what you're observing is lease with uptake of 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?
Dig Howitt: 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 in sort of 5 or 6 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 sites. 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, but in a state or provincial level. So, that's encouraging because it's a bit like when we talk about implants and 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 to the wards 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 approach.
Sean Laaman: 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 FY '25.
Dig Howitt: No, no. So, it was an impact in December ‘22. That makes the ‘22, ‘23, the financial year ‘23 baseline abnormal. We’re back to normal transmissions. So, we shouldn’t see then a corresponding delta in ‘25.
Operator: The next question is from Lyanne Harrison from Bank of America.
Lyanne Harrison: If we can come back to, you mentioned that you've got some growth, a significant growth in some clinics from audiologists availability. 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 audiologists capacity improvement?
Dig Howitt: Yes, Lyanne, great question. As we've talked about, audiology capacity is one of the constraints on growth. And it comes from audiologist spending, Steve, as the recipient base grows, audiologist 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 counseling new patients. And as the recipient base grows, we're seeing more and more audiologists time drawn into the recipient base noted 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 here from home and for with Remote Check, the recipient be able to do some testing that the audiologists would do and then have the audio just look at the results, reduces the load on audio. 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 in clinical practice, our appointment times has 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 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, particularly in the U.S., is some clinics relooking at how many appointments do they really need to do, particularly in the first year. H 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 employment significantly. And by tracking performance showing there's no impact on outcomes for adults and seniors from reducing those appointments so thereby freeing up significant audiology times. So, some clinics in place are still doing 12 appointments with someone in the first year. Others, based on data, are down to 3 appointments across the first year and some use of and potentially supported by Remote Check, but some just saying 3 appointments and the patient calling back is sufficient. So, that change is happening. It will take time again. And 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 we think we'll continue to happen. And obviously, by producing those surgery appointments without detriment outcomes, it's a potentially significant saving for health care systems as well. So, payers interest to see this change in practice too.
Lyanne Harrison: 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 the next 12 months, is that 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 6 to 12 months?
Dig Howitt: Yes, turning on in that time frame, just thinking about the installed recipient or the recipient BAS in that growth. And over the long run, that is absolutely the biggest driver of services. We are working hard to try to lift penetration over time so we can add to that. But even if we do lot penetration, the big driver is the size of the recipient base.
Operator: The next question is from Gretel Janu from E&P.
Gretel Janu: 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?
Dig Howitt: So, we're only just over 12 months in, we're still a very early stage of that cycle and many, many people out there who are eligible haven't upgraded yet. And obviously, every day, more people become eligible if say, the past 5 years from their initial implant or 5 years from their last upgrade. So, that's the 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 changes in emerging markets. And so, it is lifting there in developed markets, continues to have a range across countries. So, some countries are higher than others. That tells us we can be 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 approach.
Gretel Janu: So, within the 5-year upgrade cycle, typically, what would be the penetration at year 5?
Dig Howitt: So, what we've seen in the past and continue to see that over 5 years, in developed markets, we typically get to around 50% of people who were eligible for an upgrade upgrading. So, that still leaves us a scope to go further and to get more.
Gretel Janu: And then just on Osia. So, how many markets are you in currently? And did you launch in new countries in the last 6 months? And what's the target for the next 6 to 12 months as well?
Dig Howitt: That’s with Osia. So, on Osia, 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 around Japan, is it one that we are working on? We haven’t got Osia into China yet, but we’re working on that front, too, plus a range of others.
Operator: The next question comes from David Bailey from Macquarie Bank.
David Bailey: Just on that high single-digit growth rate, you're sort of expecting over the medium to longer term, key to about 25% adults, about 75%. Just can you give us a bit of sense as to what you're expecting in terms of growth for the and pediatric segments over the next 3 to 5 years?
Dig Howitt: So, I think in pediatrics, we've talked about said that at best grows with the population with the birth rates. So, it's maybe a couple of percent and therefore, all of the rest of the growth comes from topsides. And so, I see that's into double digits with that seniors growth, which gets that weighted average to high single digits.
David Bailey: You sort of called out maybe some benefits from backlog in the NH for the pediatric market. Anything to call out there for the adults? Do you think that was a bit of a contributor to your growth for all the segment in half?
Dig Howitt: No. I think in the last half, nothing we saw there like we saw, as I said, some factors for children didn't see equivalent ones for adults. Now, that said, I'm sure there were clinics that had audiology bottlenecks that removed for houses just with the bigger volume. It's just not obvious in the numbers.
David Bailey: Just a final question for me. You sort of touched on Cochlear CPN for partner networks. Just wondering if you core seeing more front there? Or are you sort of have you added more centers to that network over the past 6 to 12 months?
Dig Howitt: Yes, more percent. So, we’re focused in now in a number of countries on the sensors 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 CPNs across countries, but it’s more about working more closely with ones that are and getting more from that at this stage.
Operator: The next question is from David Stanton from Jefferies.
David Stanton: Would it be fair to assume for revenue in constant currency in Baha that are basically you're hoping for flat in FY '24?
Dig Howitt: Yes. Look, we’d have to get a little bit of growth, but we’ll see that obviously, whether it’s a bit of growth or whether it’s flat, it’s not going to be significant overall. So, we do, 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 to be able to grow again in ‘25. Maybe we can do a bit better than that, but we’ll see.
Operator: The next question is from Mathieu Chevrier from Citi.
Mathieu Chevrier: Just one on ASP going forward. I think you previously expected ASP to be kind of flat. Has that changed?
Dig Howitt: 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 very close to netting off on a longer-term basis. But what we saw in this half was somewhat abnormal on that front.
Mathieu Chevrier: And then just looking at R&D, looking a bit wider, how do you see potential CMV vaccines and gene therapy potentially impacting the demand for cocoa implants in children?
Dig Howitt: Yes. From what we can see at the moment, not significant impact. If we look at gene therapy, first, the trials, the other fair trials that a couple of companies are running are a really, really small segment, about 1 in, 1,000 of the children with hearing loss are potentially eligible for this therapy, and there will be quite some time until -- if it does work, and we have said you certainly hope it does. If there's a genetic solution for hearing loss or any solution for hearing loss, we wanted to work, but it will still take some time to get through the hurdles. With CMV, and it's certainly more preventing 1,000. The numbers are hard to get of how many of our recipients or children who are eligible for Cochlear implants, the definities 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.
Operator: The next question is from Craig Wong-Pan from Bank of Canada.
Craig Wong-Pan: I just wanted to touch on ASPs again. In the period, there was a benefit from country mix. I was wondering, does that sort of shift in the second half or beyond that? Does that become a headwind then?
Dig Howitt: I think it depends on relative growth rates. So, I think that what would need to change if the countries with the higher ISP are growing faster, which happened in the last half, then that continues. It's the country with a lower ISP grow faster there than it does become a headwind 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 and go the other way, but it's just the math.
Craig Wong-Pan: And then just the 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?
Dig Howitt: 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 and can prove it, we’ll be looking to get price increases across in all the countries where there’s that opportunity.
Operator: The next question is from Shane Storey from Wilsons Advisory.
Shane Storey: So just one for me. I wanted to go back to some of your comments on single side of defines, please. I mean I'm aware that this 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 because we're seeing some really terrific reported outcomes from the U.S.A. and Italy and sort of aware that it was a pretty good market for Baha over the years.
Dig Howitt: Yes. So, in the U.S. where single-sided deps have been now funded for the last few years in other markets, it’s been funded for a little while. We think in the U.S. is about 60,000 people here who become suffer single-site or lose hearing in money or don’t or 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 into that. And so I think people are learning over time who are the best candidates. And I think the outcome to say for them are very good. So, that will certainly continue. So, it’s certainly important segment. Boha and by an oral hearing is important for a whole range of reasons on directionality of sound on reducing the cognitive blade on being able to hear, so that sort of the medical benefits are clear. It’s then just an assessment of which are the better candidates.
Operator: The next question is from Andrew Paine from CLSA.
Andrew Paine: Just one for me. So, just last on Cochlear implants, you've covered off quite a lot here, but just wondering if you are the tailwinds in the first half could potentially be one-off type benefit like you've talked about audiologist coming back. So that means they're supporting some pent-up demand and stronger growth in pediatric. Just trying to think if there's a risk, FY '24 makes FY '25 growth difficult of these high comps? Or are you comfortable with FY '24 being a rebase year
Dig Howitt: Certainly, we talked about children and some of those things more likely one-offs than not. We've also got higher comparable in the second half of the first half. If you look at last year, our growth were more weighted to the second half. So, that sort of weighs into the outlook. But 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 absolutely put together our outlook for '25.
Andrew Paine: So, you're not seeing any kind of clear areas that could be a different unwind year-on-year?
Dig Howitt: Look, I go back to what we talked about earlier, so there is respect to our strategy. There's huge potential clinical potential is 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 and 5% penetration, we got a long way to go, but there are good signs that the strategies we're implementing working. Turning that into an exact growth rate going forward is sort of by definition, exact. 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.
Andrew Paine: And just one quick one, just on expected FX impact in the second half between reported and constant currency underlying NPAT, you give any details?
Dig Howitt: Well, we'll need to see what the rates are. I know the NPAT rule thumb, if it moves a cent, it's about $2 million to $3 million.
Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Howitt for closing remarks.
Dig Howitt: Okay, just finish up. So, thank you all for joining again, and look forward to the full year results in about six months time.
Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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