Cochlear Limited (COH) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining for our F '20 results presentation. So I'm going to give a bit of an overview with some highlights for the results, then hand over to Brent who will talk through some of the financial detail. And we'll come back to me to wrap up on strategy and outlook and then move on to Q&A. Okay. Let's go. So I'll just start with our mission this time around. And our mission has always been important for us but I think never more so than in the last few months where we've had to navigate COVID-19, and it's really, I think, helped us keep our people focused on our customers and focused on building awareness and the work that we do to strengthen our product portfolio year-on-year. Just to jump into an overview. You would have had a look at the results by now, see that we had a $238 million loss on the back of the patent litigation and the reduction in sales coming from COVID-19. You can see that, obviously, COVID-19 hit us pretty hard in the second half with our second half sales down 22%, cochlear implant units down. Services was down. Acoustics was down, and I'll get into the detail of some of that in a few minutes. And our underlying profit was $154 million when you back out the AMF litigation and profit from our investments. I think just a minute on the patent litigation. I think it's important, as you saw yesterday, that we've reached agreement on the interest and costs. We have reserved our right for a Supreme Court appeal. And really, this just wraps this issue up, and we can put it behind us and move forward. You'd be obviously well aware of the capital raising we did through the year, and that's really strengthened our balance sheet given the enormous uncertainty that we faced back in March and I think, to a large degree, we still face. But that strength in our balance sheet enables us to continue to invest both in market leadership and retaining and driving growth. And we'll talk about those things over the next little while as well. We have seen since March recovery in the surgeries, and that's positive. However, there is still a long way to go, and we'll talk a bit about the uncertainty that comes with that. Given that uncertainty, we will not be providing guidance for F '21. And we've also suspended our dividend until we see trade conditions improve and improve on a sustainable basis. If we just look back now over the year, we did in the first half have a very strong start, and that continued through to mid-March. We were clearly gaining share, particularly on the back of the Nucleus Profile series implant. And I think we continue to see that we have gained share as surgeries have recovered over the last few months. In emerging markets, again, a very strong first half, benefiting from the significant investments we've been making over the last few years, but emerging markets have also been significantly impacted at slightly different times to developed markets. And we'll talk a bit about that. As we've talked about before, COVID-19 was a significant impact, very significant decline in elective surgeries in April, started to see a little bit of recovery in May. And pleasingly in the 3 larger markets, China, the U.S. and Germany, we saw some good recovery through June, albeit remembering that this recovery includes catch-up surgeries as well. And we'll talk a little bit more about that as we go forward. And Services and Acoustics, which we'll also talk about, have been materially affected by clinic closures and priority being put to new cochlear implant surgeries over those services and acoustic surgeries. As we went into the pandemic, as we saw COVID-19 expand across the world, we were very clear that we wanted to be able to continue to invest and continue to build our market position and our market growth activities. We have received approval for 7 important new products, really does strengthen our product portfolio, and I'll talk a little bit about that in the outlook section. But as I said, we would -- as we came into this year, it was very important that we regain market share through developed markets, and we have done that. And with the strength of the portfolio now and what we've seen in the last few months, we think there is more opportunity for us to strengthen our competitive positioning and gain some share as we move forward. We've also had to evolve and adapt our awareness programs both in direct-to-consumer and the hearing aid channel to remove -- to make those programs much more virtual. We have done that, and we've also taken the opportunity with significant time in clinics and in the hearing aid channel and many places with surgeries to be able to do quite a bit of training around our products, around the direction we're taking. And we hope that, that -- we know that, that is strengthening our relationship. We hope that also continues to help us -- set us up for the future. We've provided some quite detailed guidance in our release on costs, and really, what I want to say here is that we did reduce nonessential spending. We reduced CapEx as we saw COVID-19 hit, and we did that through Q4. However, we're also very clear that our strength comes from our people, and therefore, we wanted to make sure that we retain our people so that we can continue to have strong customer relationships to drive growth and to drive our R&D portfolio. And with people making up 2/3 of our operating costs, that obviously puts a limit on the extent to which we can pare costs back. And we very strongly believe it's the right decision to retain our people and continue to invest because there's a genuine opportunity in front of us to continue to drive growth but also strengthen our market position. Now I got -- just going to run through each of the segments and just draw attention to some of the insight that we're getting in each of these segments. Starting with cochlear implants. So I said we're gaining share in cochlear implants in developed markets. We think our product portfolio and our presence with our clinics and with candidates over the last few months has helped us to continue to gain share. As you can see in the chart, a very significant impact there in the second half on our sales. And as we -- and we're seeing some recovery, which is very pleasing, and as I said, in the U.S. and Germany, good recovery. Benelux, Australia are also going quite well. We are seeing variability between clinics and very significant variability between countries. So there's still quite a way to go before we would confidently say that the surgery market has recovered and we're back where we were. We're certainly not in that state. In emerging markets, we had a very strong first half, up 20%. We then saw China shut down for surgeries from late January, did recover quite quickly, and we see good growth in China over the last few months, which is pleasing. And we have been investing in China over the last few years. However, across other emerging markets, the outlook is not nearly as strong. India and Latin America still have significant numbers of COVID-19 cases and low surgery rates. And we also have a number of our emerging markets that are heavily reliant on oil revenue for the health of their economies, and with the oil price down, that poses some risk across some others of our markets. Moving on to Services. In Services, the outlook for Services over the longer run is very strong. We have a strong product portfolio. We have a growing base. The introduction and acceptance of connectivity, Cochlear Link, Remote Check, Remote Programming, all provide good reasons for people to upgrade and for clinics to encourage people to upgrade to the latest technology, which is connected. However, in the short run, we do expect to see and we are seeing limits in clinic capacity restrict our growth in upgrades. So longer run, the outlook looks good; shorter run, a bit tougher. And we can see that here in the second half with Services reasonably affected by the clinic closures. On to Acoustics. And Acoustics, again, we reported the first half that we'd lost some share and that there was deferrals because of anticipation of Osia 2. We launched Osia 2 in February just before -- in the U.S. just before March when things started to shut down. We are seeing a very, very positive feedback from Osia 2 and a very good growth in surgeries from Osia 2 in the U.S. And we certainly believe, as we said before, over time, that the Osia 2 System is a very important addition to our portfolio for the Acoustic segment. However, it will take us some time to get the regulatory approvals and to get appropriate reimbursement across a range of markets. From the Baha perspective, we've seen some recovery in surgeries, particularly in the U.S. However, in the U.K., acoustic implants are still -- surgeries are still not happening, and the U.K. is the second largest market for acoustic implants. So while the U.K. doesn't do surgeries, we expect to see a continued impact on our Acoustic revenue. So with that, I'm going to hand over to Brent to talk about some of the results in detail, and then I will come back with our outlook.

Thanks, Dig. I won't spend too much time on the P&L because Dig's already touched on it. I think there are 3 main call-outs that I would like to point your direction to. The things we're really happy with are the -- we've maintained the gross margin more or less where it was a year ago, and that's despite the drop in volumes we had towards the end of the year, particularly as we went to one shift or so in the last month. I think that's a good achievement as we weren't able to get the recoveries from our overhead when we reduced that volume. So we're happy with that on the gross margin. And that's mainly because of the good work around the warranty, which we've seen over the last few years, which we've spoken about in previous results. As Dig mentioned, our costs have managed to fall, and we made a deliberate effort in the last few months to pull that back. That's despite 2/3 of our costs being in staff costs, and you can see that reduction there, which is highlighted, 8% down in sales and marketing and so forth. So that's mainly the discretionary spend. And I think that's important to highlight that we did pull back on that, but we're still able to invest in areas which are important. As Dig mentioned, all staff are still in the business because that's the key to our success going forward. I think the other important thing to call out is that all the AMF costs now have now been recognized in the P&L, and that's at the bottom there. That's the net amount after tax. It's about a bit over $500 million gross, and the difference in the tax rate, the reason why that's not a straight 30% is because not all of the amount was tax deductible. Some of the original payment was not deductible, so that's the reason for the less than 30% between the $500 million gross and the $416 million that you see on that P&L. In terms of the other income, we'll touch on that in a sec, other income/expenses on the next slide. And the FX contract losses, they're only up until March this year. Last year, we had about $0.67 versus $0.75 for our contracts, which is why the amount is greater than a year ago because a year ago, our rate was around $0.72 versus the contracts at the time. So there's only about 9 months' worth of FX contract losses there, and we'll touch on those in a sec. It's important to note, too, that the investments in the innovation fund continue to go well, which you can see at the bottom there as well. In terms of the other expenses, we thought it was important for us to call these out more for transparency but just to help you with going forward and looking in the modeling. These are more nonrecurring in nature. You can see there we did benefit from the government assistance, particularly in the U.S. with the CARES Act, which happened in May, which the Trump administration introduced. And we're a big benefit -- beneficiary of that. As Dig has outlined in previous announcements, we did claim JobKeeper. We started that with the big reduction in income in April. And if it wasn't for that, a number of our people in manufacturing actually wouldn't benefit from the JobKeeper amount, which was passed through to them when we went back to one shift. So I think that was an important program. It's the last year of the Sycle release, so that's -- that one won't be there going forward. And as I mentioned before, we brought forward all the foreign exchange contracts after April because they're ineffective because we could see the reduction in income going forward, and there wouldn't be any use for those contracts. So that's why you can see them there, which have been expensed this year. Plus, we have noncash write-downs for Carina and the Otoconsult, which was Fox investment a couple of years ago. And there's some more information on that in our results, which you can read on. In terms of the -- our cash flow, normally, this is my favorite slide, and it still is. I think if you back out the impact of the AMF litigation halfway -- a bit further up, the $420 million, and you added that to the operating cash flow of $157 million negative, you get a number of $263 million positive, which is more or less the underlying cash flow. And compare that to a year ago, it's only about $33 million less than a year ago. So in the scheme of things, I think that's pretty good given we have COVID. And if you're looking at the reason for the underlying cash being so much greater than the underlying P&L of $153 million, the main reasons -- main contributing factors to that are the noncash items that I mentioned before on the previous page, like the Carina and the Otoconsult write-downs and some doubtful debt provisions, which are all noncash, plus the impact of the good collections in receivables. So that's the main reason for that improvement over the underlying P&L. The other thing to point out there is the tax is a little bit less than last year. And I'll touch on that in a sec with our tax refund that we're expecting to receive next year in the first half. The CapEx has gone up with the finish of the China manufacturing facility, which actually finished last week. And the fitout of the Denver office over in -- which happened this year as well. We've already touched on the acquisition of the intangibles and the Nyxoah investment as well in the first half. The payment of the lease liability at the bottom, that's the principal portion of the lease under the new accounting standards. In terms of our net debt and financial position, you can see here that, that impact is -- it's almost up $600 million previous -- compared to last year. [ Probably fair ] that you might ask the question we're seeing all this cash and why have we got that AMF loan there. In the February results, you would recall that we actually had a U.S. dollar facility in place in case we lost the AMF case, which we did. And that was a good decision. We have that U.S. dollar facility there. At the time of the capital raise, the dollar was incredibly volatile, was around $0.57. If we paid that out in Australian dollars compared to now, it would have cost us about another $100 million. We actually settled that amount in early June, and the rate had improved a little bit. But even compared to today, if we paid in Australian dollars, it'd be another $50 million. So I think it was a wise decision to take that facility out in U.S. dollars, and we're in no rush to really pay that off. And we now have the benefit of that with the U.S. dollar at around $0.70, and we've been buying some of that. So we'll slowly start paying that down over the next few months using a combination of our U.S. receipts and what we have available there on the balance sheet. It's also -- because we did cancel those FX contracts, which I mentioned on the previous page, we have a natural hedge there in the next 6 months with that loan. So it's a good way to manage that FX exposure as well. In terms of -- if you're looking at how we've actually used our capital raise at the end of the day, it's really the -- a bit over $1 billion that we rose, less the AMF payment is almost the amount you see there in our net debt position at the end of the year. And finally, in terms of the capital employed, as I mentioned before, back in March, when COVID hit, I was really happy with the way the business responded around the world to how we're managing our cash. We really rallied the troops to be focused on not only receivables, which you can see there. And that's not only just a function of reduction in sales, but it's a good result of focus by the -- everyone around the world in chasing debtors and a good control over our discretionary spend. And you can see the result of that pullback in the last quarter when our credit has actually fell. And normally, you would expect that to go up in a growing business. We're not too worried about the inventory going up. That was an insurance policy at the time. We didn't know what would happen. We didn't know what would happen with borders around the world, so we kept the manufacturing plant going all the way up on 2 shifts up until late May or so. And that built up the inventory levels as a safety buffer around the world in case there were any border closures or we even had a COVID case in the manufacturing plant here. So we'll now bring those back to historical levels going forward, but we're not too worried about that inventory jump there. It was a one-off, and it was a good insurance policy to have. You can see the other -- improved other net impacts of the capital and CapEx and so forth underneath. As I mentioned before, we're expecting a tax refund next year, which is part of the change in the other net liabilities at the bottom, netted off with the amount for the AMF prejudgment interest, which we announced yesterday with the ASX release. So if you go to our balance sheet and you see the improvement in our net assets from about $675 million or so, that's mainly a combination of the $115 million you see there and the previous page of the $560 million. Back over to you, Dig. I'll let you talk about the dividend.

Thanks, Brent. Yes, just to cover off the dividend. As we've said, we won't -- we have not done a final dividend, and we will continue to look for sustained improvement in trading conditions and cash flow before the Board resumes the dividend. Okay. Let's have a look at the outlook. So our -- first of all, our strategy is unchanged. We've had to adapt how we've implemented some of our strategy as you'd expect in the changing market, but the core is unchanged. So we do want to retain market leadership, and I think with the strength of our product portfolio, the strength of our field teams around the world and their presence, particularly over the last 3 months, we are in a strong position. We know we have to drive growth. As the market leader, it's very clear that we have to invest in awareness, in access, in the evidence to support expanding access for hearing implants for people right around the world. And we aim, over the longer run, still to deliver consistent revenue and earnings growth. Obviously, this year has challenged that, but the important point for us now is -- really through F '21 is to really be focusing on those first 2, our market leadership and growing market -- growing the market and aiming to get back to where we were and then to be driving growth from there, particularly as we go into F '22. So our product portfolio very, very clearly leads our competitors. And one of the reasons that we lead is because not only do we have terrific benefits for our customers, but we do that across the portfolio. So we've launched about 15 months ago now the Profile Plus implant. It is clearly the benchmark in size, in reliability and with the range of electrode options. And we're seeing that help support our market share. The Slim Modiolar Electrode now has been in the market for a few years, and there's increasingly good data showing consistency in placement, showing improvements in hearing outcomes. We do believe that the future lies in getting electrodes closer and closer to the auditory nerve and therefore, being able to deliver better hearing outcomes. The sound processors are a very important part of the portfolio, and there, we lead in terms of size, in terms of connectivity and hearing performance and hearing performance driven particularly by our signal processing algorithms, which ForwardFocus and SmartSound iQ are a very important part. So it's a very strong portfolio, and that portfolio has been strengthened this year with 7 important product approvals. And we said 18 months ago, February '19, our result then, that we had a strong product pipeline in R&D, and what you're seeing here is the results of the -- some of those products in that pipeline coming -- getting approval and coming to market. So the Osia 2 System, I've talked about, very, very strong reception from both patients and surgeons in the U.S. over the last few months. The Slim 20 Electrode, lateral wall electrode is rolling out now into a good reception. Adding Kanso 2 to Nucleus 7 means that both our BTE and off-the-ear processors have a full range of connectivity, and that's connectivity both with iPhones and now with Android phones. And that connectivity is an enabler of connected care. And so our Remote Check solution, which is approved this year, rolling out around the world, all of that goes towards making care easier and simpler and more convenient for our customers, also keeping clinics well connected with their patients. And from a payer's perspective, these connected care solutions have the ability to lower the overall cost of care by reducing the number of face-to-face appointments, which both frees up capacity for growth but lowers the cost of lifetime care as well. And we're also adding clinical and surgical tools for audiologists and surgeons, again, to make their jobs easier, with Nucleus SmartNav being able to provide the surgeon with more information on the electrode insertion, and we can see that there is a clear link between the electrode insertion and hearing outcomes. So one of our strengths in terms of retaining market leadership is that we are able to advance the whole portfolio, across all areas of portfolio so that all of our customers are able to see gains, benefits, and that really builds our relative competitive position being able to move all of the aspects of the technology forward. We did execute, as Brent said, on important CapEx projects in the year, and those projects have run very close to schedule. And that's, I think, a good achievement given the impact of COVID-19. So the new office in Denver is now open. People are moving in. And as Brent said, the factory in China has been handed over to us just a week or so ago, and we're now in the installing equipment and commissioning phase, leading into regulatory approval over the next few years. So it's been important to execute those significant capital projects well over the last year. We now look to the outlook, and it's obviously more complicated and more difficult to give an outlook statement than normal, and that's why we're not providing guidance. We do think that there remains significant uncertainty in terms of what our revenue will be through F '21. And as I said earlier, what we're trying to do is to use this year to really strengthen our competitive position and to invest in our growth programs. So we will continue to invest in R&D. We very clearly have a strong portfolio. We continue to invest, and we have a -- continue to have a strong pipeline of products and services coming through that pipeline. We will also continue to invest in awareness and referral channels in developed markets. We know that in developed markets, that's the major barrier. There are significant numbers of people with hearing loss that meets the indications for our products, but the awareness is still low, and the referral channels are not clear and consistent. So investing in both of those things will continue. In emerging markets about awareness and our presence, so we continue to expand our presence in emerging markets through F '20 and we will continue to do that in selected markets into F '21 and beyond because we know that building -- putting people on the ground, building relationships, driving awareness, getting governments onboard with supporting implants for children is very, very important part of our growth. In terms of the recoveries for CI surgery, in June and July, we did see that developed market cochlear implant units were broadly in line with where we were last year and that we've seen good growth in China. It's important to note there that -- particularly for the developed markets, that that's a result of clinics reopening, but it's also a result of some catch-up surgeries. So surgeries that were deferred through April, May, many of those surgeries occurred in June and July, which is part of the recovery as all -- and the other thing that we're seeing and getting strong indications from clinics is that we are gaining some market share, which is part of that recovery being in line with where we were 12 months ago. We're monitoring the mix of surgeries by age. That's very important. As we said in March, we expected that surgeries for children would proceed relatively quickly, but we were uncertain for adults and seniors. What we have seen broadly across the developed markets that have opened more quickly is that surgery mix is largely in line with where it was, not quite but largely. So we're seeing significant numbers of adults and seniors coming through to get surgery. There's very, very clearly uncertainty around the second wage -- second wave of infections, and we've just seen elective surgeries deferred in Victoria. There are clearly a number of U.S. states where surgeries -- sorry, where infections are rising. And also through Western Europe, we're also seeing, again, some resurgence across a few cities in a few areas. It's just very uncertain to know what impact that will have, but we do not expect that there will just be a nice linear recovery. We expect there to be some variability in the rate of recovery of surgery. And I think as many others have been saying, we're now 5 months into COVID-19. There is still a long way to go before we are out of here and before, I think, we can have a good level of predictability over the future. In emerging markets, as I said, we've seen China recover very strongly, but outside of China, surgeries have been very low. And particularly, if you look at Latin America and in India, they're still seeing increases in the number of cases and much lower level of surgeries than we would normally see in those markets. And it's just too early to know what the outlook -- what the future holds there and what the outlook will be like. I think a very important aspect across all markets, but particularly developed markets is what does the new candidate pipeline look like. Remembering that for most people who are getting cochlear implant surgery, an adult and a senior -- adult or a senior, there's a 9 to 12 months process of referrals and assessment leading up to surgery. So surgeries that we saw in June and July are people who are well down the pipeline when COVID hit in March. So we're 5 months on from that, so those people are all already halfway through the pipeline before COVID hit. What we're watching very closely and it's too early to make a call on yet is just what's happening with the new entrants into the pipeline through our DTC programs. We're obviously monitoring that, but it's just too early to know. What we do know is that clinic capacity is lower than it used to be largely because of sensible conservatism around social distancing, around appointment times and scheduling. So we won't know for another few months really what that pipeline looks like. We are using our direct-to-consumer activities, and we've adapted those, as we've said, to try to rebuild the pipeline to work very much on online lead generation and virtual interactions with candidates to try to understand their intent and to educate them around our products. But it will still be a few months before we know how that -- what that pipeline looks like. From Services, said earlier, we think over the long term, there continues to be a very significant opportunity in Services. Kanso 2 with all its connectivity, I think, is a very important addition to the portfolio. The recipient base grows. Remote tools make upgrading even more attractive than normal. However, there is reduced clinic capacity right now, which makes it more difficult to predict just what will happen with Services over the near term. And just -- and we did see in June, July about -- Services running about 70% of the rate they were 12 months before. Acoustics, similarly, running about 70%, reasonably good recovery in the U.S. through June and into July, particularly for Osia 2, which has grown very strongly and as I said, getting very good feedback. But also, as we said earlier, the U.K. is not doing acoustic implant surgeries, and as a significant market, that will clearly have an impact on Acoustics performance. We gave some detailed guidance in the release on our costs and how we expect to manage costs over the next 12 months. But we do have very strong liquidity position, and that puts us in a position where we can continue to invest sensibly in building our market position and in driving growth. Going back to what we said in March, we want to emerge from COVID-19 in a stronger competitive position and really executing on our growth programs, and that's where we're focusing our expenditure. Cash flow, about breakeven. And as I said, no -- we won't provide earnings guidance until there is more certainty. And similarly, the dividend will be suspended until we see a sustained improvement in our sales and cash flow and we see that, that improvement will be sustained into the future. So with that, we will now go on to Q&A. Just as we move to Q&A, since we have both a teleconference going and a webcast, there may be a few second delay between the 2. So just, as you're asking questions, be aware that there could be a delay and may have to turn off the telecast to avoid feedback through the teleconference.

[Operator Instructions] Your first question comes from Lyanne Harrison with Bank of America.

It's good to hear that volumes are starting to recover. I was wondering if you could provide a little bit more color on the recovery in key markets, particularly between pediatrics and adults. And could you mention backlog and catch-up? Is it safe to say that pediatrics are pretty much caught up and it's just adults that are in backlog? And how are the adults faring in the United States, Germany and Australia?

Yes. Thanks, Lyanne. Good questions. So yes, look, the pediatrics have been prioritized just about everywhere. And from best we can tell through developed markets, there isn't a backlog in pediatrics. We think for adults and seniors that the backlog is also largely caught up, and that's part of the driver for the strong numbers in June and July. If we look in the U.S., Germany and Australia, we're actually seeing the mix of surgeries not too far from where we were. Where we were was about -- in those 3 markets, about 25% pediatric, 75% adults and seniors, with the higher proportion of seniors in the U.S. and Australia than in Germany. We're not quite back to 25-75, but we're not too far away. So that's, I think, encouraging in respect of people who were well down the pipeline. Adults and seniors well down the pipeline didn't give up after spending a few months at home from COVID-19. As I said, what we're going to -- what we're watching closely for now is are adults and seniors entering the pipeline. People have just gone through a few months at home with a significant hearing loss and coming out of that saying, "I'm actually more worried about other aspects of my health," or "No, I really do want to get something done about my hearing loss, so I'm going to get into that 9 months pipeline of referrals and assessment." So we're certainly seeing some new introductions of adults and seniors in the pipeline, but it's too early to tell if it is in the same proportions that we were seeing 6 months ago.

Okay. And just to follow up on that, you mentioned pipeline. I know you -- in some of the earlier comments, you mentioned that about 80% of clinics were back operating. Do you get a sense of -- and obviously, you talked about social distancing within those clinics. Do you get a sense of what proportion of capacity those clinics are operating at?

It's very hard to know. Right now, we think, generally, clinic capacity from an audiological perspective is still below normal because of social distancing and cleaning procedures and so on. We -- so it's hard to put a number on it, and it definitely varies by country. So significantly down in the U.K., whereas in the U.S., it's -- it would only be a little bit short of where we were. So far, we haven't seen -- from a surgical capacity perspective, we haven't seen restrictions on surgeries coming back in those markets where we've seen good volumes come through. Obviously, markets where the volume is still down, like in the U.K., it's -- there's not enough coming through to really test out surgical capacity.

Your next question comes from Saul Hadassin with UBS.

Can you hear me?

Yes, Saul.

Yes, Saul.

Just the first one, Dig, maybe just a bit more color. Obviously, the release talks to the developed region effectively seeing normal growth or growth consistent with where you were in June, July period last year. Can you give us a bit of color as to specifically, say, the U.S. and Germany? Does that imply you've actually got high unit sales for those 2 months versus last year and it's some of the other countries like Italy and Spain where those volumes are below? Just a bit more color on what you're seeing in the U.S. and Germany would be great.

Yes, probably a little bit more. It's -- I think a few things to note. Certainly, the U.S. and Germany being the biggest cochlear implant markets, without good performance there, we couldn't get back to being sort of reasonably in line across June and July. And U.S. and Germany have recovered better than some of our other markets. But we've also got a market like Korea, and Korea has just continued to grow all the way through last year. COVID-19 impacted how people work, but it didn't impact clinic volumes or surgery volumes, so certainly seeing a real mix. I think the other thing we just got to -- just to bear in mind, too, that we launched Profile Plus at the end of June last year in the U.S. So June sales were probably a bit down on where they would normally be just given that launch, and that launch was obviously telegraphed given we launched in Europe a little bit ahead of that.

Dig, maybe just to push on the U.S. if I could. Are you saying U.S. volumes are effectively reasonably flat? Or are they actually up on June, July last year?

I'm not going to go into too much of the specifics, but they're reasonably flat. I think we were slightly ahead. But remembering -- I think what that indicates is capacity because of the catch-up rather than demand is restored and we can all move on. I certainly don't want to leave the impression that demand is restored and we can always just look forward from here. The -- what it does show is that there is good surgical capacity and that's allowed the catch-up of deferred surgeries to happen.

Okay. And just one for Brent if I could. Brent, just taking into consideration all the different other expense lines that were incurred in FY '20, and I guess on the assumption that you do get some government assistance in FY '21 and that effectively none of the other items recur, it translates to maybe, call it, a $30 million rough income benefit in FY '21. Is there anything that would not see that benefit wash through in FY '21, other potential write-downs or foreign exchange contract termination?

Yes. The main thing to keep in mind about STI coming back in F '21 because we had a big benefit of that in F '20 and we've called that out in some of the commentary. But at the end of the day, the balance sheet has never been cleaner, Saul. So I think you'll -- it's a nice parting gift. So I think it's looking very good, and I think we've got a good handle on costs going forward. We know where to invest and so forth across the business to drive growth.

And the Carina write-down -- so just to complete that, the Carina write-down, does that imply that, that middle ear implant as a product is, I guess, no longer viewed as a significant growth opportunity? Or just some comments on that.

Yes. Yes. I'll take that one. Yes. Look, so we've had the Carina implant in the market since about 2013, and we really sold very low volumes over the 7 years. And the outlook for us was while we think that there is an opportunity for an implant like Carina, which was implanted into the middle ear, had an implantable microphone, we don't think it was the right configuration to really unlock that segment. So it just made sense in the end that we were losing quite a bit of money on it and couldn't see a way out of that, that's going to be -- and it made sense for us to cease sales while we continue to support all of those customers who have one of the Carina implants.

Your next question comes from Chris Cooper with Goldman Sachs.

Dig, just a clarification one, please, on the -- on a commentary to an earlier question there. So I believe you said that around half the driver of the strong numbers you were seeing in June and July was due to catch-up or backlog. I'm not sure whether we' expected to interpret that half proportion literally. But how do we interpret that? Is that to say the delta between the sharp decline you saw in early April back towards a kind of flattish number in developed markets in June, July, around half of that was the backlog? Is that the intention of the comment?

Chris, I don't think I said half, and if I did, I didn't mean to because now we -- it's very hard for us to tell exactly what that split is. And so therefore, we wouldn't want to try and guess what the split is. I mean we're getting that -- the way we get that is sort of anecdotally back from our field people as they're talking to audiologists and talking to surgeons, saying what's your mix look like. And certainly, what we're seeing is that those catch-up surgeries are -- we think we're largely through them. Therefore, they were a lesser and lesser part as we moved through June and July. So that'd be...

Okay. And given we're largely through -- is that to say, as of June, July, we were largely through and maybe August, we just step back a little bit in terms of volumes from where we were given your comments on capacity and the fact that we're still slightly below pre-COVID levels?

I think that's the issue with uncertainty, we don't know. And we don't know if -- certainly, there won't -- there's not catch-up to top up the volume. What we're watching closely is what's coming through in terms of referrals and scheduled surgeries, and we're just not in a position to say -- to be able to make a meaningful comment on what's going to happen there over the next few months. We will watch closely, and at the time of our AGM, we'll give a trading update on what we've seen and insight we get into the pipeline. But right now, we can't do that.

Got it. And just last one just on the market share gains, please. I mean I appreciate, again, that's sort of based on feedback you have with practitioners. But did you have any sense of the trajectory of this from here? I mean, clearly, you had a period there for most of the fiscal year where you probably have the leading product in the market in my opinion. At what point do you expect that to kind of get back to a sort of more normalized position? I appreciate one of your competitors has had some material challenges in the period, which has given you a further tailwind. Is this something that can continue to persist for fiscal '21? Or do you expect that to revert back to a sort of more normalized sort of market share position?

I think we have an opportunity to take some more share in '21, but it's -- our share is obviously very high. So in terms of the overall impact of that, it's not going to be hugely significant. But we are launching these 4 products that we've just had approved. I think that builds our leadership position. There's good reasons why we put each of those products into the market. So we think customers and candidates will respond to that. And one of the things we've made sure we've done over the last few months in our field teams is stay very, very connected with professionals, with candidates. And so I think that, that will make a difference as well. But I wouldn't put a number on it by any stretch, but we do think that we have a further opportunity at least in the shorter run.

Your next question comes from Andrew Goodsall with MST Marquee.

Perhaps just looking at your cost base. Obviously, a lot of the costs, SG&A and corporate overheads and so on, sort of were held pretty flat during this period. Just trying to think forward as you return to growth, how you're thinking about those costs and sort of where the opportunities might be to get some leverage.

Well, Andrew, first, thanks for the question. In terms of opportunity to get leverage, I mean we just -- we want to get back -- first of all, we want to get the revenue back to the level we had sort of back in February and then grow from there because our cost base is largely set around the revenue that we did have. We've obviously reduced discretionary spending. I mean our travel and sort of conference expenses are a reasonably significant cost for us. They've gone to close to 0, and I think it'll be a while before they come back. We will continue -- we've given guidance at a high level by the line items, but we'll continue to invest in R&D. And in key markets, we will continue to put some more people on the ground if we believe that putting them there will help us gain share or drive growth programs. But we would like to get back to having a P&L that looks largely as it was before this happened in terms of percentage of sales into R&D, into SG&A, our net profit as a percentage of revenue. At this stage, we are aiming to get back to where we were, albeit there's uncertainty on how long that will take. And while we're seeing some good recovery in some of those developed markets, there's still uncertainty in emerging. All of our sales are important, obviously, in terms of supporting our cost base and driving profitability. In emerging markets, there are some really significant challenges, I think, certainly over the next 12 months.

And just a follow-up, I guess, just in terms of the way in which you're operating the business on a day-to-day basis. Previously, this was heavily a business, I guess, where people were out visiting clinics and so on. And just trying to understand how that's evolved and whether, in fact, that does provide benefit to the incumbent like yourselves as a sort of dominant market share because I imagine it's quite difficult for the other players to launch products or try and prosecute their case before the clinics at the moment.

I think, yes, look, certainly apart from a few countries, virtually all our interactions with clinics and professionals are virtual, I think, because we've all found, over the last few months, those interactions are easier if you already know who you're talking to and already have a rapport and a level of respect. So I think, yes, there's some value in incumbency and the relationships we've built. And that's one of the reasons why we said very quickly we want to retain our people because they build these relationships. They have the respect. And that's very valuable, and we want to maintain that.

Your next question comes from Sean Laaman with Morgan Stanley.

Thinking, gentlemen, more forward on what might be some of the permanent reshaping of the cochlear implant market as a result of COVID and the market share gains that you've observed are short term today, how much of that is due to sort of the connected angle through programs such as Remote Check and Cochlear Link and the Cochlear Provider Networks? And is there any sort of sense of the uptake of Remote Check? Or is it too early?

Yes. Look, it's hard to disaggregate what it is we've done that supports market share apart from when there's a very obvious issue like MRI as we had 18 months ago. I think our connected solutions are certainly very much appreciated and even more so. I think what we've seen with the move to telehealth more broadly is a real opportunity for telehealth for connected solutions. Now we've been working towards this for several years, so I think that the timing has worked well for us in terms of having Remote Check submitted with the FDA at the same time that COVID hit. As we roll Remote Check out, it's still early days. We have seen a rapid take-up in the markets in which it is available, but it's still very early in terms of the life cycle of this product, in terms of the evolution of how can customers and clinics use it, and in terms of the feature set that we currently have compared to what we could offer in the future. Things like Cochlear Link have been valuable, particularly in the U.S. and parts of Europe for a long time, and that's just been reinforced over the last few months when we do, for example, have MAPs in the cloud and be able to replace sound processors directly to people's homes, do that all remotely. And those sorts of things have been appreciated for a while but even more so recently.

Would you be able to give us a snapshot where you are on penetration rates of the N7 and the reimbursement situation with Kanso 2? Should we thinking self-pay mostly or not?

So Kanso 2 first. No, it's a normal sound processor, so it will be -- will have the same reimbursement as Nucleus 7 in most markets. Now in some markets, there's a registration process that can take a few months beyond the regulatory process, a registration process for the reimbursement. But I think the way to look at that is to say as people become eligible for an upgrade, they now have a choice -- they don't have to choose between connected or not, which is what they had with Nucleus 7 and Kanso. With Nucleus 7 and Kanso 2, both solutions are connected. It's been just a wearing option choice, behind the ear or off the ear. So we think, therefore, it will sort of take upgrade share from Nucleus 7 to some extent, and that will vary by market. I think we'll probably see some level of private pay in a few markets where people add a second processor on top of their reimbursed one.

Your next question comes from David Bailey with Macquarie.

Just following on from Sean's question actually on the Kanso 2. It looks like there'd be some improved features coming through on connectivity side but also on the rechargeable battery. It looks like it's a positive change. Just wondering if you have any feedback to date as to some of these feature changes relative to the initial version of the Kanso.

It's early days. So we haven't officially launched yet. We were in a very early stage, but the feedback we have had is certainly positive. People have been asking us to put a rechargeable battery into the option -- sorry, rechargeable battery into Kanso, and that's what we've done. And the connectivity, I mean, is already very well received. So we'll see as it rolls out, but early reception is positive. And always, when we're developing these products, we are listening to customer feedback on features that they -- and benefits that they value and try to incorporate them.

Yes. And then just also on the CPN. Just wondering if you could give us a bit of a sense as to how the number of clinics has changed over the past 12 months or so and then where you expect that to get to over the next 12 to 24 and how that might help drive growth over the next couple of years.

Yes. So we continue to add CPN clinics last year. It's around about 400 now, so that rate did slow a little bit over the last few months as you'd expect. Our focus looking forward is twofold, is one, to continue to add CPNs but also to get more -- to do more education and get more referrals from our existing CPNs. So we certainly see a range of levels of referral across CPNs, and there is more to be gained by us working with those CPNs that are referring at a lower rate than some of the others to understand why that is and how we could help them identify more candidates that should be referred because we know that they are out there. In all of the numbers, there's a lot of -- but all of the -- every hearing aid clinic that's working with high-powered hearing aids is seeing potential cochlear implant candidates. So part of our CPN plan from here is actually lift the rate of referrals by continuing the education.

Your next question comes from Gretel Janu with Crédit Suisse.

So firstly, just on the outlook for upgrades, is the current constraint coming from the clinic perspective and lower capacity there? Or are patients unwilling to get an upgrade at the moment? So the fact that we're in a recessionary environment, is that leading people to defer getting an upgrade at this point in time?

Gretel, good question. We don't think at this stage that it is a recessionary environment, although that could have some impact in the U.S. both in terms of the insurance plans that have co-pays. People might be less willing to do a co-pay right now. And obviously, insurance is tied to employment in the U.S., so with unemployment rising, there's potential impact there. But the majority of the impact is clinic capacity.

Okay. And then just in terms of the -- in the U.S., what is the typical out-of-pocket payment for an upgrade?

It's all over the place. It's a huge range.

It could be $2,000 or something like that, $1,500. But the best thing we've done is actually lock in contracts with all our insurers over the -- we've probably got 70% of the market covered. So people would know what they're up for upfront, and that's reduced the uncertainty because that was often a reason why people might not go ahead with an upgrade.

Yes. And some of those co-pays are on an annual deductible. So if they have other medical payments through the year, they don't have a co-pay if they get an upgrade at the end of the year. But there is a very big range.

We also have some third-party financing, which is available as well for some of that co-pay, which has been used quite a lot over the last few years.

Okay. And then just on Acoustics and the U.K. markets there. Have you -- do you have any insight in terms of when surgeries would start? Would you know what's kind of pushing those on back at the moment?

Look, we're pushing -- it's a decision that's made between sort of the NHS and hospitals and the surgeons. We're pushing that, obviously, that surgeries restart because there's a clear medical need, a clear need for treatment, but we don't have insight into how long that will take. And that's just part of the uncertainty and variability that we see.

Your next question comes from David Stanton with Jefferies.

Look, I just wanted to follow up really on what a recovery looks like for you guys, particularly in cochlear implants. You say 80% of cochlear implant clinics are open approximately. We've had feedback that it is a little bit tougher than normal for patients to have surgery for a cochlear implant. It sounds like you're not seeing that to any great extent though. That's my first question.

Yes. Look, I think it's probably a bit more difficult, but if you look at our -- if you look at the numbers, we're not seeing that have an impact. And we're not -- we're hearing some difficulty, but not -- if you go back to March, there was talk about cochlear implants are going to be lined up between -- behind hips and knees and all sorts of things and very few will get done. That's -- so the point you're making, that's not what we're seeing. That doesn't mean that if you want a surgery tomorrow, you're scheduled tomorrow and off you go. But it's certainly not the level of constraint that we thought it could be in March in the U.S. and Germany. However, in the U.K., it is.

Understood. And then, I guess, overall, though, would it be fair to say that, today, you're more -- you'll -- you're bringing up a potential, I guess, for more W-shaped recovery than perhaps initially thought in March of a potential V-shaped recovery? Is that what you're basically saying?

Yes. Look, I think one of the things that's interesting over that time is I think the clarity over the shape of the -- there is very little more clarity over the shape of that recovery. W is quite possible. Sort of early -- I don't think it's going to be linear just because I think what we're all seeing is that it's pretty easy for infections to spread, and that puts pressure on hospitals. It leads to restrictions on what people can do and how they can move around. All of that's going to have not only an impact on scheduled surgeries, but it's probably going to have an impact on the pipeline. And so we just -- while we're encouraged by what we've seen, we just don't know. And certainly -- it's likely going to be quite a long time until we can have confidence that the system works without impact of COVID-19.

Fair enough. And then finally for me, is it, on the basis of what you just said then, really as simple as there needs to be a vaccine for cochlear implantation rates to -- well, to be as solid as they have been historically? Is it as simple as that? Or can you and the industry, in particular the hospitals, work around not having a vaccine over the medium term?

Yes. I think a vaccine would certainly make it much easier. And I think, otherwise, I think if a vaccine doesn't come along in the near term, I think people will find a way. But that's just where the uncertainty is. It's just very hard to know what will happen. And we're seeing that right now. The countries in reasonably similar circumstances, if you look at infection rates, have different surgery rates. So in some countries, they just got on with it. In others, they said, no, we're not going to. So I think some have shown there is a way but just very hard to look into the crystal ball right now and say here's what we think could happen.

Your next question comes from David Low with JPMorgan.

Maybe following on from Dave's questions. So Dig, you've talked about the catch-up being largely done. You've talked about clinics operating below normal capacity. So it feels like you're telling us that June, July was probably going to sit above where we're going to be in the next couple of months until that clinic capacity starts to pick up. Or am I missing something?

I think we just don't know. We honestly don't know.

Would you [ hold ] my logic?

Yes, it's good. Look, I think it's good logic. Yes. I mean there is certainly -- there is risk of the surgeries coming down because of -- as much because of the pipeline as anything, and that's just the thing we just don't know yet.

No. But if the catch-up's down and the pipeline is -- Yes, if the clinics are below capacity, does it mean that the pipeline can't be growing on where it was in previous periods?

Yes. Look -- and that's just we just don't know at the moment. So what we -- I mean what was -- and just to put a bit of color on that. I think clinics are prioritizing their capacity, too, and I think that's why we're seeing services down a bit, that if they've got a patient time, they will prioritize new patient surgery over an upgrade for an existing one. And that makes perfect sense from a health outcome perspective. Getting someone to -- their implant and being able to hear should have a higher priority than helping someone hear better who already -- through an upgrade. And that's very [ complex ] to think through capacity.

I will stop belaboring that point. Just a couple of other quick ones then. Brent, you talked about the gross margin, being pleased with where it ended up. Can I get you to talk a little bit about where it's likely to be, I mean, given that presumably production capacity still remains below where it was historically?

So David, I think we did flag this the last time with Chengdu opening. We expect that margin to fall a little bit because we obviously won't have that capacity. We have a bit less -- more capacity, and we're going to absorb those overheads up there. And particularly, we're probably pushing that back a bit. We're waiting to see when we'll really ramp up that in Chengdu. But as Dig's mentioned before, it's ready to go, but we won't be going as quickly as we thought. So it will be a staggered approach. So I would expect that margin to fall a little bit.

And if we pulled the Chinese impact out or the new plant impact out, would gross -- could you maintain gross margins with the existing facility?

Yes. Yes. I felt we could because I think we're almost back to 2 shifts now. And at the moment, it's going well.

And obviously, starting to have enough sales coming through, too.

Yes.

Sorry, last one for me, and I know this call has probably gone over time. Government assistance, any expectations into '21? It's a bit unclear as to what you're saying there.

We certainly will have some coming through in '21. At this stage, we're not sure how much of that assistance that's in there is -- that we got last year across several countries, all sort of working on slightly different schemes. It's there. But look -- and it's important. These are important programs, but we haven't got a number on what it's -- we think it'll be.

Could it be as big as it was in '20?

Probably not.

No. Yes. There is some in Europe, so we're still working on those. And a lot of that depends on you actually have to get through their summer and spring. So...

Okay. Look, last one for me. The dividend, you talked about not reimplementing the dividend until sustained profits were back. I mean what variables should we as outsiders be looking at as the signals there?

We'll, look -- so we'll -- I think we can't say much more than we got a cash flow of sustained profits. So in February '21, we'll see how we went in this first half. If we're profitable in the first half, then there's a -- and we think the outlook's okay, there's a reasonable prospect of a dividend. If we're not, then I think there won't be.

There won't be any franking for a while, David. I can tell you that.

Your next question comes from Steve Wheen with E&P.

I just wanted to clarify your comment, Dig, just on the opportunity to take more share in '21. That's clearly a reference to the product launches that you've got. But I'm just curious as to your perspective on whether you've recovered the lost share from the MRI and whether you're also continuing to see benefit from the recall that Advanced Bionics has because I note there the MAUDE report for -- with the FDA is continuing to show performance-related issues.

So we've certainly recovered this year what we lost through MRI. With respect to the reasons that we might win share from any -- from our competitors, it's obviously twofold. It's what do we do and what do we do well, whether that's our service or our product, and how do they stack up against that again in terms of their service and their product. I think that's probably all I want to say on a -- from a competitive perspective.

Okay. I mean in terms of feedback, I mean are you still hearing any disquiet from surgeons just with relate -- with regards to that recall?

Look, I think we're certainly hearing a bit from surgeons on what they're seeing from a performance perspective. As I've said before, we have seen some of that going back into end of '19. And obviously, we talk to surgeons -- when we talk to surgeons, they will often give us some insight into what they're seeing. But I think, yes, there's been a few calls that some of -- that either you or some of your peers have done, and I think the feedback that comes from those is consistent with what we're hearing.

Yes. Just lastly just on China. You've seen a quick recovery. Is that in the tender market or outside of the tender markets? The point being is that I noticed the central government tenders were recently awarded but very low volumes to yourself. Could you just sort of explain what dynamics are playing into that recovery in China?

So the recovery is very much through the private pay segment, and what we've seen -- and some of that goes through provincial tenders. What we've seen happening over the last few years is a devolution of the tenders and some of the money to the provinces and for them to either run their own tenders or run forms of reimbursement programs, which really then ends up in private pay. So we'll wait to see -- I haven't yet seen the detail of the next 5-year plan to see what's there from a national tender perspective. I think we've been saying over the last few years or so a decrease -- it has much less importance than it has in the past in terms of not only our overall sales but also our China sales.

And just to pick up on something else, in China, is there any sign of that replacement cycle coming through processers as yet?

Not from a national funding perspective, but again, in the private pay market, we are seeing a reasonable uptake of upgrades.

Your next question comes from John Deakin-Bell with Citigroup.

I'll be very brief. I was just interested in your comments around the emerging markets. You've made a number of comments, I think, with significant challenges over the next 12 months, et cetera. I mean given that the majority of the cases are pediatric, I'm assuming that there's plenty of deaf kids being born still. Are they just not presenting to the hospitals? Or are you just saying you're concerned because the hospital systems are overwhelmed with the number of COVID cases? And if that diminishes, should it bounce back as quickly as it has done in some of the major markets?

It's a little bit of everything. It's both local lockdowns. I mean India has had a very long period of trying to lock down the society and the economy. Now that stops people presenting. The hospitals can be overwhelmed, so that reduces capacity. And remembering, in most of these markets, there's no sort of routine screening. So the diagnosis typically depends on the parents recognizing that there's something unusual about their child or their child's not responding to sound. I think there's a risk with people at home, therefore, potentially a bit less stimulus, that parents don't notice or may miss that their child is hearing. So I think it's certainly a more -- it's a bigger issue than just the hospitals are overwhelmed and as soon as they get on top of it, it will all be okay again. I think there'll be a real gap in the pipeline as well as in the hospitals. And I still -- I think, if you look at India and some of the Latin American countries, they're, I'd say, behind what we've seen in other countries in terms of just the -- when the infections really started to rise, they haven't taken off yet. So we're still a few months behind what we've seen in other countries. So it's just very hard to know. But I'm not optimistic of a quick -- sort of a quick return to normal in several of those countries, which, obviously, has impact on our revenue over time as well.

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

Okay. Look, thanks all for joining. It's been a complicated year, and we're trying to set ourselves up for the future. But I did want to finish just by thanking Brent. As you would know this is Brent's last result with Cochlear, and I did want to acknowledge the great work that he has done for us, from a cash management, financial control perspective, just to name a few things, to bring our global financial team strongly together. And if you look at our balance sheet, we are in a very strong position looking forward to be able to take on the uncertainty and the challenges in front of us. And I do want to publicly thank and acknowledge what Brent has done for us.

Thank you, Dig, and good luck to '21.

Thank you all.

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