Cochlear Limited (COH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cochlear Limited 2021 Half Year Results Briefing Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.

Good morning, everyone. Thank you for joining us for our first half results presentation. Just before we start, we do have closed captioning available that you can access through Teams if you wish. But let's start on the presentation. So obviously, very quick overview of Cochlear as a whole. I think you know this, and you will read through the headlines of the results, so we'll jump through, get into giving you the results. But just pausing on our mission. Our mission has been critically important for us, for employees around the world, as we work through COVID over the last now 12 months. And our purpose has actually been central to what we've done and has kept people focused on delivering results. It is our 40th anniversary, our 40th birthday this year, so important milestone for Cochlear as a whole and the chance just to recognize some of the history but particularly to look forward to our future. So let's get into the results at the headline level and then we'll go into a bit more detail. I'll give a bit of an overview of some of the aspects of our revenue and Stu Sayers will talk about P&L, balance sheet and the cash flow. But our underlying net profit, as you will have seen, is down 4% in constant currency. We had very good improvement across the half, the first quarter being okay and then a strong second quarter. You'll also see that our OpEx was well below where we've been. It's largely around COVID-related savings, particularly with travel and conferences. Some significant one-off items in this result, $111 million after tax, so our headline statutory profit of $236 million, but the underlying of $125 million. And in that, some significant items there of a tax ruling on the deductibility of some of our AMF payment litigation expenses, gains on the innovation fund with Nyxoah listing in September and Epi-Minder doing a raising. So it just recognizes the increase in value of those companies and our shareholding. And we've also taken government assistance in -- that was provided to support jobs around the world as a one-off item because we will be repaying that through this half. The majority of that -- the $25 million is -- JobKeeper, $24.5 million is $23.1 million received from JobKeeper in Australia in the second half. So certainly finished the half with a very strong financial position with good cash flow that Stu will talk to, and that's enabling us to pay a dividend of $1.15 a share. That's 60% payout. We do want to get back to a 70% payout ratio. And I'll talk about our guidance at the end of the presentation. So clearly, we had a strong Q2. We see our units being down 14% in the first quarter, only down 1% in the second quarter. And when we look at that by markets, we see some markets performing very strongly, particularly the U.S., Korea, Japan and China. Western Europe performed well up until November, then the escalation of COVID cases from November. We saw a slowing in Western Europe, and that's certainly nothing like we saw in March and April. But we did see some pullback from the gains that we had seen up until the end of October. Emerging markets improve more slowly, and I'll talk a little bit more about that when we get to talk about CI. But importantly, the new candidate pipeline across developed markets across all ages has been rebuilding, and I'll talk a little bit more about that one. One of the things that we talked about right back at the start of when COVID hit and certainly at our F '20 full year result was that we really saw this time as an opportunity to strengthen our competitive position. We knew we had a strong pipeline of products in our development portfolio. We launched 4 products in the last half, bringing to 7 significant products we've launched in the last 2 years. That combined with a strong customer presence and the service experience we offer, both professionals and recipients, has helped strengthen our market position, and we've seen that in market share gains across many countries through the half. And despite the lower spending, the lower OpEx, we have been able to maintain progress across our major R&D projects. And certainly, our growth initiatives where we slowed them in March, April, and we have been able to bring back investment in our growth initiatives through the half. So on the cochlear implant revenue, as I said, it's certainly improved quarter 2 over quarter 1 and quite a different picture across developed markets to emerging markets but even with -- in developed markets, some real strengths and some recovering but recovering more slowly. So certainly seeing there that with U.S., Japan, Korea very good unit growth, which clinics really back to the capacity they had but also seeing that, that growth we saw, particularly in Q2 was a mix of some rescheduled surgeries, some market share gains and definitely some market growth as well. Hard for us at the moment to sort of pick it -- unpick what was the mix of all those that led to that, but certainly, all 3 of those contributed to a strong Q2. In emerging markets, quite different there, down 30% across the half. We said at the quarter we were down about 40%. So you see emerging markets did improve Q2 over Q1. It will take longer for emerging markets to recover the surgery rates compared to developed markets. We think that's as much about the health situation as it is about the economic situation that we're certainly seeing the -- a pullback in the government money going into cochlear implants in some of these countries. So that's typically the -- sort of the pretty good volume but at lower prices, and we've seen a pullback in some of those countries on that segment. But I think the thing when we stand back and look at this and say, okay, there's ups and downs through the half, countries performing a little bit differently, but the broad trend is certainly very solid and clear momentum building. And all of that's encouraging because as we've looked at this and said 2 things sort of when we COVID hit us, one is it's an opportunity for us to strengthen our share, strengthen our competitive position. The second one that we're looking for is, is there a change in people's propensity to treat their hearing loss, is there a change in underlying demand, remembering that we have this enormous clinical -- unmet clinical need. So the vast majority of people who would benefit from a cochlear implant or an acoustic implant, don't get access to one because there's not a way because there's not a referral path. Might be because there's not funding. But part of it is people's awareness and propensity to act on their hearing loss. So one of the encouraging signs that we've seen through COVID is that the combination we think of isolation and of mask wearing has highlighted for many people the extent of their hearing loss. So people, who were subconsciously augmenting poor hearing with lipreading have found that they're unable to do that either through some lockdown isolation, particularly through mask wearing, have realized their hearing loss is worse than it was. And we certainly see a lot of anecdotes of people who've had hearing loss for some time starting to take action. So it's certainly something we're watching as we go forward, but it does give us some confidence that underlying demand doesn't look like it's been impacted by the impact of COVID, and it may be that there's some more encouragement there for people to act. So that's cochlear implants, fairly good performance through the half and a strong second quarter, which was certainly pleasing to see. We're going to look at Services. Services, as we said through our updates, is a bit more impacted than new CI system sales because where clinic capacity is constrained, the clinic will favor new surgeries over upgrades, and that makes perfect sense. It's certainly the right approach. So we saw a slowdown in services end of last year through Q1. We saw a good bounce back in Q2. In part, clinic capacity freeing up and certainly, the launch of Kanso 2 in October across the U.S. and Europe has proved very popular and certainly helping bolster our upgrade revenue. Cochlear Family membership exceeding 200,000, that's a good sign and remembering that purpose of Cochlear Family is that we can connect better with our customers right around the world. Through that connection, we hope to be able to give them a better hearing experience to make sure that they are informed and educated on the features and functions in the system that they have and that we can also keep them informed of upgrades, new technology. And that so, over time, we hope that by expanding our Cochlear Family membership and the connection that goes with it, we can gradually lift upgrade penetration. Remembering that, obviously, there's at least a 5-year lag from probably someone becoming a Cochlear Family member and us seeing upgrade revenue from it. We also see that products like Remote Check and more connected solutions give us just more opportunity to connect, both improved hearing outcomes to lower system costs but really to improve the experience of people and give them more reason to connect with us. So Services, good performance in the second quarter. Maintain confidence that Services will grow over time as we get through the clinical capacity constraints that have had an impact earlier in the -- certainly earlier in the half. Move on to Acoustics. So there's really 2 different components to Acoustics. Our sales fell by 7% in constant currency in the half; but if we dig underneath that, there's really 2 things going on. We're seeing a very, very strong uptake of Osia in the U.S. Product continues to grow. It's very well received. We've seen clinics that we're doing Baha had taken on Osia, switching about 70% of their volume over to Osia. That's part of what we want to do with Osia, but there's -- the broader opportunity for Osia is actually to really expand the acoustic implant market and being able to do that because it provides very good power output across a strong -- a broad range of frequencies, so high-fidelity sound and is also cosmetically a very appealing product. So we see genuine opportunity to expand acoustic implants with Osia. We're early days in the U.S. but some very encouraging signs there. As we said, we do want to roll Osia out over countries, and it'll take us perhaps up to 3 years to do that. We're getting regulatory approvals. In some countries, we're going to need new reimbursement codes to make sure that the price that we get for Osia is appropriate. And we will go -- we will make sure that we take a long-term view here and get the approvals, get the reimbursement so that we're really setting up for long-term growth in acoustics. So we continue to be very excited by Osia with what we're seeing. The flip side is on the Baha part of our business, which is heavily focused on the U.S. and the U.K. and in the U.K. where CI surgeries have been slower than, in a nutshell, the developed world. Even more that trend is even stronger in Baha with significant pullback in surgeries. And while they have started -- did start to recover, still well behind where they were. So that has certainly been a short-term drag on Baha. And also with Baha 5, now several -- late in the cycle with Baha 5, the number of upgrades in Baha has been declining as well. So all that says, some COVID circumstances bringing down the revenue a little bit late in the cycle on upgrades. We have some confidence looking into the future, both with Osia, but also there's an important role for Baha going forward and do think that we can get back to really driving growth in the Acoustics revenue component of the business. Okay. With that, I'm going to hand over to Stu Sayers to talk through our financial results, and then I'll come back at the end with our recap of strategy and the outlook.

Thanks, Dig. Morning, everybody. On the P&L, Dig has already mentioned revenue, so I'll make a couple of comments around gross margin and OpEx. You noted gross margin, we have dropped from 75%, down 3 points to 72%. There's really 3 factors driving that. The first is, at the beginning of the half, we did have some significant COVID disruption to the manufacturing plant having to run shifts week on, week off. Those companies run their plant at a much less efficient rate than we would normally do. That was very much early in the first quarter but did have a significant cost impact on the COGS line. The second is, as Dig mentioned, we've launched quite a few new products, and some of those have incremental COGS costs in their first year. A good example of that would be Kanso 2. It's a new sound process. It's a great product, but every clinic that is servicing customers or fitting customers with that product also needs a troubleshooting kit that has a working Kanso 2 device in it. So that's a device we make, but we don't sell. That [ offsets ] the COGS line. And then thirdly, while we're launching the new products, we still have a big tail of legacy products that we're servicing and maintaining, and we have a lot of inventory that goes with that and a lot of the lifetime buys given the age of some of that stock and some of that -- some of those products. And we periodically look at do we need to expire or obsolete any of that stock, and in which case, we write it down, and we did that in the first half as well. So all of those 3 depressed gross margin a bit in the first half. If we move down to OpEx, you'll see we're down 9% in the half, $33 million less than last year. The biggest contributor was travel and conference spend that shows up in the sales and marketing line, but that's not the entire difference there. Obviously, that pretty much went to 0 in Q1 and very close to it in Q2, but also a significant number of small cuts across the business, and that's things like not replacing open roles, not hiring new heads, looking at reducing the amount of contract labor we had for a period in the business, lots and lots of small cuts that add up to a significant drop in OpEx across the board. And FX was of assistance here as well. Those reductions in OpEx were heavily weighted in Q1, and that was really attached to then where the outcome was most uncertain. As we saw that revenue start to come back and actually come back quite strongly, we shifted that orientation to more -- much more focusing on growth and chasing and driving growth in year and into F '22. And so we'll see that continue as we move into half 2. The one line bucking the trend on the reduction in OpEx was the admin line. You'll see that's up 13%, 14% in constant currency. The single biggest and, by far, the bulk of that increase was insurance and, within that, D&O insurance was up 300% year-on-year. That's, by far, the biggest contribution there. There's a small impact there as well from those gross investments. There's some IT expense that's also coming through that line. Last thing on this page and I guess, worth touching on is just the hedging line not because it's big but actually because it's so small. The contract gains and losses in the first half are just $400,000. The reason that's so low, even though we've had big currency movements as we effectively had wound down the short-term hedge book at the start of the half, we didn't have enough certainty on cash movements to be really confident of what we're going to be hedging. So we wound that book down pretty close to 0, and that's why that FX line is so small in the first half. If we move on to cash flow, a couple of things to note here. We pride ourselves and have always prided ourselves in being a strong cash-generating business. And half 1 was really no exception to that. You see the $175 million at the EBIT line. And despite paying out over $104 million in the last of the AMF payments, we're still strongly cash-generating and 44.9% better cash position at the end of the half than at the beginning. One other thing to call out here is the CapEx line. You see that $35.3 million. We expect we're going to do about that again in the second half. So it will be roughly $70 million of CapEx for the year. For the last couple of years, we've been slightly higher than that, just up over $100 million, and that drop is a function of 2 big projects, the Chengdu and Denver offices completing. And as those have rolled down -- rolled off, that's causing that drop from over $100 million down to $70 million. We think, looking forward, $60 million to $80 million is probably the new normal for us for CapEx for the next couple of years. In terms of capital employed, we'll note that the big move here was inventory, $27 million down, and that was really the function of 2 deliberate decisions. The first was that we actually chose to increase our inventories around the world going into the half so that we had some buffer in case there was any supply chain disruption. We really didn't see any material disruption until we were able to wind back some of those stocks over the course of the half. And then the second thing, as we've already mentioned, the writing down of the obsolete and the expired stock also hits that inventories line. The other big move here you'll notice is that other net assets line from negative $76 million, climbing $152 million up to positive $76 million. And that's really 3 big factors: 2 of them AMF related and 1 FX. So first off, this is where we were keeping the AMF provision on our books, and as we paid off those payments and paid off the legal fees, that provision has wound down. It's also where the tax asset shows up that we get for, as Dig mentioned, the ATO ruling that lets us get tax deductibility on that AMF payment. So those 2 things drove a significant lift there. And then the third and smallest of the impacts was then just marking to market our current FX book. And then last but no means least, really delighted to be returning to paying a dividend for the half. We have traditionally aimed to pay out 70% of underlying net profit. We're going to be paying 60% for this half. We do want to walk back to 70% over time, but we think 60% is a good reflection of the fact that there is still a degree of uncertainty in the outlook. At 60%, it's $1.15 a share. It is going to be unfranked. Because of the AMF-driven losses last year, our franking credit balances have been depleted. It's going to take us at least a couple of years to build those back up. And so for the next couple of years, the dividends are going to be unfranked. So those are the headlines. And with that, I'll hand back to Dig.

Okay. Thanks, Stu. Let me just close off with a recap of our strategy and the outlook. So a reminder on our strategic priorities, which, to retain market leadership. As I said, that's been a significant focus through the COVID period. We saw an opportunity there. I think with our product launches, our service, we executed well on that. Growing the hearing implant market, as Stu said, we bought back some investment. We're putting -- turned that investment back on into driving growth as we've seen the revenue recover, to really try to set ourselves up for continued growth into the future. And we do want to deliver consistent revenue and earnings growth. It's been a challenge over certainly the last 12 months. We have more confidence that while there is still uncertainty out there, we can perhaps see more stability looking forward than we certainly had over the last 12 months. Let's spend a minute on our market leadership position. It really is driven by the breadth of our product portfolio, but also the service and support that we offer both to professionals and to recipients. And that service and support is something we've worked on for a long time and strengthened over the last few years particularly. We do have a very strong product portfolio. Part of our competitive advantage rests in our ability to -- through scale to be able to invest in all of the aspects of the system to advance the overall performance of the whole system and the experience for both professionals and for clinicians and customers in helping people to hear. But also that service element of being responsive, being faster, the more that we bring out connected solutions, like Remote Check, the more we are able to lower the overall cost of care for people, improve the convenience of care and improve the overall experience that people have. So we've got quite a comprehensive portfolio of products and services, and to hold the significant market position we have, we think it's appropriate we continue to invest in building out all aspects of this portfolio. Okay. Looking forward for the rest of F '21, we are and have become, over the last 6 months, increasingly confident of the resilience in the hearing implant business, that hospitals have clearly found a way to continue to do surgeries at good rates across most of the developed world and back at normal rates in some of these countries. There is certainly short-term uncertainty. We expect in the second half, the developed market units will be about in line with first half. We have had a slower first 6 weeks of the half than we saw in Q2, and that's largely around COVID-related impacts in some Western European countries, a couple of states or subregions in the U.S. where lockdowns are more restrictive. There's been a pullback in surgeries. So a little bit slower start this half, but again, we're confident that, that is a shorter-term issue rather than anything of concern over the medium term. Emerging markets will recover, but it is slower. As I said earlier that government money has pulled back in some of the countries. I think it will come back. The demand and the need is very clearly still there. But I think it will take longer. For what we're seeing, it will take longer than developed markets to return. Stu said we have -- are investing. We are going to lift our investment in the second half, but in our OpEx, particularly both in R&D and in our growth programs, that's really important to make sure that we are set up well for going into F '22 and beyond. So we'll see an increase in OpEx through this half. Our underlying net profit, we're guiding between $225 million to $245 million. From where we sit now, that does factor in the slower start through January and February that I've talked about. We're also basing this on a $0.70 exchange rate for Australia and the U.S. That lift from $0.72 in the first half does have a significant impact on our net profit. As Stu said, we do want to get back to paying a 70% payout ratio as we see the conditions improve and the stability continue or get more stable in the surgery trends into the future. Okay. So with that, we'll wrap up the presentation and turn over to questions.

[Operator Instructions] Your first question comes from David Low from JPMorgan.

Just maybe if I could start with guidance. So I have a fairly firm memory that, historically, certainly under -- as you've been the CEO that when guidance is given, you tend to spend to meet it. So if the revenue line runs ahead, the OpEx spend tends to go up. Now I recognize that it's not something you can do in the last month of the year. But should we assume that, that sort of pattern is likely to continue on or return in the current environment?

Yes. David, good question. A few thoughts on that. So certainly, we do obviously try to sort of regulate our spending a bit to make sure that we're delivering appropriate level of profitability. One of the reasons for sort of slightly a larger range for our guidance for the year given where we are in the year is that, if we do see a COVID-related slowdown in surgeries that's more than we've anticipated in the half, really don't want to pull back spending because we're investing in -- we know that the surgeries will come back, and so we do want to continue to invest through this half to set ourselves up for the future. So we'll be -- I think short answer to that is we will moderate the spending less in this half than perhaps we've done previously if there is a change in the sales because we believe -- based on that change in sales being a short-term COVID-related issue rather than anything longer run.

Yes. I think my experience of that is you tend to increase it rather than decrease it because the sales often seem to exceed. Yes. Hopefully, that'll be the case again this time.

And you're right on what you say on how much we've increased spending over 4.5 months. Yes.

Of course. Look, the other question I have is just share gains. I see that comment there. We certainly heard feedback out of the U.S., but gains have been quite material in some centers that the expense has been over advanced bionics. But can you just talk a little bit to what you've seen in terms of share movements and how much it flows between markets, please?

Yes. And so you'd always have to quantify share gains in the short run because there's ordering patterns and that we know our sales is hard to get a handle on our competitors' sales in short period of time. But definitely, the U.S. stands out as a market where we have gained share. I think historically, the U.S. is -- the share can move around a bit faster than some of the other markets. And we have performed very well based in terms of our product portfolio and our service. So that's helped lift. But we're doing well from a share perspective across several countries at the moment. And in part, that is the strength of our product portfolio, but it's also through COVID. Because we were financially secure, we could say to our teams that their jobs were safe. Their role was to support our customers. And so they've been very present with clinics, albeit mostly virtual. And I think that's reinforced our strength and the support we can provide. That combined with the product portfolio has helped us lift share across a whole range of markets. I think the U.S. is one where we'd move share more than some of the others, but we have seen some good gains in, I think, across the board and across a broad range of countries.

Your next question comes from Steve Wheen from Jarden.

I just wanted to drill down on, in terms of your revenue profile, what the patients' profile have looked like in terms of a rebound. Is there certain cohorts that are responding faster than others?

So in -- yes. So in markets where the clinics have been back at pretty much normal capacity. So U.S., Japan, Korea, the age distribution there is pretty much the same as it was pre-COVID. So that's very encouraging but particularly over -- people over 65, which in the U.S. is the majority of our -- I'm sorry the largest segment of our sales, are back at the same level as it was 12 months ago. So it sort of plays to this point I'm talking about that we haven't seen any decline in the propensity of people to act on their hearing loss even if they're older. In markets where it is restricted, as you'd expect, we're seeing a higher proportion of children because the children get obviously and should get priority for surgical slots. But all that -- and what we also see in our DTC pipeline is a age distribution that reflects what we saw pre-COVID. So all of that gives us confidence that, to the extent there are some disruption in the age distribution, it's a short-term issue rather than a longer-term structural issue.

Yes. Got it. Can we just switch to the systems revenues? There was, at the time of your first quarter, quite an obvious slowing within the processes, which was completely at odds with the implants. Are you seeing that, that deferral of processor upgrades is more related to people's deductibles within their policies? Or they're sitting on their hands waiting for a new product?

Look, I think a few things, and Stu might want to comment on this. Obviously, he has a lot of knowledge on the upgrade services side, is that we did see in the first quarter, both lower clinic capacity through COVID, that increased into the second quarter and the launch of Kanso 2 also helped lift. And there was probably some people getting some knowledge of Kanso 2 ahead of time. So there's probably a bit of deferral there. Stu, if you'd talk a bit as to...

Yes, absolutely. So partly clinic capacity and partly patient propensity to come in. So we saw sort of a noticeable difference that if you were coming in -- actually, a higher proportion of seniors were still coming in to get a new system than we had expected, but we really did see a significant drop in the number of existing recipients, who wanted to come in and have their annual checkups. So those kind of things are then quite often a trigger for the upgrade process. So I think combination of clinic capacity, propensity to actually go into the clinic in the first place from the patient's perspective and then possibly a bit of slowdown ahead of Kanso 2. But we're seeing that's rebounding pretty strongly in Q2. And obviously, the nice thing about it is everyone you don't get this month, there's someone you can still get next month.

And Steve, you mentioned deductibles in there, which is just an issue specifically in the U.S. We did see earlier on, so it's I think pullback of people having -- had not having -- because they've been at home, hadn't used up their deductible and were deferring a little bit less of that more recently.

Yes. Great. One final one for me to you, Stu, if I can, on the gross margin for the second quarter. It sounds like that's going to be more of a cleaner gross margin than what you've outlined for first quarter. Can you give us sort of any insights as to what that looked like so that we can, I guess, extrapolate for the remainder of the year?

Yes, sure. So looking forward into the second half, obviously, we don't expect to see a repeat of the COVID-related inefficiency. The -- we'd still -- will see a bit of the first year of launch stock and the write-downs, we'll need to take a look again at the end of the half. Probably not quite as high as we had at the first half. So I think confidently better than 72%. I don't think we'll be back near 75% yet. Yes, so that's probably in that sort of 73-ish range, better a bit for the second half.

And remember, there'll be an FX impact that comes through also in that, stronger FX impact [ in the first half than ] the second half.

Actually, just on that, you're not disclosing your FX hedge book profit this half. Is that -- how -- where is that sitting? And why the change?

Yes. No, we've actually made that change in the past. So certainly, we do it at the full year, not at the half year.

Your next question comes from Sean Laaman from Morgan Stanley.

Congratulations on the appointment. I have a couple of questions on the newer products, Dig. So the first one is Remote Check. I don't know if you could give us a bit of granularity on the in-market experience with that product and how that might have been -- freed up some of the channels, if you like. And the follow-up question would be on the Custom Sound Pro fitting software. And is the real-world experience that you can kind of push those fitting practices out into the more retail-based channels?

Yes. Thanks, Sean. So first on Remote Check. Certainly, we're pleased with the rollout so far. And this is a product that takes a bit to roll out because it links into clinic IT systems and that raises concerns of cybersecurity because there's patient data that gets transmitted from the patient to the clinic for the clinic to review. So it takes a bit of work upfront to actually get all -- we've done all the work to show we can do that but to then meet each clinical hospital requirement. But as we do that, we do see then good adoption from a patient perspective. Out of that, we had seen sort of 85% to 90% of the checks that are being done don't need a clinic visit to follow up. So there's no issue that needs a face-to-face appointment. I think we've done enough to see that, that level should continue. And clearly, that's better for patients when that lowers overall healthcare costs, so certainly moves to sort of enable the system to be more streamlined and free up clinic capacity for new implants as well. So certainly pleased with what we're seeing. But it will take some time to roll Remote Check out given it's a clinic-by-clinic process, and we obviously want to do it across countries and are doing it across countries and languages. Custom Sound Pro being well received and given the software changes, a pretty significant change to clinical practice, and we're hitting our internal targets for the rate of rollout and adoption on Custom Sound Pro and training clinics without actually being able -- in many cases, being able to be physically present, and that's gone very well. Custom Sound Pro is certainly set up so that the, I think, more traditional way of programming where lots of individual tuning can be done as possible, but there's also a more automated way of doing the programming as well. And so that more automated way does, we think, enable broader reach for Custom Sound Pro in terms of the numbers of people who can access it, use it competently and get good outcomes with patients. Early days on that but certainly, it's good -- well received so far. And obviously, one of the things that we want to do is to enable simplification of the mapping, the programming, both from a capacity perspective and a convenience perspective. And what we're seeing so far is good, but it is early days in that launch.

Great. Great. I might just squeeze one more in, and sorry, if this has already been touched upon. But are you able to give us a bit of granularity on what you're seeing on new pipeline versus catch-up surgeries?

Yes. So in the -- it's hard to unpick but in the countries that are going well, Japan, Korea, U.S., for example, where all new surgeries the catch-up was all done. Now obviously, given some parts of the U.S. are going to have a little bit of catch-up to do from where we are at the moment. Across most of Western Europe, we saw that heading into the -- sort of the end of October. Most of that catch-up was done. There's probably a little bit of a backlog building in a few -- or there is a bit of a backlog building in a few countries now. So we'd hope that when things free up, it should come back pretty quickly. But I think the vast majority of the surgeries we're seeing now are new surgeries rather than catch-up. Certainly in the last half, there were catch-up surgeries.

Your next question comes from Andrew Goodsall from MST Marquee.

Just -- actually, just picking up on that last comment, just a segue to, I guess, unmet demand. I guess some of the calls we've done as well pick up the referral channels sort of hasn't entirely kicked back in. I guess it's a country-by-country type scenario. But do you sort of think that there's still a little bit of unmet demand in there and I guess perhaps trying to get back to what you think is sort of an underlying growth rate that you might expect?

Yes. Andrew, good question. Certainly hard to put a number on what the underlying growth rate would be. I think we're certainly seeing in our DTC pipeline building quickly and which is very pleasing. So that's certainly one channel. Then there's a channel of referral and hearing aid referral or CPN referral, which is particularly a U.S. issue. There's other countries as well, and we're obviously trying to build more referral networks as we go forward because that's one of the keys to our growth. Certainly, some of that referral has gone a bit more slowly, although I will say, though, on the CPN side, we had quite low expectations going back a few months because we thought that the channel would slow down. And we've actually been a bit surprised against our lower expectations that the referral is working better than we had thought. But it's still not, certainly, across the whole developed world, referral is not back to where it was. But again, we've got confidence that it will get back there when we look at sort of the behavior of people and prepared to act on their hearing loss. So it's really hard to pick apart in the short run but have not seen a longer run issue. And as I think your calls are saying, it's a bit mixed, that's what we're seeing, too, but overall, still quite positive on we're seeing.

So in terms of what you got in front of you, I guess, that probably gives you a bit of capacity for multiyear sort of recovery, if I think about it like that. But I was just going to then focus on emerging markets. Obviously, not all uniform, and you commented on some that are coming back down 30%. And I mean just how quickly do you think that'll sort of -- do you think that will roar back with some confidence? Or is it sort of more related to low -- slower rollout of vaccine and things like that?

Yes. It's a tricky one. It is variable. So there's some really strong performances in there that India and Brazil, the government money or the government programs have virtually stopped or significantly slowed. And that is as much about the government health care systems being caught up with COVID-19 and as financial -- just how much funding is available. So I think both of those things, I think, will take some time to play out because rollout of vaccines in many of these countries will take several years I think. And the economic impact of the slowdown will also take some time to play through as well. So emerging markets, it's much -- it's hard for us to have a good view of the time on which they'll recover. I think as an overall part of our sales, it's obviously a relatively smaller part. And what we are seeing is that the private pay segments in those markets are performing quite well. So just some -- and in some of those countries, that private pays probably substituting for some of the government surgery. So the people who might have been -- going to get a government-funded implant realizing that that's now not going to happen, and so they find the money for -- to pay themselves. So there's a little bit of a shift from -- to bolster the private pay segment. So I'm not sure if that helps too much, but it's just complicated for us to predict.

No, I've just crossed out roaring back [indiscernible]...

Yes. I think we can definitely cross out roaring back in emerging markets, yes.

Yes. And just a final quick one. Just any issues around clinic capacity? We did hear of a couple of clinics closing down, but it sounds -- just looking at your numbers today, it does sound like they're at fringe.

Yes, yes, yes. Certainly, if we look at the U.S., particularly clinic capacities in -- bounced back quickly, again slowed up a little bit in a few places now, but it will come back [ I think ]. So yes, some short-term issues on capacity, but we don't see anything from a medium-term outlook that concern on the clinic capacity.

Your next question comes from Saul Hadassin from UBS.

Just a relatively quick question for me. Dig, the growth in units versus revenues for Cochlear's unit sales, looked like there was about a 10% benefit from ASP mix that you call out on the call. I just wanted to ask, so what's the rough price differential in a high-level sense between developed versus developing markets as it relates to the ASP per unit? Can you give us any guidance on that?

Yes. Saul I'll give you a little bit without getting too specific, partly because in emerging markets, we'll have -- as we talked about before, we have price tiering. So our latest system in emerging markets will typically sell at the same price as that system in the developed market. So in India, with Kanso 2 and a CI632 implant, will pay pretty much the same price that you're paying in a developed market. Then we have the tiering below that, that the government purchases that -- talked about it being really the area that's really slowed up is typically the lowest price segment because it's often a tender-type volumes. So that is really what we're seeing, is that low-end pricing is that volume has come off quite a bit, and that's why you see that the average of the ASP move. It's just by cutting that lower-priced volume off lifts the ASP. There's nothing more underlying change than that.

So maybe just to press a little bit more on that. So I mean we're thinking at 25% to 30% average price differential. Does that sound about right in terms of...

As you talk to -- it's a bigger range from sort of the lowest price government tenders to -- which might be sort of few-generation-old technology to the latest premium system with a Kanso 2 is bigger than that sort of 25%, 30%. I'm not going to guide you on exactly how big.

Sure. And if the math is right, I think it implies that units from emerging markets were about a 30%, 25% [ in second ] half versus developed?

So we're certainly off by 30% if you're saying what's the proportion. We would say that -- careful in what we disclose, that our emerging market revenue is around 20% of our total revenue, developed market being 80%, that the implant volume is higher than that 20% because the average system price is lower. But we haven't given out a specific number on what proportion of the overall implant sales goes into emerging markets.

Your next question comes from John Deakin-Bell from Citi.

Dig, just following on kind of a similar line. I was just hoping to focus on the margins going forward or the EBITDA, starting in the net profit margin and the EBITDA margin because pre-pandemic, you kind of framed the business as being around 18% net profit margin, which translated for several years to be about 28% EBITDA margin. This year is a bit different. And I note consensus before today was similar for FY '22, back at that 28%. Is there any reason why that wouldn't be the case? I know that the SG&A is one line that's moving a lot. But by FY '22, for example, should we be thinking about the business in the same terms as we were back in 2019 with respect to EBITDA margins?

Yes. John, broadly, yes, just with one caveat on it that the Australian dollar has risen obviously very quickly and significantly that even with some hedging puts pressure on our margins. So we've got some decision there as to what extent do we continue to invest in longer run growth versus sort of preserve that 18% margin. And I think if the Australian dollar stays up where it is now, it makes sense for us to probably pull that margin off a little bit in the short run to make sure that we can continue to spend on future growth.

Your next question comes from David Stanton from Jefferies.

Just to sort of follow on, on John's excellent question. Wanted to understand sort of second half FY '21 operating expenses. I'd note that travel's declined and the like, but you've got some -- you've got -- in terms of your guidance, you still got -- implied same to lower profit going forward. Why won't -- why will operating -- second half operating expenses increase going forward, please?

Yes. David, a couple of things there. One, the OpEx in the first half and particularly the first quarter, I would say, was very depressed, almost sort of artificially low. So marketing and -- sorry, the travel and conferences was literally almost 0 but then, as I said, a bunch of other restrictions that we put on the business just to -- while we were still more uncertain on the outlook. And so going into second half, we're not expecting massive return in travel and conferences, but there will be some and particularly in some markets, where -- Korea has been a good example, where that country has largely operated as if it wasn't an impact for a large part of the half. But also then, we are looking at -- we're seeing more confidence in revenue and more confidence in revenue growth in half 2 and into '22. And so there are things we want to do now around R&D, around some IT that enables some of those R&D things and around some activities directly with customers and building out the pipe more that we think warrants investment now to drive that growth into the half and into '22.

And following up on that, too. Just apologies if you've written this down somewhere. But can you give us some idea about R&D spend as a percentage of sales -- percentage of revenue for second half '21?

So again, David, we still want to hold R&D around 12% of our revenue. Over time, it'll move around a little bit on that. As we said, opportunities could put a bit more in, and so that's a balance. I'd probably push a bit higher than that, I think, into the second half. But I think, yes, just to reinforce what Stu said, what we said going into this year is we are in a strong position. It makes sense for us to invest into the future. And now that we've seen that revenue coming back and that's what we'll be doing into the second half and through into '22.