Cochlear Limited (COH) Earnings Call Transcript & Summary

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

Good morning, everyone, and thank you for joining for our results presentation today. So let's get started. I'll start with our mission. As always, our mission has been a very important guide for us over the challenges of the last year and certainly a unifying purpose for all of our employees as we have over the last years seek to strengthen our market position and really set ourselves up for the future. And as part of setting ourselves up for the future, we not only refreshed our strategy in the last year to refine it based on what we've learned, but also got clearer about how it is that Cochlear creates value across society as a whole, and there's more details on this in our annual report and our sustainability report. But here, there's really 5 areas in which Cochlear creates value across society. The purpose of those is a healthier and more productive society, and that's clear from helping people hear and hear better. They're empowered, they're able to achieve their potential and to be more productive in society. The second one about empowering our customers is really all about making sure that both the recipients and professional customers get convenient solutions have confidence in our solutions and are able to either deliver care or let their lives as fully as they can. Third area being a lifetime of hearing solutions, it's really about investment in R&D and our continuing extension of the capability of our products of the hearing outcomes of our customers and their lifetime commitment to working with and supporting our customers so that they get the best hearing experience they can throughout their lives. Our employees, thriving people is a very important part of the value we create with over 4,000 people around the world, having high levels of engagement, commitment to our mission and with our customers, and we've seen that over the last year is a very, very important part of how we create value overall. And finally, their staying value and our financial performance is obviously critical are for us as a company. It's critical for our customers who need support through their lifetime that we are financially strong and stable, and that we also want to deliver the results that we do and the benefits that come from Cochlear in environmentally sustainable way. So you can read more on that in our annual report or our sustainability report important move for us to be clear on how it is we create value as a company overall. So with that, let's move on to the results summary for F '21. We did deliver record CI units and sales revenue in the last year, which is a result of a solid and pleasing recovery from the depths of Q4 in F '20. So you can see here, the CI units are up 15%, up 7% on '19, and we compared back to '19 in this result because it was the last COVID unaffected year, that gives, I think, a good indication of just how the business is performing. We did set out in '21 to say that the really important thing that we did in '21 was to set ourselves up for '22 and beyond. While financial performance is important in '21, it was really about consolidating and strengthening our market position. We were able not to keep all of our people, we actually increased employment through the year as we saw markets recovering and in being able to do that and strengthening our presence out in the field, particularly been able to provide terrific support for our customers, and that has helped us not only grow the market and support our long-term growth, but also helped us with some share gains in some very important markets. Our underlying profit -- net profit of $237 million is up 54% last year. Our net profit margin of around 16% is well above F '20 and still below the 18% for long-run target. And obviously, we want to move back to that 18% over time as markets fully recover from COVID. There are a number of one-offs in our statutory net profit, as you can see in our results. And very strong cash flow, and Stuart will talk to this later. That strong cash flow has enabled us to move back to a dividend payout of 70%, and that's obviously a sign of our confidence over the medium to long term and that continuing confidence in the market growth opportunity and the opportunity that we have in front of us. And I'll finish up with our guidance that you can see here at the bottom of this slide. So moving on to Slide 5 and our Cochlear implant sales. We did really see improving momentum across countries in the last year. Really, what we saw, I think, when we look back is that the countries where the COVID impact was short and reopened quickly. They have recovered the fastest and are really on a trajectory that we were on in '19. And the U.S. is a good example of that. There was a very significant sharp lockdown in Q4 of '20. As you saw in our half year results, U.S. -- and our annual updates review the U.S. had recovered well. We've seen very strong growth in the U.S. through F '21, and we expect that to continue into '22. Similarly, in Japan and Korea that were less affected in that first hit in Q4, we've seen strong growth in those 2 markets as well, albeit Japan has been a bit softer more lately on the delta variant. It's a little bit different to what we see in Western Europe. In Western Europe, we saw that the impact of lockdowns or the waves during infection were extended, the response in the health community and by governments were more protracted. And there, we've seen it take a longer time for the markets to recover. And so as we said across Western Europe, our overall implant units are still below, just below where they were in F '19. What we've seen through the year is a continuing recovery, albeit that recovery in some countries impacted by growing waves -- rising waves infection. But as we look forward into '22, and we see rising rates of vaccination. We're anticipating certainly through Europe more continuing opening up and a continuing recovery of Cochlear implant sales through Western Europe. And so that overall growth that we've seen is clearly coming from some share gains in key markets, definitely underlying growth in those markets that had the shorter shutdowns and certainly in the first half, some impact of rescheduled surgeries from Q4, helping support the sales. In emerging markets that the story is similar in that the shorter the shutdown, the faster response, but what we're seeing in emerging markets, which we do normally see too is a much broader variation in -- across countries. So China, for example, which had shut first, open first, has bounced back very strongly, and we've seen very good growth in China. Similarly, Eastern Europe and Middle East have performed well through the last year and recovering, whereas if you look at Brazil and India, which we've read about in the press, the impact of COVID, there have been much more significant on society on health care systems, and we're expecting there to see a longer and more protracted recovery in a longer time before we're back at the levels that we were in F '19. But still with cost emerging markets overall, our sales were up 10% on '20, and they are above where we were in F '19 on average. Obviously, underlying that there's significant variations across companies in the countries. In services, so nice to see a record there in services, up 5% in constant currency on '19, well up on '20. As we've said through the year that the access to clinics has restricted upgrades in a number of markets. So it's certainly pleasing to see that growth and the launch of Kanso 2 and Nucleus 7 in [ '22 ] have been important part of helping drive upgrades. We remain confident here at the medium-term outlook. The installed base continues to grow, and we know that that's the biggest driver of upgrades. And clearly, with some restrictions through second half of '20 and through part of '21 in driving access to upgrades and therefore, the services revenue we do anticipate there to be a medium-term growth continuing here. The expansion of Cochlear family membership to 217,000 up 19% is just very important in helping us maintain and improve engagement with customers, to connect better to hopefully lift upgrades over time, but very importantly to get direct feedback on the performance of our products and how they fit in with people's lifestyles enabling us to collect clinical data and also be able to refine our products and services over time. On to the acoustics outlook on Slide 7, Acoustics performance. Acoustics is still in recovery. You can see here that their sales are not yet back at the levels that we saw in '17, '18, '19. That's clearly improving in the second half with the launch of Baha 6 Max, the launch of Osia. Now well established in the U.S., and we continue to see excellent feedback from surgeons and from customers on the simplicity and the performance with Osia, we we're very confident of the medium-term outlook here. Also, I said with Osia that it will take us some time to get regulatory approvals country by country to get reimbursement because it does in some countries and many countries actually is going to be in a new category, and that will take us some time to expand around the world. We did get CE Mark during the last half and have started to roll out across some European countries in early days there, but they're also getting good feedback. So the outlook for growth in Acoustics is very positive. Some good signs that we're recovering from the dip '20. I'm very confident that we'll go back past those peaks through '17, '18, '19, when we look at the strength of our product portfolio and the opportunity that Osia provides to really expand access as we get the regulatory approvals and the reimbursement. Okay. So that's a look at our 3 revenue segments. Now I want to move on just to looking at how -- what we achieved from a strategy perspective and looking at our strategic priorities over the last year. So we did -- we have, in the last 18 months, received FDA approval for 8 products, and you can see those here. The Osia system, Baha 6 Max, Nucleus Kanso 2, Custom Sound Pro fitting software, SmartNav, remote check, Nucleus 7 for N22 and the Nucleus Profile Plus Slim 20 electrode. So importantly, what you can see here is that we continue to advance every element of our system. That's an advantage of our scale and important for our market leadership is that we address the whole therapy and improvements in the whole therapy and that means improving each of these elements that go into delivering the therapy. That's an important part of our competitive advantage. And certainly, our scale in R&D enables us to deliver a broad portfolio. And obviously, we continue to invest in R&D and have a strong pipeline of future releases. We also know that the important part of our market leadership, move on to Slide 9, is delivering world-class customer experience. And the in part comes from the quality of our products and our technology, whether that's Kanso or Nucleus 7, but it also comes through the service and support that our field teams around the world provide to both professional customers and to recipients. And we know that the easier we can make their lives, the more we can do to improve clinic efficiency or remove nonbillable time from clinics, that's where our connected care solutions can assist. The more we do to streamline overall care, improved care, lower the cost of care and strengthen the opportunities for growth and our market position. We have launched CoPilot, which is a rehabilitation app for adults just in the last few months. The uptake of -- while it's early days, the uptake of that app has exceeded our internal forecasts. Certainly, the feedback has been very positive. And this is an effort really is aimed at engaging with our customers and helping them get the best performance they can from the hearing implant system and really helping them adapt to it and understand the potential of it. So a whole range of skills training, plus tips and tricks as well, but very good response in the early days from that app. And Cochlear Family, I've mentioned, but also I think we're rolling out of SmartNet and Custom Sound Fitting Pro, again, that's really aimed at helping our professional customers to have better care over time and reduce the cost of care. Moving on to the market growth and our activities there. Some very good progress on access and awareness in the last year. So our consumer facing activities here, which is the direct-to-consumer promotion as a global program now. We continue to grow leads and grow surgeries from our DTC campaigns right around the world. We continue to work hard on referrals from the hearing channel, knowing that referral from the hearing channel are essential part of executing our strategy and our future growth. That is where, for the [indiscernible] segment virtually all of our future customers, we're in high-powered hearing age at the moment would get better performance if they got a Cochlear implant, but don't [indiscernible] getting referred and there's not a clear referral path. So our work in the hearing aid channel is really to educate and develop those referral parts whether that's through the Cochlear provider network or through cycle. And we continue to expand those programs and again seen increasing referrals from these programs. On the longer run, we want to make Cochlear implantation of standard of care fit for adults and seniors, as it is already for children born with severe and profound hearing loss, we want to make it the standard of care for adults with severe and profound hearing loss. This is a longer-run program and it aims not only to build out on the referral channel, but really build on the advocacy and the awareness. And so important milestones in the last year with the World Health Organization's world report on hearing, calling on governments to prioritize hearing health care, recognizing Cochlear implant as a very effective solution for the people with severe to profound loss. The publication of the consensus statement on adult hearing loss and Cochlear implants in August of last year was also a very important milestone in helping establish clearer clinical guidelines and clinical referral powers. And for the first time, there is a global advocacy voice for consumers. This is a Cochlear Implant International Community of Action. And again, advocacy and advocacy by recipients directly to governments and professionals are very important part of building out standard of care. All of that enables expanded market access than we saw last year. So again, some examples of our market access programs at work and expansions in market access with indication expansion in Belgium, leading to a significant growth in the number of implants there despite impacts of COVID, and in France, expanded reimbursement for acoustic implants and [indiscernible] upgrades for acoustic implants has led to strong growth in the acoustic business in France as well. Market access work, I've moved on to Slide 11. Now is grounded in strong clinical evidence and particularly studies of cost effectiveness. Two very important studies, independent studies coming out in the last year in Sweden and in the Netherlands. The Netherlands study concluding that Cochlear implants was beneficial and cost-effective across all age groups. The Swedish study also showing significant cost effectiveness. And as you showed cost effectiveness in line with hip and knee replacements and then pose the question as to -- or hearing loss is as prevalent as the need for the knee and hip replacement. Why isn't Cochlear implant as widely available or as widely used as a therapy in adults and seniors when it is so cost-effective and cost effectiveness measured and cost improvement in quality of life, so a very high benchmark. And as you know, we've also started with the University of Nottingham entered into a contract to conduct a clinical random controlled trial of Cochlear implants against high-powered hearing aids for people with severe to profound hearing loss. That's people with a 70-decibel hearing loss or worse. And that's build to build -- aim for that trial will take a few years to run, but it really aims to build out the evidence showing [indiscernible] and effectiveness of Cochlear implants compared to hearing aids, but those within indications. And that's, again, all part of this longer run work on standard of care and making Cochlear implant standard of care for adults and seniors with sever to profound loss. On to delivering consistent revenue and Stu is going to talk to the detail of this. But in summary, we continue to invest to grow through '21, and we'll continue to do that because of the significant growth opportunity that we have. And as always, we want to maximize our spending on growth while spending enough to make sure we retain our leadership position in the market. We continue to work on operational improvement, and we have started a multiyear program to upgrade our processes and systems across the business that will improve the agility and our customer experience even further. And clearly, we're in a strong financial position. So with that, I'm going to hand over to Stu to talk through some of the details of the P&L and the balance sheet.

Thanks, Steve. Good morning, everybody. You've heard a lot about sales revenue already. I won't add anything to that. On the P&L, we did jump down to our gross margin. You'll see we're down 2 percentage points there. We want to be back at that 75% point long term. About half of that drop was a function of the Australian dollar appreciating and that obviously hits our sales line more than it helps our purchasing power on the cost line. Looking through the operating expenses, the selling, marketing and general, we saw some pretty substantial travel savings coming through that line, but we also, importantly, reinjected the short-term incentive program. And we continue to invest heavily to drive growth and growth driving activities through that line. We aim to preserve R&D activity as much as possible through COVID. You saw that in '20. We did again in '21. The long-term target there is to have that sitting at about 12% of revenue. It's slightly above because the revenue was slightly lower due to COVID. On to our admin expenses, the increase is there, it's 3 things. The biggest is the D&O insurance. We continue to see significant premium increases there. Again, that return to STI, coming through that line and also to the extent that the growth activities require IT investments, some of the IT investments are showing up in that administration line growth as well. For OpEx in total, it's sitting at 50% of sales revenue. That's a nice increase on F '20. Pleasingly, it's also slightly ahead of where we were in F '19. That number was 51% in constant currency in F '19. Our net financing costs, the $8.4 million there, $7 million of that $8.4 million is the accounting treatment on leases. The remaining finance costs are very low, not surprisingly given the strength of the balance sheet. And that got us to that $236.7 million underlying NPAT. That's 16%, as Dig mentioned, long-term target here remains 18% and we expect that number to improve going into next year. We then need to add back the windfall gains from -- on tax from the patent litigation payment we made. And we also had some noncash innovation fund upwards revaluations that get us then to the stat profit number. If we go to the next slide, we'll look at cash flow. And again, we started here with very strong underlying EBIT performance, and then we still have to pay out the final AMF payment that $104.4 million. And so very pleasing that despite having to pay that money out, we were still able to generate $107.6 million more of cash through F '21. We always aim to be very strongly cash accretive and F '21 was no different. The other thing to call out here is probably the CapEx line, dropping $57.9 million, and that's a function as we flagged at the last update that the 2 major site investments we've been making, Denver is now complete. Chengdu is very, very nearly complete. And so the bulk of those site-based CapExs have rolled off, and we're back to sort of a normal situation now. If we come to the next slide. So net cash, again, is pretty straightforward, very pleasing to be throwing off $107.6 million for the year. If we go to capital employed, big increases in trade receivables and trade payables entirely driven by the fact that we're selling a lot more product, so moving in the right -- moving for the right reasons. The other thing to call out here that big increase in the investments and other financial assets line, the $126.9 million. That's $18 million of us injecting cash into some of these investments, and the remainder is then noncash value increases driven off either funding round, implied valuations or in the case of Nyxoah, their NASDAQ listing. And the other big move was that net liability line and improvement there. That was 2 things. One, we made that final AMF payments, so the provision came down, so that liability dropped. It increased slightly with the deferred tax liability of 1 of those innovation fund investments. And so on to dividends. And we paid $1.15 at the half. We're going to pay $1.40 per share for the full year dividend. That takes us to $2.55 for the whole year. And again, really pleased that we are back at the dividend payout target of 70% or above of underlying NPAT for the full year. It is unfranked. We are still rebuilding our franking credit balance, following the loss from F '20. And we expect to starting out a partially frank dividend again in F '23. And with that, I'll hand back to Dig.

Thanks, Stu. So you look at the outlook. So look, if we look into '22, we do expect to see continued growth in those countries where we're clearly back in growth trajectory and also continuing recovery through Western Europe and sort of in the parts of Asia Pacific that have not yet recovered. As I said earlier, on emerging markets, we think that some of those are going to take longer than F '22 to fully recover. That's certainly our expectation at the moment is that through Western Europe and -- that those markets will recover back to above [ 19% ] in '22, and U.S. continuing to grow strongly. We will, as always, continue to invest in our long-run growth opportunity and that will be focused on market growth activities and strengthening our competitive position, so continue to invest in growth, continuing to invest in R&D. Our OpEx will continue to increase as we push those growth projects forward, particularly as those markets are recovering. Our CapEx range of $70 million to $90 million. Now that includes $20 million -- approximately $20 million that will relate to major process and transformation IT systems upgrade. And that we have included in CapEx for the moment, obviously, with this change in the accounting standards under the treatment of cloud computing and expenses associated with cloud computing, we are working through how much of that $20 million will we need to expense and how much will be capitalized. And because we have an update as we go through the year on that. But our outlook at the moment assumes is in line with the previous accounting interpretation that, that would be capitalized. So again, if we get to -- if we look to the guidance then, we're guiding to between $265 million to $285 million, which is 12% to 20% increase on the F '21 underlying profit. We expect our net profit margin to move back towards 18%, and not going to get there this year. And in part, that's due to us continuing to invest, while we are still having countries that are not back at full speed, and it makes sense for us to continue to invest rather than to moderate our spending while we wait for those companies -- countries to recover because it's very clear from everything we've seen from the ones that have recovered, there will be a continuing recovery. And in fact, what we're seeing out of COVID actually an increased focus on the importance of treating hearing loss, particularly in adults and seniors, whether that's -- and that's -- we're seeing that because of people spending more time in isolation, and the importance of communication when they are isolated and mask wearing. And what we've seen with mask wearing and we talked about this before, is that many people have hearing -- their hearing is worse than they thought it was and they lip read to supplement their poor hearing. And with mask wearing, they can't lip read and they're now realizing that they need to take more action. And we've seen many examples of that around the world over the last year of people progressing towards implants having had hearing loss for a long time and realizing that because of mask wearing that their hearing was much worse than they thought. So on our guidance, we do -- we are factoring into this near-term impact from COVID. I -- clearly, we're seeing some of that in Australia at the moment. That's will be a very small part of our business, but we are seeing that impact. But there are also other countries on the back of the Delta variant, where we've seen some slowdown in a few places. Now we factored that into our outlook. Clearly, if that gets materially worse from here or there are significant countries or portions of countries that get -- major countries that get shut down, then that would pose a risk to our guidance. So we have factored in a level of disruption that we're seeing at the moment should that deteriorate, that would have an impact on our guidance. We've also talked about this cloud computing. So we have not factored in what would need to be expensed as we work through that. We will provide an update. Clearly, this is -- there's no change to cash flow, whether this expense is categorized as a capital item or an OpEx item. We are committed to maintain our dividend policy to a 70% payout ratio. And the underlying assumption for currency here is a USD 0.74, seem pretty reasonable earlier in the week. Obviously, the dollar has fallen towards the end of this week and we will see where it goes from here. Okay. So with that outlook, I think we now will move to Q&A.

[Operator Instructions] Your first question comes from Steve Wheen of Jarden.

I just wanted to talk to the guidance. In particular, the impact in FY '22 of commissioning the China plant and perhaps what that might look like in subsequent years. And then also within that guidance, the slowdown that you've been anticipating in some countries because of COVID. Could you just sort of talk to which countries they are that are showing that sort of slowdown at this point?

Okay. Yes. I'll talk to the second part of that, and Stu can talk to the gross margin impact, Steve, and good to hear from you. So what we're seeing at the moment is clearly a bit of an impact in the East Coast of Australia on -- at the moment. We've certainly seen a little bit in Japan as well, and that's a little bit around the Olympics, but Japan had a state of emergency in several prefectures which has limited access. A little bit of a slowdown in the Southeast of the U.S. as well. Florida and Texas going on with the back of Delta. So that's sort of there the main at the moment. I mean, India and Southeast Asia are slow and stay slow. Now that's not -- I mean it is Delta, but that's not necessarily changing the trend. Those markets have been down and staying down. So that's what we're seeing at the moment. And obviously, with Delta, it is quite volatile, things are moving quite quickly. And Stu, do you want talk to the....

Sorry, Dig. Just on that slowdown, the U.S., just because the hospitalization rates have really ticked up. No sign of that having an effect in Cochlear implants?

[indiscernible] in Southeast U.S., particularly in Florida, we've seen a little bit of a slowdown, most to the rest of the U.S. is fine. Sorry, Steve, do you want to talk to the Chengdu in gross margin?

Yes. Sure. So Chengdu coming online. Obviously, there's a significant learning curve sort of ramp-up period we go through. We're at the beginning of that we'll start to see the impact of that in '22 and then it should be peaking towards the mid to end of '23. The scale of that at its height, it will be about a 1 percentage point hit to gross margin. But despite that, we think we'll still be in an improved gross margin situation in '22 relative to '21.

Yes. Okay. Great. And just on FX, you obviously are winding down some of your hedging contracts when COVID was hitting or impacting your sales. So can you just sort of talk to what you've done since then? And then in the context of what the Aussie dollar versus the U.S. has done, is that [ 74 ] to where it is today at [ 71.5 ]? Is that largely hedged? Or is there still some benefit that could come from that if they were to remain at that [ 71 ] type level?

Yes, sure. So look, we wound the hedge book write-down at the beginning of COVID because we just didn't have enough certainty around the cash flow outlook. We've rebuilt that book and we're solidly back within our policy ranges for between 0 to 6 months out to sort of 24 months and beyond. Obviously, much more hedged closer, less hedged over the medium to long term. Relative -- and so given it's the recent drop -- that dropped from sort of [ 74 ] down to [ 71 ]. That there's still a better benefit to flow through there. But we are -- we aim to be at least 80% hedged here over 6 months, and that's where we are right now.

Right. And last one for me. Just whether you're seeing any pressures in the supply chain given the step-up in your volumes, maybe even related to semiconductors. Just if you could cover off on that as well, that would be great.

Yes. Steve, on the supply chain that we run our inventory at pretty high levels. We try to take a conservative approach there. So we're certainly pretty well covered for semiconductors. That said, there are a lot of -- we've got a pretty long supply chain, and there's a lot of electronic components. And so we're doing -- have a team have done enormous amount of work to understand where we are. And we're pretty confident where we are and our ability to continue supply. There is always some risk on that as well. And now COVID presents some risk on the supply chain as well. But from what we can see the at the moment, we're confident of our ability to supply and to continue to be able to grow our output, at least in line with our sales.

Your next question comes from David Low of JPMorgan.

Could I just start with the gross profit -- sorry, the net profit margin that you're targeting. We did notice that it fell away in the second half there. Just wondering sort of how you think about that in the short term? I heard the commentary that it will -- the aim is to get back to 18%, I won't see that in the current financial year. And then if I could throw into the mix your accounting change and whether that's likely to change the long-term thinking on that target, please?

Yes, David, no problem. So first one, is that, yes, net profit margin was lower in the second half. And we said at the first half, that we've really got a bit of a sort of a windfall in that first half of '21 of the sales rebounding quickly, and we had pulled discretionary expenses out of the business as much as we could. And so we certainly -- we've said that at the half, we've had a good lift and expect us to lift our spending in the second half, which we did. So in the second half year, our net profit margin was 15%. It was 17% in the first half. So I think that's what gave us just for 16% for the year. We expect we are going to lift it back up towards 18%. But as I said earlier, it just -- while we've got countries where we can still see the potential, but they're not yet running at the sort of pre-COVID levels. It makes sense for us to continue to invest in anticipation of those sales coming back than pulling our spending back to just to get to an 18% margin. That's why it will take us a while to go back there. With respect to the cloud computing impact, look, that will just depend on the magnitude, I say, of this $20 million. And we've said, $100 million, $120 million over the next 4 or 5 years of what of that, that we have to expense. I think it's what we're seeing is likely a bigger part of that than a smaller part will need to be expensed. We'll need them to look at what that means for our margin outlook. And as I said, clearly, it's no impact on cash flow. But our priority is got -- is and will remain that we continue to invest in R&D and invest in driving growth, and that should be largely impervious to -- unaffected by accounting changes.

Okay. No, that's helpful. So just with the guidance range that's out there. I mean when you think about giving range at the bottom end, are we talking a different profit margin being likely? Or is that not really -- I mean that's a sort of a reasonably fixed part of it when you think about those numbers?

That depends a bit on what happens. I mean we sort of give a range there for reasons that revenue could move around a bit, cost could move around a bit. And it's why we guide on net profit range rather than sort of feature the lines through the P&L. So I think I could add anything to that if we're -- our bias as we see recoveries to keep investing. So we will get that margin back up, but we'll make sure we invest -- we don't starve investment as we do that.

Yes. No, look, I'm sure pretty much every shareholder would definitely [indiscernible]. Look, last question for me. I did see the comment in the press release about market share gains. Can I get you to talk a little bit to what you're seeing there? I mean, obviously, we're quite sort of focused on the fact that similar to [indiscernible] have been recalled. It's more than a year ago now, just whether any sort of competitive dynamics, market share movements that you think are worth calling out, please?

Yes. Look, I mean, it is a competitive market, and we have -- as we say, we've got good strong competitors. And they will continue to launch new products as we do. Our customers want to see competition in the market as well. So they're always keen for our competitors to succeed along with us. So I don't think the dynamics have changed all that much. I mean look, we've definitely gained share across some key markets. We can see that look, we definitely have in the U.S. I don't want to get too specific on which markets we have, but there's certainly important markets where we picked up share over the last year. And obviously, we got to hold that and there's still some markets out there where we want to try and grow our share as well. So I don't want to go too much into the details of what our competitors are doing up and say they're good competitors, and they'll keep launching products, but we're very confident that our product pipeline and the quality of our sales and service and field support for customers.

Your next question comes from Andrew Goodsall of MST Marquee.

You mentioned you're working on a new process or upgrade. And I just want to understand if COVID's a factor in your typical 5-year sort of process or refresh cycle. And if that -- what's your sort of thinking around where the next sort of upgrade cycle would start?

Okay. Yes, Andrew, I didn't say we were working on a process [indiscernible]...

It was a multiyear upgrade, I thought. I write down, but...

Okay. But yes, but you're right, we are always working on process -- in our separate work across the whole portfolio. So we are working on processor -- process and new implants that's -- and new software as we should. Look, I won't go into the details of, as always, into timing of any product launches. Look, certainly, COVID makes it more difficult to operate. That's certainly true. We showed that we can work through that with the launch of Kanso 2 in September last year and with countries in all sorts of states of lock down. So we can work through, but it does complicate running of clinical trials and things like that, certainly -- depending on the countries that you're in. So it's definitely a challenging time. But we're always going to have processes in development and at the moment with Kanso 2 still only being out there less than a year and being very well received, it sort of doesn't make sense for us to try to rush anything else out to take away from what's a really strong product and performing very, very well.

And then just asking around the mix that you might be seeing at the moment. Is there any sort of preference to continue to prioritize pediatrics through the implant process and perhaps defer adults? And if that's the case, I know COVID is almost becoming normal now. Are you seeing a little bit of backlog in adults? Or are you seeing them sort of come through in the catch-up when reopens takes place?

So as a general rule, we're seeing the age distribution of surgery is the same now as it was pre COVID and some seniors coming through at the same rate. That said, there are isolated areas, and we've got that in New South Wales right now. So in New South Wales, elective surgeries was stopped in public and private hospitals, children still get go through, but adults not at the moment. So -- and we see that happen from time to time in places around the world, children go through, adults get held back and then there's a backlog to come through. So it does happen, but when we look at it in aggregate, the age mix looks very much as it did pre-COVID. Yes, and that it is -- I think that's important because it gives us real confidence that people are continuing to get there hearing loss treated. And as I said earlier, they're actually -- what we're seeing there's a higher propensity in a number of places where people can get their hearing loss treated.

That's good. And just a final one for me. Just in the Acoustics growth rates. Just trying to understand how meaningful Osia is at this stage? And I guess, any other comments you've got just on the potential that is inside that segment?

Yes. So Osia is certainly very significant in the U.S. where it's been out in the market. Sort of around 70% of our Baha surgeons have switched over to Osia. As I said, a round number. Now that switch is good. What we're really after here is actually growth in getting new surgeons and broader indications, and we think we can do that over time. So I think that shows the potential of the products. And as we roll out in other markets and get the reimbursement in place and get the counseling pipelines there, do you expect to see -- in the bigger Baha markets a conversion from traditional Baha to Osia. But overall goal here is actually growing the entire market, not just substituting 1 of our products with another one.

And is the price point meaningful relative to Baha price point in terms of just its contribution or making a more significant contribution in that mix?

It's certainly important that we get a price increase over Baha. It's a better technology, it's more complicated technology, but that's a complication that actually gives a much better outcome. So there's clearly additional value there. And we want to get that value. And that's why we're taking some time to roll this out, but we're choosing not to use Baha reimbursement codes unless the Baha pricing is very, very favorable and to get new codes that give a price that reflects the value in the product.

Your next question comes from Sean Laaman of Morgan Stanley.

Well. First question, Dig, is there any commentary you can provide us on ASPs, whether there's been -- through implants, whether there's been any upcoming changes in country to ASPs? Or give us a sense of what any mix benefit or penalty could be?

Yes, Sean. And yes, we are going well. Thank you. we're not seeing significant changes in ASP. It continues to hold pretty steady. We've said over time, we said in the past that in Western Europe, we'd expect to see sort of some small ASP declines over time. I think from an outlook perspective, that's still what we believe. But over the last year, no really significant moves in ASP.

And second question, just looking at the growth on fiscal '19 in services versus Cochlear implants, it was 5% and 10%, respectively. How would you think about that going forward? Is it just a more subdued recovery in services, hence, the lower growth rate? Or is sort of getting past the pandemic, we could expect a step-up in service growth to become more like Cochlear implant growth? Any commentary around that would be useful.

Yes. No, look, we expect -- I mean if you look back at our history of services growth, that has been the fastest growing part of the business up until COVID hit. And that's because that installed base grows year-on-year and continues to grow, so that helps to support the growth there. So we'd expect the services to continue to grow and to continue to grow at least the rate of the CI business, perhaps not the rates that we saw from '14 through '19, but certainly, at least the rate we see lately.

And last question. Is there any updated commentary you can provide us on your progress with CPMs and cycle as a part of that?

Yes. So look, on cycle first, continue to see, as we said in the past there that we're seeing a small but growing number of referrals and that continues. So we are -- continue to see a lift in the referrals through cycle. One of the investments that we're making is to put some more work into educating through cycle to try to lift those referrals further. So that's experiment that we're going to run through this year. On the CPM, that program certainly matured in the U.S. And with COVID, we continue to see a good level of referrals. We continue to learn importantly about clinics that have a higher propensity to refer and those that don't. And so we can help target our efforts in which hearing aid clinics to run -- to try to work with. And we've, over the last 18 months, expanded that program into other countries, certainly into Australia. And we're working through a number of Western European countries now to work on those hearing aid referrals. And we can take what we've learned in the U.S. and other places, we've got to tailor it for local conditions. But we're doing that as we go, and we do see this as a very important program to run -- build out the referrals and the growth of adults and seniors over time.

Your next question comes from Saul Hadassin of Barrenjoey.

Did, if I could just start with a question on the commentary around NPAT margin improvement into FY '22. I mean you flagged in the commentary, China manufacturing and commissioning costs potentially impacting gross margin negatively over the next few years. And I'm assuming you're targeting R&D as a percentage of sales still around that 12% mark. So can you just talk to, is it SG&A leverage that you're expecting to improve the NPAT margin over the next year or 2?

Stu, I just want you to comment on this one. So we do expect we expect the gross margin to improve through '22. So that that's definitely part of lifting the margin back up. we do want to hold our SG&A at around about that 50% that we've got there near sales because that's where a lot of our longer-run growth investments go. So it's really not trying to push that gross margin back up and get efficiencies where we can across the business. Stu, do you have any more to add on?

Yes, absolutely. Yes, Chengdu is going to negatively impact the gross margin percentage. But despite that, we still think we're going to see that improve in '22, and that's a function of a bunch of factors partly learning curve as we get up the yield curve on new products, there's a bit of FX in there. There is some -- we took some write-offs of obsolete stock in '21. So a range of factors, but we think that we're confident we can see that gross margin improve despite any impact in Chengdu in '22.

Right. Second question was just looking at the implant ASPs in second half '21 versus first half, pretty material decline in [ average ] ASP. Was that just recovery in Kanso in developing markets that saw that decrease half-on-half?

Yes. Yes, yes. Significant growth in the emerging markets in H2 over H1 in '21.

And then just last question for either Dig or Stu. Just you've got over $0.5 billion of net cash sitting on balance sheet. What would you decide that COVID is no longer a existential threat to the business in terms of liquidity and the Board or yourself decide that there's some flexibility in returning that capital in some form?

So yes, good question. We're very comfortable sitting on a lot of cash right now. We're confident on the outlook, but there's no doubt there's still a bit of uncertainty out there. So we're in no rush to do anything with that cash. Hopefully, as vaccination rates increase and we see increasing stability in the recovery around the world, then we'll be in a position to do something with it. But right now, we're comfortable with just holding it there and being very focused on running the business well and investing in the long run growth opportunity.

Your next question comes from David Stanton of Jefferies.

Look, I know it's tough, but I'd be interested in your views about overall market volume growth in Cochlear implants at present, given that you've said you think we're through backlog. Given the [indiscernible] implementation at present, I'm interested in understanding what you think overall market volume growth might be?

Yes, Dave, it's a very tough question right now to put a number on. I think we're definitely seeing growth in the U.S., for example, in Japan, we're seeing market growth. Australia definitely growth. Europe, as I said, we're still below where we were in '19. Now there's a couple of countries in there. It's obviously an agglomeration of several countries. There are some of those that are growing, but there are countries still with a long way to get back. I mean the U.K. is one where at that there's still a significant backlog of surgeries for every procedure in the U.K. and the U.K. is clearly opening up again now. But just to get through that backlog, we got to get through the backlog there before there's opportunity for growth. So things like that complicated. We have seen growth in Benelux on criteria expansion, which is -- shows the value of market access, but it's just very hard now to give a single number and say, here's what the growth rate is that -- so what I'm trying to say is that in markets where we have recovered, we are clearly seeing growth and underlying growth, not just recovery in those markets that are still recovering. It's very hard to know of the patients you see, are they ones that have just been delayed? Or are they genuinely new and part of growth. And I think we won't know that until those markets really get back sort of through to the levels they were in '19 and beyond, then we'll be in a better position to see it.

Understood. That said though, how do you maintain those market share gains that you obviously picked up?