Cochlear Limited (COH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cochlear Limited FY '23 Results Analyst and Media Briefing. [Operator Instructions] I would now like to hand the conference over to Dig Howitt, Chief Executive Officer and President. Please go ahead.

Thank you. Thanks all for joining today. Great to have you with us to talk through our F '23 results and outlook. So let's get started. As always, we start with our mission that guides all that we do at Cochlear, both our strategy and our day-to-day work. And sitting under our mission is our strategy. And there, I think particularly of what's the impact that Cochlear has on society, on our customers, on our people, on the environment and financially. And we talk about our strategy in that context. I'm not going to go through all of the detail on this slide. You can read through it. But this -- the one point I did want to make is that in helping over 44,000 people hear in the last year, the net societal benefit of that is over $7 billion, which just shows how cost effective our products that we can conservatively create that sort of value with what we do. And that comes from health outcomes, educational cost savings and through productivity gains. I'll now step into the results in a bit more detail, and I will run through the revenue on each of the revenue lines, and then Stu will talk through the P&L and the cash flow and the balance sheet in a bit more detail. Clearly, it was a really strong revenue result. We saw double-digit growth in each of our revenue lines, Cochlear implant services and Acoustics, and we saw double-digit growth in each of the regions. We often talk about having a portfolio of geographies and products. It's rare that we see all of those growing at this rate at the same time. There was hardly any countries last year where -- when we didn't see good growth. And I'll talk through each of those revenue lines in a minute, but certainly Nucleus 8 is a highlight. In terms of net profit, Stu talk more to that, $305 million, and we took the opportunity with the increase in sales to choose to increase our investment in R&D and in long run growth. Something we'll also talk about is we have an incentive system that runs right through the business, which is highly leveraged to above planned revenue growth. So employees get rewarded for the strong revenue growth in the year it happens, and then we obviously lock that revenue in for what the baseline for future growth. And we remain in a strong position from a balance sheet perspective. And I'll talk to the -- Stu will talk to the dividend, and I'll talk to the outlook at the end of the presentation. But now let's jump into each of the revenue lines in more detail, starting with Cochlear implants. So clearly, very strong growth in Cochlear implants, 17% in constant currency. And we saw good growth across developed markets and emerging markets. And we've called out there about 15% in developed markets, about 20% in emerging. And we called out the second half growth rate there and developed of 18%. And that's because if you just look at the raw numbers, you'll see a 30% revenue lift in Cochlear implants in the second half. That's driven by currency by the deferred revenue moving from first half to second half. And so the underlying growth rate, which you can see across all implants and then in developed markets, is very strong but well under that 30%. So what drove that growth? So there are 4 factors. Market growth was there and clearly important, improved clinical capacity, and that's both the audiology capacity for screening and the hospital surgical capacity. And as we've talked about, it's the audiology capacity that is more of a constraint for us now. We gained market share on the back of the strength in our product portfolio and particularly Nucleus 8. And there were COVID catch-up surgeries, which we didn't expect at the rate that we saw them. Now we don't know exactly what each of those 4 elements contributed to growth. One of the ways we looked at this, we looked at the growth in children in the developed markets. Normally, we would expect children in the developed markets to grow about 1%, which is pretty much in line with the birth rate. We actually had surgery growth of 5% of children in developed markets. And there's 2 things that are driving that, but we don't think will repeat next year. One is market share gains. We have gained share, but we don't expect that to continue into '24, just given the level that our share is at. And the second one, which we saw in children but it flows through adults as well, is catch-up surgeries. And we can see that in the numbers, and we hear that anecdotally from clinics that they are seeing some older babies come through that we're assuming got missed through the last couple of years of screening. And again, that surprise us to see that come through. We don't expect that to repeat. So as we look into next year, we think our growth will be just driven by market growth. I think one of the very pleasing things on growth is that we are seeing an improvement in the adult surgery rates and in referral rates in key markets. So that gives us -- is encouraging in terms of the investments we're making in standard of care, which, as we've said, a long run investments. It's encouraging to see the growth there. We obviously want to see that growth continue for more than just a year to give us even more confidence. And emerging markets, strong growth there. We said we expected governments to come back with the restart tender activity. We've seen that. So emerging markets are now well above pre-COVID levels, and we expect continued growth there. We had also strong performance in China. On to services. So a very strong second half, which we said would happen on the back of Nucleus 8, up 14% in constant currency. And we saw growth there across the world. One of the pleasing parts of services, we are seeing increasing growth rates and increasing penetration of upgrades into emerging markets. Upgrades over time has been much more focused on developed markets. It continues to remain largely a developed market source of revenue, but we are seeing increases in emerging markets. And I think that's coming from -- we've been in emerging markets for longer now. The -- largely children who get implants as those children get older and as wealth grows, more of them either themselves or through governments are looking to upgrade technology. So we're encouraged by the longer-run outlook and expect services to keep growing in '24, given the full year opportunity with Nucleus 8. And then on to Acoustics. Again, strong growth again, 20% in reported currency, 15% in constant currency. It's really 2 factors here. The Osia 2 System continues to go well. We've always said with Osia, this is a long-run program. It's effectively a new therapy. We need to get regulatory approval. We need to get appropriate reimbursement in countries before we will launch. In the countries where we do have that achieve those 2 things, we are seeing a strong uptake and strong growth in Osia surgeries. We've now sold over 12,000 systems since that launch and continue to be very excited about the long-run opportunity. Baha 6 was a strong contributor to growth in the last few years, and a lot of that comes from people with the Baha implant upgrading from an earlier generation to Baha 6. We expect that the upgrades for Baha 6 will slow in '24. Therefore, while Osia will grow strongly, we expect slower growth in Acoustics overall in '24, but remain very positive on the long-run opportunity here in Acoustics. Okay. Let me just then run quickly through our strategy. There's a lot of information on these slides. We think it's certainly very important to articulate our strategy clearly. And our strategy is unchanged over the last few years, and we continue to execute carefully and clearly on it and invest as we can afford to, to drive this strategy. So I'm going to jump through a few slides. I do want to just pause on this one, the healthier and more productive society, because this is about standard of care. It's about getting particularly the developed markets adults and seniors. And we've made good progress in the last year, not only helping over 44,000 people hear, and that's across all of the world and all of our products. But the development of The Living guidelines, which was 50 -- a couple of implant professionals from around the are world collaborating and, based on evidence building out practice guidelines, which are now available and able to be tailored to countries to get more consistent referral, more consistent clinical practice and post-surgery care. That's an important part of building standard of care. The ACHIEVE study, which is Frank Lin at Johns Hopkins has been running for 3 years, reported just in July. For a long time, there's -- it's been very clear evidence of a strong correlation between cognitive decline and hearing loss or between dementia and hearing loss. This study was looking for, is there a causal link, does treating hearing loss change the rate of cognitive decline in people with that hearing loss. What the study saw that, in the overall cohort, there wasn't a change in 3 years. But for people with higher risk of cognitive decline, then the study showed the 48 -- the rate of decline slowed 48% across the 3 years for those people who had hearing loss and had it treated versus those that didn't have it treated. And that's a very significant result in terms of building the evidence base that shows that hearing loss is a serious and significant medical condition. It can be treated. It should be treated. And treating it improved -- has the potential to improve overall health. So we expect more evidence to continue to come out over the next few years from this study and others, but all of this helps build that evidence background towards standard of care. And finally, reimbursement. Very important that reimbursement expands with the effectiveness of the product and to support broader adoption A good example of that is the CMS expansion of indications in the U.S. from a 40% worse score to a 60% worse score. Clearly, that expands the -- that matches then in the U.S. insurance reimbursement, that CMS matching insurance, and expands the opportunity as did single-sided deafness a few years ago, and we're seeing that come through now in our sales. And Osia funding and then countries -- more countries adopting newborn hearing screening and comprehensive programs for newborns. Okay, I'll jump more quickly through the rest. So hearing -- a lifetime hearing solutions. We have a very strong product forward pipeline based on our investment in R&D. As we said, with Nucleus 8, great reception. Over 48,000 people upgrading their processor in the last year, up 19% on previous years. As a technology business, we are a knowledge-based business. Now people are critical to our continued success. We have strong engagement throughout the world. We continue to make progress on shaping our culture and our organizational processes to really underpin and support growth. We are planning on continuing to grow and to be a bigger company, and we need to make sure that we build out the infrastructure, the capability and the processes to support much larger number of customers underpin our growth. Our culture is central to doing that as it is to executing our strategy and driving growth. And we continue to make good progress on building out a diverse and inclusive workplace. Environmental impact, we're a very small carbon emitter, but it is important that we take action and we are. So we have converted our manufacturing sites to renewable energy. Now 96% of energy used in our manufacturing sites is renewable, and the constraint there is actually availability as to why it's not a 100. We've had -- as a result of that, a significant reduction in our Scope 1 and 2 emissions from our F '19 baseline, down 68%. And we've also committed to reducing air trouble, both in terms of the number of flights per employee and then buying offsets to reduce the overall flight-related emissions. And you can see the impact there. And we continue to work with regulators to reduce the amount of paper that we need to distribute with our products. And as we make progress there, not only as an environmental impact, but a pretty significant cost impact as well. And then finally on to sustained value. I talked about the sales. Stu's got to talk about the P&L and the balance sheet. We have started manufacturing a sound processor at our factory in China. So it's an important milestone. We expect the implant approval to come through within the next 18 months. We're making very good progress on our business process in IT platform upgrade with the $150 million spending over 4 to 5 years, and we're a little bit below halfway through that program. Connected Care products remain important, and the cybersecurity certification helps us with implementation in hospitals. We talked a lot and reported a lot on the Oticon Medical acquisition that we're now focused on the Cochlear implant business. Happy to take questions on that, but there's really no new news from our previous updates, but happy to go into that further in Q&A. With that, I'm going to hand over to Stu to talk about the P&L.

Fantastic. Thanks, Steve. Good morning, everybody. You've heard a lot already about the strength of the top line sales result. I'm not going to add anything more to that. I think that the next line gross margin, we came in at 75%.

Please standby while we reconnect the speaker line. [Technical Difficulty] Thanks. I'll just join us back through. When you hear the music pause, that's your queue that I've restart the conference. One moment.

Okay. Sorry about that. I think we're now back on. So as we're saying gross margin, we are expecting about 0.5% headwind in '24. As Chengdu moves into production, we are actually making sound processes there now where we're expecting to get certification to make implants there within about 18 months. And that will -- we see that headwind increasing for a year or 2 and then moving to a net positive tailwind as Chengdu goes to full capacity. Moving to sales, marketing and general. Big increase there 19% year-on-year. Biggest driver of that was investments in growth. And so that's particularly putting more people out selling in the regions. It's also -- the sales commissions that went with that with a very strong year, as Dig's alluded to. And it was deliberate investments in growth. So that's things like standard of care initiatives, that's things like market access and getting more funding, expanding their funding criteria and direct-to-consumer, DTC activity where we are spending money direct with candidates to try and pull them into clinics to get addressed. R&D, similarly, alongside the selling and marketing, we saw -- with the strength of the momentum in the business in the second half, we saw the opportunity to accelerate programs within R&D. That saw us land just a fraction above our long-term target of 12% of revenue. We came in at 13% of revenue in R&D and very happy with the rate of innovation in that team. Admin expenses, up 20. That's driven by a couple of things. First off, again, that's where we see some of the bonus and incentive payments coming through off the back of the strong year. It's also where we see the Oticon transaction costs flowing through. And we also took the opportunity to do a small amount of restructuring within the business as well, and that's really completing the integration of our Acoustics business and our services business into the main group. So that saw us land at the absolute top of guidance and with some very deliberate investment choices given the strength of the revenue result. Let me jump to the next page onto the balance sheet. On net profit, we delivered 17% ex cloud. We'll keep targeting 18% long term. On the balance sheet, the big movement here is on net working capital, only $80 million. That's a combination of very strong growth in receivables. That is absolutely driven by the strength of the sales and particularly in half 2 and Q4. Very happy with what we see in terms of debtor levels and recoveries. So that really is indicative of the underlying sales strength. Inventories, slightly up, about $40 million, slightly more in components and raw materials at this point versus this time a year ago. And again, that's us opportunistically taking the chance to do lifetime buys for componentry and raw materials when those opportunities come up, and it's to make sure that we stay insulated from what is an increasingly tricky supply chain, but the guys are doing a fantastic job managing that. Payables is up on a year ago, but that's very much a timing thing. It swings plus or minus $20 million based on weekly payments. On to the cash flow. So the underlying EBIT result was strong again, indicative of the strong results. And you can see we earned more interest sitting on that large cash balance that we have. The big change -- the biggest change to call out here is that income tax paid line. Now this is hopefully the last of some big swings and differences between cash tax versus tax due where we had a small refund in '23. We had a much, much bigger refund in '22. And that meant that our cash tax expense in '23 was $50 million higher, and that's what's driven the operating cash flow to be slightly lower. We expect those big swings to have really flushed through the business now, and we expect that to be more consistent from '24 and ongoing. And in terms of the effective tax rate, we've got a couple of permanent benefits in terms of the increase on R&D that's allowed to be claimed against. We had some one-off benefits in terms of annual adjustments. So we're sitting at about 24% effective tax rate in '23. We think 25% is about right going forward. CapEx up just under $96 million there. That includes the beginning of a pretty significant overhaul of the Lane Cove facility. Dig alluded to the solar panels going on the roof there. We've also -- phase 1 of that is the solar panels and all of the communal areas, the lunch room, the reception area, trying to make it a nicer environment for the staff. The next phase of that will be about actually expanding the production capacity as well. In terms of looking forward, somewhere between that, where we landed in '22 and '23 on CapEx is about right, somewhere in that sort of $70 million to $90 million range. And then lastly here, the other net investments, the $29.8 million. That's us putting additional money into Precisis, Nyxoah and Epiminder. It's hard to be very precise about that looking forward, but that sort of $30 million range feels about right to us. It's a good balance of enough to be putting stakes into interesting growth opportunities and IP, but also not so great a risk becoming a distraction. On to then the next slide. So for the dividend, the full year dividend is going to be $1.75, that's up 21% on this time a year ago. And again, that reflects the strength we see underlying in the business. That gives us a full year payout ratio of 71%. I'm just 1% ahead of our long-term target. And with -- on the annual, 70% franked. We expect it to be 100% franked in '24 and beyond. And those -- again, those historic losses just washing through the business and trailing off. Last but not least, the share buyback. We announced that at the half, we said we'd aim to reduce our cash balance gradually over time over a number of years. For the first 12 months, we were targeting $75 million buyback. We're about 4 months into that. We spent $30 million. We're on glide path to achieve that $75 million. And we'll be updating you again at the half on what the spend for the next 12 months will be, but we absolutely expect that program to be ongoing over a number of years and obviously maintaining that 70%, given payout ratio at the same time. And with that, and apologies for the IT glitch, I'll hand it back to Dig for the outlook.

Thanks, Stu. Apologies for me, too, for losing connectivity in the middle there. On to the outlook. So obviously, a net profit guidance range of $355 million to $375 million, and that anticipates revenue growth and improved net profit margin. So getting our net profit margin back towards the 18%. As I said earlier, actually working out all of the factors that impacted growth this year is difficult to do in a highly analytical way. But as we look forward, we do expect to see high single-digit growth rates in Cochlear implants, driven by this improving trend in adult referrals in developed markets and obviously continued growth in emerging markets. We don't expect that the share gains we achieved this year and the COVID-related backlog of surgeries that came through, we don't expect them to repeat in '24. Full year of upgrades with Nucleus 8, we expect to drive the services number with strong growth. And as I said earlier, with Acoustics continue to see strong and long run growth for us here, but low growth rates from Baha 6 as we just moved to later in the upgrade cycle, slowing the rate of Acoustics growth from the level we've seen in the last few years. We continue to -- our strategy, as said, is unchanged. It is our long run strategy, and we will continue to invest both in our product portfolio and strength -- continuing to strengthen the portfolio and improved hearing outcomes for our customers and investing in standard of care for adults and seniors in the developed market and building out the evidence, the referral path, the awareness and the funding. And as we talked about in the past, that's -- we really believe in building a clear and consistent referral path. We are building an asset, and it makes sense for us to invest in that asset as fast as we can justify and can manage from a capacity perspective because that underpins our long-run growth. You can see there, cloud computing. We've also put currency rates in and compare those to '23 because part -- we can see that our net profit is growing faster than revenue. That comes part from currency, and it also comes part from expanding the net profit margin. And we expect to maintain a 70% payout ratio, and we have not included anything from Oticon Medical. We do still anticipate closing in December, but conscious that we are in the hands of the regulators on the process there and the timing. So we haven't factored any costs of the acquisition and integration into our F '24 outlook. Okay. So I'm going to stop there and hand over to questions.

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

Can we just start with the audiologist capacity expansion that you talked about? That's certainly a topic that we hear from particularly U.S. centers that is a bit of a challenge. I was just wondering if you could talk to what you've seen and what you expect going forward and how much that might be a constraint to future growth, please.

Yes. David, thank you. A really good question. It is, particularly in the U.S., one of the constraints on growth, and we were pleased to see obviously the volumes that came through this year. Now we are working -- the key to expanding audiology capacity is to reduce the amount of audiological time spent post surgery where there is an opportunity, both with evidence to reduce the number of appointments and to use tools like Connected Care to significantly reduce the face-to-face clinical time, and therefore, use that audiology time upfront on screening and diagnosis. So we're working with a number of the leading clinics in the U.S. to trial new models and build the evidence that supports those models and obviously integrating our technology into the delivery of those models. So we're confident over time that we can continue to expand that capacity. But certainly, in the shorter run and at the bigger clinics, delays in getting an audiological assessment for a new candidate as one of the constraints on growth. But certainly, we were pleased to see that the volume comes through this year because it's an indicator that clinics are making progress in dealing with that bottleneck.

So delays at the bigger clinics are effectively the norm at the moment.

Certainly, in some of them. I mean it varies. Some of those clinics are moving faster than others in reducing the post-surgery appointments and, therefore, freeing up capacity. But it's just by way of numbers, it's more likely to be in a bigger clinic than a smaller clinic. And what we're seeing is that the smaller clinics are not surprisingly growing faster than the bigger clinics because they don't have that load of patients, but also typically the smaller clinics have come into Cochlear implant more recently, and they are adopting less intensive practices in their post-surgery care, which enables them to grow faster, too.

Great. And just one other for me. I was looking at Slide 10, where it talks about having helped 48,000 prior generation Cochlear implants, up 19%. Can I back calculate from that seven-odd thousand -- 7,000 or 8,000 that were added with the upgrades that were done this year? And same question, can you talk about the penetration rates that you're seeing there, please?

So 48,000 is the number of upgrades done in the year, and that's 19% higher than the prior year. In terms of penetration, as we talked about the last few years, we now think about this as an annual number of the number of people who are eligible and what proportion of those people are actually getting an upgrade. Now we haven't put those numbers out there because we're still trying to get our own comfort with them. And as we see growth in emerging markets, we think through how does that change the calculation. So before we push something out, we want to actually make sure it's meaningful. But I think the sort of short way around that is we are seeing some improvements in penetration, which is very encouraging.

The next question comes from Steven Wheen from Jarden. The next question comes from Mathieu Chevrier from Citi.

Can you hear me okay?

Yes. Thank you.

Excellent. Just wanted to just dig a bit deeper in the growth in developed markets that you've been seeing in developing markets. Could you give us a sense of what you think is a normal kind of market growth rates in developed and emerging markets?

So what we're forecasting for '24 is that we see high single digits in our Cochlear implant unit growth. We think that, that is pretty much the market growth number and that we don't expect the sort of, as I said, the abnormal increase in -- or not abnormal, but we don't expect an increase in share. We don't expect COVID catch-up. And in that, typically, we'd see a little bit higher growth in emerging markets than developed overall. And that's remembering that in developed, around about 30% of the surgeries are in children, and we expect sort of 1% growth there and obviously then a higher double-digit rate of growth in adults and seniors.

Yes. And just on that of -- that topic of growth in adults and seniors, do you see yourself increasing that sales and marketing expenses perhaps a bit more than you thought just a little while ago given the response that you seem to be seeing from the marketplace?

Look, we continue to watch that carefully. And you saw that, as we said, we did lift our spending there this year as we saw more revenue come in. And that sort of, as said, is on the basis that we're building this referral path, which we think of as an asset. Therefore, it makes sense to sort of build that asset faster if we can afford to. The things that therefore constrain the rate of growth, we do want to make sure that we deliver appropriate and growing profitability. And secondly is just our organizational capacity. We want to make sure that we don't take on more than we can execute effectively.

The next question comes from Steve Wheen from Jarden.

Yes. Dig, can you hear me?

Yes. Thanks, Steve.

Yes, yes. I just wanted to pick up on that, the processor upgrades. Obviously, a very strong launch into the second half, which seasonally is not that -- well, historically, that's not normally where you'd be as strong. So I was just wondering what the potential looks like for next half as everyone starts to burn through their deductibles. I mean is it your expectation that, that surges again from here into that half?

Look, we certainly expect to see strong growth in upgrades this year. Largely, that's just the full year potential. Your point on deductibles is particularly relevant for -- obviously, for the U.S. And with people on annual calendar year deductible, we often do see more upgrades in the U.S. sort of in Q4 than we do in the earlier quarters as people have used their deductible and, therefore, don't have to pay out of pocket for an upgrade. So I think that has some impact. But with the growth in emerging market numbers of upgrades that impact of sort of seasonality in the U.S. is more muted on the total. So full year of Nucleus 8, I expect good numbers. And we don't have Nucleus 8 -- look, we don't have Nucleus 8 approved in Japan just yet, for example. So there's still some approvals to -- well, largely there, but we still got a few approvals to come through, which we think will help support that good growth.

Yes. Great. And secondly, for me, I just noticed a bit of change in your commentary, particularly around the expansion of the eligibility criteria. Previously, you seem to think that, that was probably a little bit more long dated. But certainly from channel techs that we've seen, it sounds like you're starting to see a lot more come into the funnel, maybe through the audiology clinics in the first instance. Is that what we're hearing with your commentary now that, that is starting to open up that adult channel a lot more?

We're certainly seeing a good rate, an increased rate of adult referrals. As you would have seen -- heard on channel checks or checks with clinic, single-sided deafness is a part of that. And that change in some fundings a couple of years ago. So I think the more recent change on the CMS funding will take a little bit -- will still take some time to come through. What we're seeing is it's -- and that's why we want to see these referrals run for longer. So as I said we're encouraged, but we want to see it run longer. This has always been a multifaceted problem to solve in increasing referrals. It's not just indications. It's not just hearing aid clinic awareness. It's not just funding. It's all of these pieces working together. It is hard to sort of disaggregate them, work out what's contributing what, but we're certainly pleased with what we're seeing, but do want to see this increase in referral sustained over time. But it does give us more confidence that -- increasing confidence in the path we're on with our strategy and investments we're making having an impact.

The next question comes from Andrew Goodsall from MST Marquee.

Just asking you to be a bit more granular on the growth that you saw and where you've got some of that market share. Just, I guess, specifically asking around Oticon and the gains you might have taken in both CI and Baha. But also, we did note a couple of markets were a bit slower in their recovery like Germany and just whether they're now kicked in or whether that will be more of a '24 event.

Yes, Andrew, good questions. So certainly on market share, it's been -- the growth there, we've seen pretty much across the board in -- certainly in developed countries, a little bit -- it's always a little bit patchier in emerging countries for a whole range of reasons. We have seen -- now the biggest growth over the last couple of years has been in France. And certainly, that's on the back of Oticon Medical recall and our commitment to support their customers that certainly helped our share in France. But we have seen share growth across the whole range of countries. Small amounts, but obviously they all add up, and it's all important. From a growth, we saw, as I said, good growth across just about all of the developed markets last year. Some of them were coming from lower basis or higher basis, depending on how well they've gone in the previous year and how low they went in COVID. But pretty much all of them have recovered very well and are well above pre-COVID levels. And I think part of the context for that is back to our strategy of -- in every market, the clinical opportunity is huge. Our penetration is low, and we have the opportunity with the right strategy and good execution to increase that over time. And I think COVID has put a lot of noise in the system. We hope we're getting through that and can get back to more consistent and predictable revenue outcomes.

Okay. That's great. And just a quick one for Stu. Just on the NRIs in both '23 and '24. I think you flagged or -- just trying to get a bit more granular on restructure costs and then Oticon costs in '23. And then if you can talk to Oticon in '24. I know you've excluded that from guidance, but just a bit more color on that.

Yes, sure. Thanks a lot, Andrew, and good to hear you. Couple of one-offs in '23, so we had about $5 million more uplift in Oticon transaction expenses relative to '22 and sort of similar level of non-Oticon-related restructuring charges. And as I said, that was the tail end of us integrating our own Acoustics business fully and the services business fully into the group. Going forward on Oticon, as Dig said, we're expecting that to complete in quarter 2 by the end of the calendar year. We're still in discussion with demand and trying to find a happy landing that meets the needs of the CMA and then through the European regulators and now CCC as well. I think the numbers we put out there in terms of the potential impacts in the first 12 months of acquisition haven't really changed. We're still in that 30 to 60 range, and we'll update as soon as we know more.

The next question comes from Saul Hadassin from Barrenjoey.

Can you hear me?

Yes. Good to hear you.

Just following up on that discussion around processor upgrades. I know historically the company has spoken to maybe a target penetration rate globally of around 50% and potentially being able to move that higher. I'm just wondering if you're willing to give us a sense of where you think with this N 8 cycle, you think that penetration might ultimately get to.

Yes. Look, a couple of ways to look at it. So one is, yes, we used to look at it that way. Talking about sort of penetration over the cycle got more complicated when we launched off-the-ear processes because some people go [Audio Gap] And that's where we started to look at an annual basis, which as I said, we just haven't put the numbers out yet because we're just trying to -- we want to make sure that they're meaningful. But as we are looking at this in different ways internally and we do see that we've seen small lifts in penetration, that's what we hope to see because we're investing in the Cochlear family or in building out connectivity with customers so that they're more aware of the opportunity to upgrade. We continue to -- Nucleus 8 is absolutely a standout product that delivered on the 3 dimensions of improvement in a sound processor. It's smaller. It's better connected and has better signal processing, which gives better hearing outcomes. We have kicked goals in each of those 3 dimensions, and customers appreciate that and they're taking it up.

And then obviously just, Dig, your comments around no expectations for additional market share gains into '24 for Cochlear implants. I mean on the basis that you're presumably outspending your competitors significantly in both R&D and SG&A., just wondering why you think that seeding of share will slow down into '24.

Yes. Look, it's -- I mean, we've got -- good question. We've got very strong competitors, and they fight hard per share, which is good to see. People want a competitive market and want to make sure that there are other players alongside us. So we think there's probably -- there's a limit on how much share we can gain. And it's also about how do we invest, and we want to weight our investment to market growth because that's the driver of our overall revenue. Rather than waiting it towards market share and trying to eke out another percentage share, we'd rather put that amount of money into growth and hopefully get more than 1% out of it.

The next question comes from Chris Cooper from Goldman Sachs.

I just wanted to follow up on a previous answer. I just kind of shared the view that you're sounding a lot more positive on the adult referral rates in developed markets. Dig, you mentioned you need to see a bit more evidence of that before calling it a trend. Could you ask what you would need to see, whether that's sort of time or a bit more sort of referral coming through? And maybe just to push you a little bit on quantifying this. I mean, as you say yourself, it's unusual for each segment to be growing double digits here. How much of the growth you've seen in implants would you say is a function of the referral rates as opposed to sort of COVID backlog and market share gains that you've also called out?

Yes. So on the first one, what will give us more confidence, it really is time because I think there has been, with COVID, quite a bit of noise in demand or variability in demand over the last few years of a low in 2020. Through that time, we've continued to invest in standard of care in building the funnel pipeline of adults and seniors. We see -- over the last year, even a bit longer than that, we've seen good increases in that funnel and the quality of candidates coming through. We still want to see that trend continue for longer. So it's more about time than it is about increasing the rate. And as I said in our outlook, we've said high single digits on Cochlear implants, driven by market growth. And as I said earlier, if you think about that from what's that mean adults and seniors in developed markets, it's probably -- it's in the double digits, given that we expect children about 1%. So that's what we're -- what we've seen. As I said, it's very hard to back out last year, how much was share in referrals, but the best -- our best analysis or estimates of that, we see that high single digit overall, which probably means low double digit for adults and seniors.

Okay. And second one, you've obviously sort of taken the decision here based on the strength of the top line to put a bit more into growth initiatives. Are you able to split that out for us in some way? Can you give us a sense of how much of that additional cost growth we saw in the second half was sort of, I guess, discretionary as opposed to the normal run rate?

I mean we've got a lot of discretionary spending. So of the extra, as Stu said, there was choices to invest a bit more in R&D, choices to invest a bit more in growth. And also the -- as we've said, the incentive program is highly leveraged to above-plan revenue growth. And so there's a good chunk of the extra, which is going to employees as a reward for delivering the sales growth. That's a great one-off for them, and now we've got a higher base as we look towards '24 to grow from.

Okay. And just a quick one on the cognitive decline date published in the Lancet a couple of months ago. So I know we've got to be careful making cross comparisons here. But for a higher risk of decline, you did seem to show quite a meaningful benefit -- or not you, but the study showed a meaningful benefit in rate decline, some help of where the pharmaceutical guys are currently reporting their product to be. So I just wanted to ask, is there something that can be done here that you perhaps could be leading to perhaps increase that referral rate further?

I think this -- the building out of evidence of the importance of hearing loss to healthy aging is a very important part of that overall referral. I mean that's been -- so the fundamental issue with hearing loss forever is it's not seen -- hasn't been seen as a medical condition. People accept it as a natural part of aging. And what this shows and others start to show is that, not only is hearing obviously treatable, but actually treating it improves overall health. And I think that's what gets people to get up and take action on their health is sort of a fear that something else could be wrong. I mean, look, people go and get blood tested for cholesterol now routinely, not because they enjoyed blood test, but because they want to know what the outcome is because of the consequence. And I think what we'd like to see over time is that people, once they get past a certain age, they get the hearing kit regularly because it's -- people often don't know that they're losing their hearing. But now -- and not just this ACHIEVE study, but other studies are increasingly showing that treating hearing loss has important medical health benefits beyond just being able to hear better. So I think it's a very important study. We think more data will come. And this links directly to our strategy of making hearing loss a medical condition being really clear on the paths for treatment and the effectiveness of our products in providing that treatment.

The next question comes from Sean Laaman from Morgan Stanley.

I hope you're both well. Dig, on the audiologist bottleneck issue, are you able to give us a description of your experience with Remote Check so far?

Yes, Sean, good question. So Remote Check, we continue to roll it out. It's been -- it's slower progress than I think we anticipated upfront. And what we've learned out of that is it actually takes quite a bit of work because of patient data involved to get through hospital privacy and cybersecurity screens. That's why we got the ISO 2700 cybersecurity rating because it helps us. Where it has been implemented, it definitely cuts down on the need for face-to-face appointments beyond the first year. And that's part of the work we're doing. But the -- so part of the work we're doing is not we got to get into hospital, but then you actually got to change clinical practice. So if the clinic is set up to set appointments and put the 1-year follow-up in, unless we actually change the -- with the clinic change the process to put a Remote Check in instead of a 1-year appointment, it doesn't have an impact. So it's the changed management piece that we're now working through, but it's an important step. But the other important step, which is significant is there are still clinics that will do 10 or 12 appointments in the first year after surgery, whereas other clinics now are down to 3 appointments in the first year for adults. And demonstrating with evidence, there's no impact on outcomes. So being able to take 7 or 9 appointments out of the first year is actually an even bigger impact than Remote Check, which takes an appointment out 1 a year, but obviously on a bigger base. So both of those things have got to work together over time. But it will take -- change in clinical practice takes time, and that's certainly one of the things that suppose we knew, but it's only once you get into it and working on it that you'll learn that it really does take time and effort, but the rewards are worth it.

And on the Cochlear Provider Network, some -- what's the progress -- sorry, the progress across the U.S. in terms of numbers over the period is a program that's still ongoing, how helpful is it been driving penetration to those older demographics?

Yes, it's only one of our sort of CPN and hearing aid referrals is one of our drivers of growth under the adults and senior growth strategy under standard of care. It is -- we are seeing an increasing number of referrals. With the CPN, what we've done in the last couple of years is slow down the rate of addition of new CPNs and really work with the ones we've got on the education and on expanding the number of referrals because we've seen that they are referring only a very small -- a small proportion of the potential. We think we're better off not expanding it, but actually working with them to show them the benefits, how they make money, who's a candidate. And with the expanded CMS, that's where the expanded CMS criteria in the U.S. is very helpful because it gives us more of a base to -- for people without insurance to be able to talk to -- for the audiologist to talk to them about potential for an implant. And in Australia, we're doing a lot of work with hearing aid clinics and seeing it definitely an increase in the rates of referrals from that, too.

Great. And squeeze one more in, if I can. Just remind us, if you haven't disclosed already, the portfolio of products due to come out of Chengdu, how different to other manufacturing sites.

So the product portfolio in Chengdu will be a subset of our total portfolio. So at this stage, there won't be different products, but there will be products that we're currently making in Sydney and may move to Chengdu or more likely add new capacity. Most of it around the implants will be adding -- implants that we make in Sydney will also -- some of them will also make them in Chengdu.

The next question comes from David Stanton from Jefferies.

Look, I've just got one, if -- and it's around out of context. So for Stuart, if you do get disclosed in December 2023, will you take the expense of it, that $30 million to $60 million you've talked to above the line or you treat it as an NRI? What's the thinking at the moment, knowing that, that might change in the future?

Good to hear from you. Look, we take it below the line. It would absolutely be a cost that would not -- we would not be seeing as recurring. And as I said, it's early days, right? We're still in discussions with demand and then obviously with CMA and the other regulators. But yes, we'll definitely be taking it outside of the underlying result.

The next question comes from David Bailey from Macquarie.

I'll also be quick. Just in terms of ASP, it looks like there was a bit of a step up in the second half of '23. Is that all going to be mixed? Or is there some pricing to consider there? And then just for fiscal '24, 16% to 23% growth year-on-year. Just wondering what the benefit of currency looks like. So what that growth rate might look like in constant currency terms?

Okay. Thanks, David. So on the ASP, there was a significant currency piece in the ASP lift. Backing out currency, there was a small increase in developed markets. And when we launched Nucleus 8, we said we were trying to put some price increases through where we could, and we've got a modest increase out of that, which is nice to see. Look, in terms of the outlook, we haven't been specific on how much of that's currency, but we have put the direct comparison of the rates we've used for the outlook. And you can see the big differences there in the euro. And it is part of the revenue growth that we -- and obviously, part of the reported revenue growth will be driven by currency and that given our outlook for margin does push that profit up a little bit. But certainly, the majority of the lift is sales growth and some margin expansion and a little bit of currency. Thanks.

The next question comes from Susannah Ludwig from Bernstein.

Great. I just have one question. Can you talk about how successful your DTC marketing has been so far? I guess just how expensive are you planning to sort of bring people in through this direct-to-consumer channel?

Yes. Susannah, good question. So again, like the CPN and referrals that you see is one of the legs of our adults and senior referral strategy, i.e., that -- it's not just one thing, it's multiple things we do. We've been at DTC for quite a while now, and we have learned a lot out of that. So we are seeing a better uptake or better success with our DTC. We just continue to refine the messages, how we respond to inquiries, what sort of information we provide at each stage of the people's journey. So it has improved. And that's the goal across all of our -- the elements of our strategy is to take results to experiment with things to learn as we experiment and then when we find something that works to continue to build on it and spread it across the globe.

The next question comes from John Copley from UBS.

For Laura Sutcliffe. You've spoken in the past couple of years about funding for Cochlear implants and emerging markets being withdrawn during the pandemic, but now returning. Could you quantify perhaps in percentage terms where funding for Cochlear implants in emerging markets is today relative to the pre-pandemic baseline and also perhaps where you see that funding headed directly, please?

Yes. So John, good question. We haven't actually quantified that. We -- the 2 markets we called out that had the most significant dips were Brazil and India. And both the public funding dried up significantly in COVID and has been restored, and in both -- and then in those markets that are above pre-COVID levels. And so if you look at our emerging market growth rates, the funding across the board is certainly above where it was pre-COVID, but we haven't quantified it exactly. And I think just a reminder on those markets is we often don't see just linear growth that it can go up and down a bit, depending on economic conditions and it can be steps up to as another state, for example, in a country as a program.

And if I could just squeeze in one more. Is it fair to say that mix was less favorable than usual looking across FY '23 in terms of gross margin impact? So on that basis, could we expect Cochlear to be able to maintain 75% gross margin even with the Chengdu headwind next year as mix normalizes?

Look, thanks, John. Broadly, no. So we certainly sold a lot of sound processes, sold a lot of -- and implants in '23. So we didn't see a massive mix impact on that COGS line. And projecting forward, the bigger impact we do see in '24 is that headwind as Chengdu comes online. Obviously, there's a bunch of other factors like FX and yield and other things, but that's the one we're calling out for now. Don't anticipate mix being able to offset that.

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

Okay. Just thanks all for joining. And I know the CSL call started, so probably not too many people left. But for those who are still here, thank you and talk to you again in next results, if not before.