Cochlear Limited (COH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cochlear Limited FY '24 Results Analyst and Media 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. Thank you for joining for our F '24 results update. Let's get started. As always, we like to start with our mission. Our mission is the inspiration for all employees at Cochlear but also, at a high level, guides our strategy. And the core of our strategy is focused on the middle piece of our mission. We transform the way people understand and treat hearing loss. So hearing loss is one of the most prevalent medical conditions out there and one of the least treated. That's our opportunity, and that's the core of our strategy. So let's get into having a look at F '24. So clearly, the highlight of the year for us was helping over 47,000 people hear with 1 or 2 of our implants, and in doing so, we created over $8 billion of value for society. The way we think about how we create value is in terms of that overall banner and then the 5 pillars that we show here. So I'm going to talk about a lifetime of hearing solutions and a healthier and productive society in a little bit more depth in the presentation because they are the core elements of our strategy, our market leadership and our growth strategy, and very importantly, our people and environmental responsibility and the value. So from a people perspective, we are a technology company. So our people are critical to our know-how, to our customer relationships and to our growth. So we remain very focused on having committed and engage people with employee engagement maintained at 80%. And we also are very conscious of providing opportunities for people in the organization and bringing new people into the organization as we grow, so with over 1,000 roles filled for people outside Cochlear in the year and 37%, so another 400 roles, actually filled by people within Cochlear. And to do all that, we have over 43,000 applications. So there are clearly many, many people who want to work for Cochlear. You would've seen just recently an announcement on our -- some executive changes. It's all part of providing broader experience across Cochlear with Richard Brook stepping down, Anthony Bishop moving to the President of EMEA and Stu, who's with us today, moving from CFO to be President of APAC and that being effective all from the 1st of January. And then on environmental responsibility, we are a very small emitter of greenhouse gases. But we've made significant steps, as you can see here, to reduce that small footprint. And we, obviously, as others, prepare for the new reporting requirements coming, and part of that is doing a full Scope 3 inventory, but significant reductions in Scope 1 and 2. Okay. So let's move on to financial summary. So strong year for revenue, up to $2.258 billion, 15% growth, 12% in constant currency. I will talk through the elements of that in terms of the cochlear implant, Services and Acoustics, just in a few minutes, and a strong profit performance at $387 million, up 27%. Obviously, currency part of that with a 15% in constant currency. And then with the closure of the Oticon Medical acquisition and the restructuring costs that we've taken up, our statutory profit up 19%, 8% in constant currency to $357 million. But largely, that's the Oticon Medical restructuring that accounts for that gap. But importantly, our margin. So we say that -- and we have said consistently, we target 10% revenue growth. Over the long term, we target a net profit margin of 18% pre cloud with our investment in cloud over the last few years. In the next couple of years, that'll take about 1 percentage point off the margin from 18% down to 17%. But our long-range outlook and goals there are unchanged. And overall, we remain a very strong financial position. Significant cash on the balance sheet. The opportunity to lift the dividend, up 24% for the full year, to $4.10. And I'll come to our guidance at the end of the presentation, talking about our outlook more holistically. So if we now dive into each of the elements. Let's see, cochlear implants being 59% of revenue, a critical driver of overall performance. The core piece of our strategy here, particularly driving developed market growth and developed markets -- in developed markets, as you know, it's adults and seniors where the opportunity is. So if you see here, we grew cochlear implants 9% across the year. Sales revenue was up 14% in constant currency. In developed markets, which is a significant part of our business, we had 11% volume growth and a 2% increase in ASP. And Stu will talk more to that. But we saw really strong performance across the U.S., across Western Europe, in part, from share gains, but largely from our growth strategy looking -- continuing to look like it's working. And we've said this over the last couple of results that the actions we're taking develop standard of care to increase referrals, increase awareness of hearing loss, increase the motivation for treatment, they do look to be working. We see that anecdotally when we talk to clinics, and we talk to them about the people coming in, their awareness and the numbers of them. We see backlogs. And we also see it through our results with 11% growth in developed markets, seniors growing at 15%. And I just put an example here of -- from the U.S. with our direct-to-consumer activities contributing more than 30% of surgeries in the U.S., and 70% of our lead generation there coming from digital engagement with that with seniors. And as part of that, we did see an increase in professional referrals and, part of that, more awareness of people coming in as they're moving through the funnel a bit faster than we have seen in the past, which is clearly a good thing. So overall, the developed markets worked as -- came out where we expected. We said at the half that we've seen unusually high growth in children. That moderated in the second half. Again, as we expected it too, and we said at the half that we expected children growth to slow to normal, that has happened, but the seniors and adults continued. Emerging markets, we saw 5% growth with a really strong first half and a decline in the second half. This was in terms of where we finished up for the year. This was one we didn't expect. We did expect the emerging markets to keep going. The key driver of this was in India. So we saw really good growth in China and Brazil, Central and Eastern Europe. But in India, and we think it was related to the election, there was virtually no government tender activity from November through the rest of the year. And so what we see in that part of the market is quite a lot of volume at a lower price. So the consequence of not having that volume come through as it pulled down our overall unit number a little bit below our expectations, not a huge impact on the revenue, but did mean our ASP in emerging markets was higher than our expectation. Stu will talk more to -- for those impacts on the ASP that explain the gap between the 14% revenue growth and the 9% implant unit growth. On to Services, so good growth in Services. And you can see in the chart there, that Services, apart from the time around COVID, has had a long run growth. We are -- again, we said at the half that we expected upgrade growth to slow as we get -- so we've had some very strong halves. And as we start to get a little bit further from the Nucleus 8 launch, we see that growth slowing. So that certainly did in the second half, and we expect to see that Services growth slow a little bit more, again, as we move later into the cycle. And then going on to Acoustics. Acoustics also worked -- came in where we thought it would for the year at the half. We'd actually gone backwards in the first half, and you can see that in the yellow bar on this slide. We said the reason for that was that we had announced and launched the OSI300 Implant, which is a 3 Tesla compatible Osia Implant. With that product launch -- with that product announcement, we saw surgeries being held. And in some countries, we also need to recontract with hospitals when we have a new price, and it takes some time to work through the administrative. So when we have a new product, we need to recontract, and it takes some time to work through that process. And particularly, if we're seeking a price rise, which we were in some markets with OSI300 because it is a better product, so we saw that dip in the first half, but then a very strong second half with 15% constant currency growth. Volume growth in Osia over the year of 30%. And we continue to expand the opportunity for Osia by adding countries, so France, Sweden, examples of countries that -- where we now have reimbursement for Osia. We didn't a year ago. The Osia implantation in the U.S. has moved just right late in the half, from 12 to 5 again, which expands the market. We talk for a while about saying that Acoustics implant opportunity is similar to the cochlear implant opportunity, very, very large. It's an underserved area of hearing loss. We do think that Osia is the right product to work to close that gap between the uptake and the opportunity. What we've seen with the uptake of Osia over the last few years gives us increasing confidence of that opportunity and that we do have the right product to realize it. So that's a quick look through each of the 3 segments. Now I want to jump on to our strategy, and I'm going to jump over our strategy here because we talk about it consistently. It is unchanged. It has been unchanged for a number of years. And what we do though each year is continue to refine our learning and, therefore, our focus particularly in those first 2 of the lifetime of hearing solutions, about retaining our market leadership and growing the hearing implant market. So under retaining market leadership, we continue to have more than 60% global market share. That's underpinned by our very strong technology portfolio and the quality of people and service that we offer around the world. We continue to make significant investment in R&D, as you'd expect, 12% of sales, $270 million, and we made really good progress in the last year on meeting development milestones across a whole range of our development areas. And we remain excited by the opportunity we have for our products in the future as well as the strengths of our portfolio now. Just one example of an area in which we've made progress in the last year is the development of a drug-eluting electrode. We did get some trial data there that has demonstrated a substantial impedance reduction what's -- from a drug/device combination. What that indicates is -- what impedance indicates is reduced inflammation, lower fibrosis and, therefore, less trauma and potentially healthier cochlear over people's lifetime, which possibly could be a path to hearing preservation in the future. Now we don't know those things yet, but the point of developing these products and getting evidence is to do that. And we certainly do have, from history, a small number of implants we did back 10 years ago with the drug-eluting electrodes, that we see sustained reductions in impedances over that 10-year period. And that's a really important outcome for us. So very, very pleased with our position and progress on our product development and a strong pipeline of products to come to build on the strength of the position that we have now. And then on to grow the hearing implant market, and here, I want to talk particularly about the adults and seniors work there. There, we're looking to build out standard of care, which is to make sure that adults within -- adults and seniors with indications for cochlear implants are being referred routinely to implant clinics to be assessed. And given the market penetration is under 5%, clearly, that is not happening routinely in any country in the world at the moment, and our goal is to make progress step by step towards that. And our results have shown -- are giving us good confidence that actions we are taking are having an impact. But the paths that our awareness, the Living Guidelines are part of getting evidence-based guidelines that can be adopted as clinical practice in countries around the world to get that more consistent system referral, so that's getting the path clear. An important part of that is the motivation, is making it important to treat hearing loss. And the links between healthy hearing and healthy aging and the importance of healthy hearing to healthy aging are growing in a whole range of areas, but particularly cognition. And there are a few points on cognition just from the last year. One is, just recently, The Lancet updated their analysis of the research into the modifiable causes of dementia. Hearing loss remained the #1 modifiable cause of dementia from their analysis of the literature. We know about the ACHIEVE study from Frank Lin, which showed the people at higher risk of dementia, that wearing hearing aids over 3 years reduced the cognitive decline by 48% compared to an equivalent group of people with hearing loss that didn't have their hearing treated. And then a study that we published later this year in Australia, analyzing the cognition of people with cochlear implants, showing that after 4.5 years of wearing cochlear implants for older people, executive function and working memory had improved in that group compared to another cohort. That, again, strengthens the more direct evidence of the benefits of cochlear implants. So there's link between cognition hearing loss and treating hearing loss to slow cognitive decline or, even in this case, improved cognition are critical around -- as are the broader lengths for healthy aging in providing that motivation and that motivation not only for individuals, but also about health care systems funding cochlear implants. So core pieces of our strategy that we continue to execute well on, but still clearly a long way to go. Okay. I'm going to skip over these next couple of slides. I've already talked about people. There's a lot more information on the annual report on this as well. And again, on environmental responsibility and the actions there, I talked about them upfront. And our sustainability report forms part of our annual report so you can read more there as well. And then on value and SKUs, in a minute, we'll just talk about this in detail, but just 2 points I wanted to make from this slide. One is we make good progress on our cloud system and transformation. And this isn't just replacing our core systems. It's actually about standardizing our processes, our data architecture across the world so that we have -- we're able to be more agile. We're able to move faster. We have better and more insightful data on the business and that we are setting ourselves up to scale as we grow to become a much larger business as we make progress on executing our growth strategy. So in the year, we deployed a new human capital management system, a new customer relationship system. Both of those have been successfully rolled out, and now we have the opportunity to start getting benefits from them. And that program continues as we go on to replace core manufacturing and finance systems with more modern and more flexible systems and getting that process of data standardization as well. And we closed the Oticon Medical CI acquisition. There's a picture here is of the team in Vallauris in France. Some great cochlear implant knowledge that we picked up with this team. Many long-standing CI engineers involved in product development, which is a great boost for us, as well as the 20,000 Oticon Medical customers that we will provide support throughout their lifetime. With that, I'll hand over to Stu to talk to more detail on the financial outcomes.

Thanks, Dig. Good morning, everybody. Good to be with you. Dig has already spoken on the P&L. Dig has already spoken to the 12% constant currency revenue growth. I won't add anything to that. I'll take you to gross margin. So it's 75%. It's slightly better than we're expecting, and it's where we want it to be long term. That's certainly where we're targeting long term. It's really a combination of from ASPs and pricing increases offsetting the impact of some stock write-offs and some headwinds and ramp-up in Chengdu. If we start with the ASP increases, it's actually -- was actually up 5% in constant currency. That's abnormally high for us. 2% of that 5% was driven by real price increases in developed markets. That's places like the U.S. and others. And that's off the back of N8 and taking price increases where we can. Obviously, there's a number of markets where we're a price taker, so we don't actually -- we're not actually able to influence price. And then the balance of that 5% constant currency impact was significant mix shift from lower-priced tender volume in emerging markets to higher-priced private pay volume. Then within ASP, on stock, we took a write-down of about $22 million for the full year. Again, that's abnormally high for us. The bulk of that was in half 1, $16 million in half 1, and that was off the back of obsoleting the Freedom series implant and sound processor. That product launched in 2005. It served us very, very well, as you probably know. We talked about a lot on these calls, we tend to prefer to hold slightly more stock and components to make sure that we, a, don't miss a sale; and b, we're buffered from any sort of demand volatility, and we've always got pieces ready to go to keep people on the air. The downside of that -- the upside is we don't miss sales because of supply. The downside is, when we do obsolete a generation, we need to write some stuff off. So that was what went through this year. And Chengdu has remained, as expected, about 0.5% headwind for us as we ramp up production there. Pleasingly, we are now selling sound processors that are manufactured in Chengdu, and we remain confident that we'll get approval to start selling implants that we are currently manufacturing there today. We'll get approval to sell them come December this year as well. On to selling, marketing and general -- sorry, yes, [indiscernible]. Thanks. That's up 10%. That's us continuing to invest to really underpin future growth. And so that's things like investing in standard of care, the COACH trial, the ACHIEVE trial, Frank Lin's work, those kind of things, to try and establish that -- trying to make that genuine standard of care for treating severe-profound hearing loss. R&D, 12% up and very much where we want it to be, also 12% of revenue for the year, again, similar to the 75% gross margin, 10% top line. Long term, we want R&D to be sitting at about 12% of revenue. You'll note the cloud expense was slightly lower this year, down from $38 million down to $30 million. We're about $90 million through our $100 million to $150 million program. And so our plan at the moment is to have somewhere between $30 million to $38 million for the next couple of years. So it's sort of in the range we would expect. Two more things on this page. The net margin, you'll see pre cloud. That's the one that Dig mentioned we try and sort of manage to, and we want to hold that at 18%. It was actually 18.1% for the year. It looks like it's improving about 1% from last year, but really, the bulk of that impact is currency. When you wash out currency, it's -- previous year would've been 18% if we rebaseline on the same currency as well. And lastly, that one-off item, $29.8 million. The vast bulk of that, $28 million of that is the integration costs to do with acquiring the Oticon Medical business. The extra $1.8 million is just very small changes in valuations and some of the innovation fund investments that we have. So if I take you to the balance sheet. So working capital, up $84 million. As you'd expect, as we're selling more and very good trading volume and receivables and payables are growing nicely, nothing concerning there. Inventories, again, we are taking a deliberate choice to hold more component stock and also increase our finished goods stock so that we're buffered from demand spikes. In property, plant and equipment, you see $28 million going in there. The bulk of that went into Lane Cove in F '24. We're about 2/3 of the way through a significant site refurbishment. The total footprint of the building is not getting any bigger, but the footprint of the clean room there, the real manufacturing engine of that building, is getting materially bigger. And we'll continue to do that across multiple sites over the next couple of years. And you'll note the net cash -- the decrease in net cash of $41.9 million, $42 million, but reminder, that we did spend $43 million on the share buyback in F '24. If you go to cash, it's a very similar story from the balance sheet there, again, great operating cash flow off the back of strong trading. CapEx, broadly in line with last year and where we expected it to be, and again, $28 million of that going into Lane Cove. We do think that number is going to tick up a bit in the next couple of years as we look at making more capacity enhancements and expansions across our network. And again, just reminder, the $43 million going out in the share buyback. And with that, I'm going to hand you back to Dig.

Thanks, Stu. And on to outlook but before we then move over to questions. So again, context for our outlook is that we are targeting continued, So over the long run, 10% sales revenue growth. This 18% margin pre cloud, as Stu said, and for the next couple of years, we've got the cloud investments, which will bring our margin down to nearer 17% when we include that. We're targeting to get over 50,000 people hearing this year, up from the 47,000. Again, there's the 1 or 2 implant piece to that. And that gives us a net profit guidance range of $410 million to $430 million, which is a 6% to 11% increase. A little bit of context for that. If we look back over the last few years, our growth rates have exceeded -- our revenue growth rates have exceeded 10%. And what that's meant is that we have had the opportunity to reinvest the extra in either more R&D, as we kept the R&D at 12%, or particularly opportunities to drive growth. And given the opportunity and we've said over a long period of time, it makes sense for us to continue invest while we can sensibly see how to do that and have the capacity to do it because of the huge opportunity. And what this guidance range gives us with the context of those targets at the top is the opportunity to continue to invest and make sure that we don't starve our future growth in a year so that we keep investing. Then a little bit more detail on the -- cochlear implant is the key part of our revenue. We've seen very good growth over the last few years in developed countries, based on higher awareness and increasing referrals. We expect that to continue. We do see some evidence of growing waiting lists for audiological evaluation or sometimes for surgery. We've talked about capacity constraints in audiology for some time, and we continue to work hard, both on the technology side with connected care but also on clinical practice with a number of clinics around the world, to make sure that we streamline them, do what we can and what the whole therapy area does to streamline those postsurgical appointments so that there is capacity upfront for further assessment and enabling more people to get access to a significant lift in hearing outcomes. So they get from a cochlear or an Acoustic implant. We do expect Services growth to slow. We said that at the half, and we saw it through that half. We expect Services to slow as we get a little bit further away from that Nucleus 8 launch. And Osia, we have high expectations for growth of Osia with the OSI300 out there with the market -- expanded market access that we have, and we continue to work across the range of countries where we don't yet have Osia and then particularly across the Asia Pacific region, where there is a significant opportunity. And as we've said, taking a long-term approach in terms of our pricing and our market access work to get the right conditions for long-run growth in Acoustics. We expect the gross margin to come up by 0.5% in the year, and that's with Chengdu ramping up through the year. R&D, as normal at 12%. Stu talked about the cloud computing. The currency have been bouncing around a bit recently, but this guidance given at AUD 0.66 and AUD 0.61. Obviously, that even with our hedging, that currency does move our revenue and our net profit around. And that we are restarting the share buyback that we started like 18 months ago, again, the same conditions, long-run share buyback to bring our cash down slowly, and we see this as a really good way to increase value to our long-term shareholders by doing a gradual and long-term share buyback. Okay. So with that, we will turn over to questions.

[Operator Instructions] The first question today comes from Andrew Goodsall from MST.

Just if we look at the second half growth rate for CI, particularly the U.S., just what read-through you're taking from that in terms of your efforts to grow the market and, I guess, how that -- those investments are being placed? Just trying to get a bit of interpretation around that particular number.

Yes. So certainly, Andrew, continue to see good growth in developed markets and in the U.S. through the second half. Obviously, we had a higher comparable. If you remember back to '23, we had a stronger second half than first half, so the comparable is up. But we continue to see good growth rates through that half and, again, particularly the adults and seniors. So we saw the children revert back to normal. So in a sense, sort of the half-on-half, that was a drag on the -- H2 was a bit of a drag on growth, but the underlying seniors and adults, we continue to see that progressing well.

Would it be fair to say that some of the sort of growth over the last couple of years might've been attributed to COVID sort of recovery and I guess we're more normalizing now?

Look, I think, certainly, in the earlier -- if you go back, we saw a bounce in '21 coming out of '20. They had hospital capacity constraints in '22. We saw them opening up towards the end of '22. And so certainly through into '23, we saw some backlogs being worked through in some areas. Yes, I think we're -- they're not lingering COVID effects now, perhaps possibly in the U.K. There's still backlogs there. So no, I think we're seeing a normalization. What we are seeing, we've seen a bit more, is as the therapy area grows, which it is, go to expand capacity across the whole value chain, audiology, surgery. And we do see some bottlenecks, as I talked, about in the audiology side.

And just a quick follow-up one for Stu. Just the Oticon integration expenses, just any flow-through into '25 with that?

No, look, we're expecting it to pretty much wash out of the result in '25. So there was definitely integration costs associated with onboarding the staff and some changes that were made in Vallauris. But from '25, we sort of expect business as usual for each of our functions and regions.

And just ballpark the cost of opening opportunity or the cost that you've incurred that wouldn't be normal?

So we put about $90 million into the Chengdu site.

That obviously gets depreciated because now we're in production.

Okay. But now it's sort of one-off costs in this last 12 months that you described as sort of just knocking doors open that weren't capitalized.

No. Now. We just -- we're starting from -- we had 0 volume a year ago, and we're getting it up to speed. But it'll take 3 or 4 years to get fully -- full capacity.

The next question comes from David Low from JPMorgan.

I might spend the same topic that Andrew started with. Just could I get you to talk a bit more directly about what assumptions you've made about bottlenecks in the system, given the senior segment is growing 15%? It strikes me that double-digit growth in developed markets is achievable if there isn't bottlenecks. And if I could get you to expand into developing markets as well. And given a lot of timing issues there, it seems to bounce back would be a reasonable assumption. Just wondering what you're thinking about there, please.

Yes. No, I think I understand the question. So we've seen in adults and seniors double-digits growth continue for a few years. We expect that to continue, and we see that there is capacity there to deliver that. I think with any -- there are hospitals and places where there is -- and clinics where there is less capacity. That's certainly true. But overall, we think there's enough capacity there to maintain that sort of level of growth for the adults and seniors. But -- sure if that answers all your questions, but I think -- let me know.

The other one was the emerging markets. Given they were very soft in the second half, India, does that recover?

Yes. So look, what the big impact there was in India, where there's reasonable amount of volume that just didn't occur at pretty low price. They're not -- some revenue there that didn't occur, but certainly brought our unit number down. We'd expect that to come back in through this year, but it doesn't really make a huge impact on our overall numbers. And certainly, we like to see good growth there because we're helping lots of children, and they're lifetime customers. But in terms of the overall financial impact, it's not that significant. And we said over time that we do see -- the great thing about healthcare, as you all know, is that certainly in developed world, it's pretty immune to macroeconomic conditions. But in emerging markets, we see much more impact from both macroeconomic conditions, but also from political cycles.

Just a couple of other quicker ones, I hope. The Acoustics market that you said that it's a similar sized opportunity to cochlear implants, which if I knew that, I've forgotten. Where are we at in terms of the level of penetration? Maybe you could give us something around volumes versus cochlear implants [indiscernible] sort of how big an opportunity that is perhaps in dollars as well as volumes.

Yes. So I think in terms of absolute numbers, very similar to cochlear implants and it's a less developed market. So it's even lower penetration, so under 5%. It is at a lower price point than cochlear implants. So in terms of absolute dollars, it's probably sort of half the potential or something like that or a bit less than half. We're far more advanced in cochlear implants on standard of care in terms of the evidence, the awareness. And yes, there's still clearly a long way to go. In Acoustics, we've been working on standard of care. We've got a global advisory professionals that work with us to understand what's the evidence that would help us open up the market more because what a lot of people do with Acoustics -- who benefit from Acoustics implants, they're getting hearing aids or they have often something like chronic otitis media, so that they actually got an ear that is hurt, it's uncomfortable and that the treatment is more about the pain than it is about the hearing. And now we're going to -- what we want to do is make sure that there's a follow-up to get the hearing solved. And there's often a lot of reconstructive surgery done in this area, too, which makes -- when it works, it's fantastic, but has a pretty high rate of not working. And that's where the -- one of the big opportunities for Acoustic implants are. So it's a long-run program to build that evidence, to build the awareness. And we still got geographic expansion. As well as you saw from the detail in the ASX release of the countries we've added this year, there are still countries that don't have good access to -- good reimbursement to Acoustic implants.

The next question comes from Saul Hadassin from Barrenjoey.

Maybe just a comment -- a question on unit sales growth and your guidance for FY '25, that sort of 10% range. I'm just wondering if you think that is consistent with market growth or industry growth or whether you think you'll be taking some share in FY '25 consistent with sort of what you've seen in the last couple of years.

Yes. I think -- look, I think it's consistent with our expectations for market growth. We've taken a level of share over the last few years for a whole range of reasons but largely on the back of the strength of our product portfolio and the reliability and quality of our products. As we always say, there's far less opportunity for that. So it's much more about a market growth focused -- our run rate much more in line with market growth is our expectation.

All right. And then, Dig, just on the Services commentary, slowing revenue growth, not unexpected as it relates to where you are in the cycle of the upgrade. But historically, there's been some commentary from cochlear about trying to smooth the upgrade revenues through mid-cycle technology upgrades or the Kanso, et cetera. So just to your comments on the ability to -- as we look forward into the next cycle, what is the ability of you guys to actually try and smooth that [indiscernible] see sort of negative revenue growth in a particular year?

Yes. Look, we are working very hard on that. And I think if you look back -- so as you would -- over time, you've seen that it is smoother than it used to be, but there is still faster and slower growth rates. Yes, as you say, look, things like -- more frequent launches with the off-the-ear and the BTE combined. That's obviously a change in the last -- or since 2016 when we launched Kanso. That wasn't there. So we're working hard at doing that, and I think we can do better at it, but there's only some progress made. More to be done. And I think part of this, just remember there is often a bit of a trade-off between cochlear implant and upgrade growth. Sometimes that's budget-related, sometimes it's clinic capacity, sometimes it's our capacity. And so those 2 things, and if you look back in time, they often move a little bit out of sync just because there are resource trade-offs at a number of levels.

Great. And just to squeeze one more in for, Stu. You mentioned on the call just with cloud-based expenses coming through, it's said to be to $38 million roughly per year over the next 2 years. You've guided to $34 million for FY '25. If I add up all the expenditure today that gets me to around -- just under $130 million. So for FY '26, is the expectation then that the whole program exceeds $150 million because otherwise, I would have thought it's about a $20 million expense that you're facing in FY '26.

Yes, we're still looking at the -- the plan currently about $150 million, we're about $90 million in. So we think some -- in that sort of 30-odd range for the next couple of years, that'll move -- the exact number will move around a bit based on what we can sort of productively spend in year, but still using plan today, $150 million.

And does it drop away meaningfully then once that $150 million is complete? Or is it going to depend on where you are in the cycle of SaaS investments? In other words, it could linger for an extended period of time.

The plan is, it'll ramp down at that stage. Obviously, there'll be some -- because -- by that stage, we should be through the bulk of the transition. And that's really going from -- it's really the cost of going from the old systems and processes to newer ones and better ones. That will bring with it -- we're largely shifting to cloud-based services, but we want to be able -- our plan is to absorb the ongoing running and improving cost of those in our standard sort of pro forma P&L. So we'll still be targeting 18% at the bottom, pre and post cloud by that stage.

The next question comes from Steve Wheen from Jarden.

A follow-up question on the Services side. The second half, the revenue went -- was basically flat, just a little bit under flat. And as a result, is that deceleration in the Services perhaps a little bit faster than expected? And I wonder if you could just touch on it and maybe explain that. Is there any affordability type issues emerging? And what sort of penetration of the installed base that are due an upgrade would you say you've reached in the first 18 months since you've launched the N8?

Yes. Yes, Steve, so all good questions. So that slowdown was sort of broadly in line with where we thought it would be on the -- in terms of affordability. So there's certainly a use of co-pay in the U.S. and in a few other markets. And as with the inflation and tightening macroeconomic conditions, that possibly has some impact. Now the way we pick that up is we look at people who are sort of dropping out because there's a waiting time between asking for one and getting insurance approval or in finding out what they have to pay. We're not seeing at this stage a pickup in that dropout rate, but it's something we're -- it's certainly something we are monitoring carefully. And it's been a while since we've been through a cycle with higher inflation and some of those economic pressures to understand what that would mean, so we're learning a bit as we go. Look, in terms of penetration, there's still plenty of scope, still lots of opportunity to upgrade people. And it's on us to -- which we're doing to -- say, I would help identify who can upgrade and be able to increase their awareness of upgrade. And as I said, there are some clinic capacity bottlenecks and clinics as we want -- who'll prioritize new implants over upgrades. And that makes perfect sense as what should happen from a societal perspective is what we want to happen, too. So there's a number of moving pieces on the Services, but it's sort of coming -- playing it out broadly in line with where we'd expected it to be.

Right. And Stu, just wanted to reconfirm, I didn't quite hear your comments on working capital, in particular, the inventory balance. Are you saying that that's sort of level that you would expect to maintain? Or can that come down, now that sort of we are seeing that slowdown in the upgrade cycle that you're anticipating in the Nucleus 8?

No, I think that level, we'd want to -- we're not looking at that feeling too high, given the growth. And what we're seeing is demand is a bit more volatile in terms of specific products and the mix, and that big mix shift we saw in the emerging markets, as an example. I think we're pretty comfortable with where it is right now.

The next question comes from David Stanton from Jefferies.

Look, I'd like some more color on what you're calling in terms of surgical constraints. What's driving that? Is there a focus on sort of other more emergency surgery that's emerging, particularly in the developed markets, please?

So where we're seeing surgical constraints -- and first of all, constraints we're seeing, audiology, is more of a bottleneck than surgery. Where we do see surgery constraints, it's more -- it's people-related. So from what we're hearing, sometimes anesthetist being in short supply. What we're not hearing -- there's not many places where we're hearing we're being deprioritized against other therapies. There's a couple of areas where backlogs are long. They can -- so the operating theaters used to do 3 sets of grommets in the time it could be doing 1 CI. So there's -- were there -- a few, but that's not significant across the globe. But yes, it's much more about sort of theater staff or anesthetist where we see it. And I think it's just natural as we grow. As the therapy area grows, capacity has got to expand and either it expands or something else has got to get pushed a bit -- pushed out of the way. And we've got a compelling case, which helps us, but we've got to work that through hospital by hospital. But audiology is the one that's more restrictive.

Understood. And I guess a follow-up in terms of second half F '24, you talked about in emerging markets some tender delays. I mean are they delays? Or do you think -- is your understanding that there may be cancellations being given? I mean -- I guess the question is are they delays? Or do you think you can get that volume back in time?

Yes, we think it'll come back. Certainly, the children are definitely there. The money is there. And we expect that those tenders will come back over time rather than they've been canceled.

Understood. And final one from me, if that's okay. Cochlear used to talk to 55% to 60% penetration of -- with new implants into that upgrades market. Are we around that getting -- topping out around there at the moment? Or is there more to go? I guess a follow-up to Steve's question.

Yes. We're short of that level of penetration. So that's why we think there is more opportunity. And as we talk about, we measure the opportunity more about now in a year, how many people are eligible for an upgrade in terms of their reimbursement and how many of those people can -- are aware and how many can we get. But there's still definitely more opportunity.

Yes. And that rule of thumb, that's over the whole life of a sound processor until we launch the new one. And that was back in the days where we only had the omni version, and we're only sort of 18 months to 2 years into that. It's typically more like a 4- or 5-year cycle.

The next question comes from Gretel Janu from E&P.

I just want to go back to Saul's question on the CI units. You've historically always said market growth was high single digits, and now you're guiding to CI unit growth of 10%. So I guess what has really changed here that you now have this increased confidence to guide higher from a market growth perspective? And do you expect that acceleration in market growth to continue into -- past FY '25 into the medium term?

So no, I think what's happening here is you got to think about it in developed markets, emerging markets and you got to think within the segments of children and then adults and seniors. Look, we have seen a lift in the growth rate over the last few years, as we've talked about, and I think that's our strategy working. When we look at saying around 10% this year, firstly, there's not a lot of difference between 10% and high single digits, but we think that's where the market is.

Okay. Can you expect that 10%, I guess, to continue more into -- past '25, I guess? Or is it just more one-off factors that have led to the 10%?

No, we do -- yes, we do expect that to continue. And remember, too, as adult -- number of adults and seniors come through, the proportion of children in developed world continues to reduce. And that's the part that's not growing. So just on the maths of that, the growth rate should improve very gradually over time if we can keep driving the number of adults and seniors coming through. But I don't think our outlook is substantially different to what we've said here in the past.

Right. Understood. And then just in terms of capital management. You've announced that $75 million buyback. That's not really going to make a debt to the cash balance. So I just think, what is your long-term thinking about capital management here? And what would make you increase the buyback, understanding that you do want to reinvesting back into the business?

It is a long-term buyback. So that's certainly up to $75 million is 1 year. What we said at the outset and what we continue to do is do this over the long term. We don't think it's in the interest of our shareholders to sort of bring our cash down to the level we think it could be at and do that all in 1 year.

The next question comes from David Bailey from Macquarie.

Some questions there just around the industry growth rate. Just interested in your views on the competitive dynamics at the moment. Obviously, some market share gains have come through in more recent years. But what are you sort of seeing at the moment? And then just given some of the updates coming through from peers, new technology from Sonova and TICI from Med-El, just talks around market share opportunities from here.

Yes. So look, we -- first of all, we have a very strong market position and a very strong product portfolio. We are in a competitive market. We talk before Med-El are working on a TICI drug-eluting electrode. We are doing both those things as well. And yes, Sonova recently announced their deep neural network for noise reduction in hearing aids, and I think probably we're going to introduce that -- probably bring that into CI in time. I think a few comments on that one. First of all, the constraint on hearing performance for a cochlear implant, we believe, is the electrode neural interface, the interface between the electrode and the hearing nerve. And that's where 21 of the significant areas of our investment in our R&D. But as we've talked about before, too, with our scale of R&D, we work across the whole -- all elements of the system. Signal processing in the externals is -- remains an opportunity for improvement, the potential for deep neural network is well known and has been known for a while.

Great. Just on the COACH trial, just -- can you just remind us to the recruitment of that one, I couldn't see on the website, and potential timing for that one.

It's running well behind where we wanted it to. So we kicked this off pre-COVID. And then being in the U.K., got hit by the COVID impact on the NHS. Even coming out, we continue to see delays in recruiting. So that's disappointing for us. We do want this data of head-to-head hearing aid versus cochlear implants. So it'll happen, but it's going to happen later than we wanted. But I think the data we are getting, which we've talked about, is this data on hearing and healthy aging and then this study on CI and cognition in Australia, they're at least as valuable as COACH. So we get COACH in time, but later than we wanted. But there's a lot of evidence coming through, and we continue to work hard to try to get more. But look, yes, we're disappointed by the progress of the COACH study. That's for sure. That's one of the things that it's got to be arm's length for us. That means we can't also kind of get involved in trying to speed it up.

Understood. And then just a quick one for Stu, maybe just the impact of currency for '25. So obviously, the currency is looking pretty flat in terms of your guidance. But thinking through hedge movements, just your thoughts on what that could mean for earnings pretax or post tax earnings for '25?

Look, if I can forecast currency, I wouldn't be sitting here. Look, we haven't changed our hedging policy. We're sort of 18%-plus hedged for 6 months and then decreasing in sort of 6-month tranches going out. And that's really just to try and provide a bit of buffer and smoothing to the results. If there's a big swing, it's not coming through as a big shock. Yes, I don't want to get into trying to predict that. There was obviously -- we benefited a bit last year. We're not assuming that, that continues. But I'd love to have a reliable forecast on currency.

The next question comes from Andrew Paine from CLSA.

Just going back to the surgical capacity constraints in tenders. Just trying to understand what -- how big a headwind was that in FY '24? And are you expecting that to subside and especially online in FY '25? Or is this kind of a multiyear journey on there?

Yes. I think the way to think about surge in capacity is a multiyear journey. There are always going to be some capacity constraints somewhere, and the key is that we keep driving demand. We keep moving those constraints, and we keep driving demand in. So I think those constraints didn't have a significant impact on our F '24 result. Look, in terms of tenders, it did, at least, but as I said, it's more on reducing just the overall CI growth rate, not a huge financial impact. And again, that probably will return in '25. If it does, it would lift that CI growth rate number a bit further, but again, not a huge financial piece.

Yes. That makes sense. And you also said direct-to-consumer is about 30% or greater than 30% of cochlear implant surgery. Just trying to understand what that was historically. And do you think -- what do you think of upgrades, too? Also, is there an ASP or margin impact there?

The way we think about that is it's a growing proportion of our surgeries. It should be, right? Because if we're investing in something to drive growth, we want it to grow faster than all of the surgeries. Otherwise, we're not being effective in driving growth. So that's -- so rather than it was x percent and we've got a target of y percent, what we're looking for is that as a proportion of our surgeries, it grows each year because that's the measure of if it was effective investment. If it's growing more slowly than our surgeries, we're probably better off putting the money into something else that's lifting referrals or awareness or expanding standing funding.

And sorry, if you have ASP or margin impacts there?

No, no, no. What we spend on [ AR1 ] on the DTC promotions there and our SG&A, it's not a huge number. We obviously monitor it carefully, and we measure the returns. But if we slowed that down, we would spend more on something else to drive growth.

The next question comes from Shane Storey from Wilsons Advisory.

My question is just back to just looking at where the profit ended up this year. I mean when you look back at what wanted you to guide, I mean, upgrade the guidance in February, what would you say would be the most important factor or upside concern that is more then show up and to explain where we ended up this year?

So I'm not quite sure of your question, Shane. So we lifted the range, obviously, in the half year. We landed in that range. If you're looking at the revenue, then 60% of our revenue is from cochlear implants, so that's the biggest driver of outcomes. But I'm not quite sure what you're asking.

No, I just -- I guess when you look at the top end of the revised guidance of say $400 million NPAT, just trying to think through that. Because it seems most of the elements of -- in terms of commentary then, reasonably in line. I'm just trying to understand what you felt the biggest contributor to the delta aside from -- and missing the top end was?

Yes. So first of all, if we set a range, we're not going to be aiming at the top end. We're aiming in the range. I think the thing we did -- perhaps another way to answer your question is we set out a certain set of assumptions at the half on growth rates and outlook for each of the areas. The one of those -- that they all turned out as we expected. The only one that didn't was the emerging market growth rate and particularly those tenders in India. So that was lower than we expected. So if you're looking at what did we think was going to happen over the last half, I'd say pretty much everything we thought was going to happen, happened apart from those low-price tenders not coming through.

The next question comes from Craig Wong-Pan from RBC.

Just on Services, on a constant currency basis, the Services revenue declined year-on-year in the second half. So I just wanted to clarify, for your FY '25 outlook, are you expecting negative Services revenue growth in FY '25 or just a lower level than the 12% growth you achieved for the full year of FY '24?

A lower level. Service will grow, we expect it to grow but at a lower level.

Okay. And then just on the Oticon integration cost, I didn't quite understand the -- if there's any more cost to come through in FY '25 or not or is that done now?

Yes, that's pretty much done now. So the costs -- the team have been absorbed, predominantly in Vallauris and a few others around the world, and they're now very much baked into the budgets of the countries and functions. And so we're back to sort of normal -- the word -- I use the word guidance, but sort of normal guardrails of 10% top line long term, 25% COGS, 12% on R&D, and then, drum roll, 18% at the bottom. And as we talked about on the 18%, there's probably a couple more years left of the cloud investments. So we'll be targeting that 18% pre cloud NPAT.

Okay. And then my last question, just on the CapEx, that $110 million to $130 million. That's -- some of that's going to Lane Cove and Malaysia. Just wanted to understand what those -- that investment is going to be directed towards there?

Yes. So it's all about adding capacity. So basically, we think about that in terms of floor plate for the building. Do we need more -- bigger buildings? We don't think we do in the short term. We will, longer term. We then look at the infrastructure within the building, and that's really -- in manufacturing, that's kind of 3 things. There's the clean rooms. So we have a very sterile environment, order of magnitude more sterile than an operating theater, where we actually make the implants. So we're expanding those. There's then the equipment within the clean rooms and within the other manufacturing premises to actually -- each stage of the process to whether it be doing the activity or testing to make sure that the quality is remaining very high. So there's quite a bit of CapEx going in '25, expanding clean rooms and expand -- and more investment in sort of plants and equipment. And then obviously, the labor force that comes with that, but that's not CapEx.

The next question comes from Lyanne Harrison from BofA.

If I could come back to cochlear implants again. Developed market adults and seniors was quite strong for 14% and at 15% growth. Is that the sort of growth that we should be expecting or similar growth in '25? Or is there a possibility to track high, given what you're doing with direct-to-consumer and the increased rate of audiologist referral?

Look, I think that's a reasonable expectation for '25 to stick around there, and the expectation that the children grows by sort of 1% or 2%.

Okay. And then just one more on price increases. What can we expect for '25?

I think I wouldn't -- we don't expect price increases of significance through this year. I think we did on the back of Nucleus 8. We've done that with Osia. Where there's opportunity and -- we will obviously seek it. But I think in terms of looking forward this year, I'd hold.

The next question comes from Mathieu Chevrier from Citi.

I just had a last one on CapEx beyond F '25. How should we think about it, given that it's been a bit higher than what you were expecting in -- going into F '25?

Yes. Like I said, we're just putting a bit more into more capacity, so yes, in that sort of like $100 million, $120 million range. And I think given that we are targeting that 10% growth, that's going to be an ongoing thing for us over the medium to long term.

Got it. So $100 million to $110 million is kind of the new CapEx?

Yes, about $100 million to $120 million, I think.

[Operator Instructions] The next question comes from Laura Sutcliffe from UBS.

Could I just go back to Chengdu for a second? Just what you said today about gross margin impact for '25 impact any of your projections on when that turns from a headwind into a tailwind for you?

Not very much, kind of where we expected. '25 will be the first year where we're sort of producing all year. And certainly, [ sound ] prices is all year and implants, hopefully, for about half of the year, and we think sort of 4- to 5-year journey for that thing to get to full capacity. But that's very much where -- it's tracking where we expected.

All right. And then just one more. I was wondering if you could talk a little bit about what portion of seniors at the moment are receiving 2 implants or 1? And to what degree does any focus on changing that versus trying to drive recruitment of completely new patients as you try and further penetrate that large senior population?

Laura, it's about 15% of seniors are getting bilateral and with -- both are opportunities, both bringing new people in. Bilaterally, the thing is sort of country by country, helps us think that through is just what's the reimbursement if there is reimbursement. But easier reimbursement for bilaterals, then we want to push that. If that's really difficult, we're just going to keep driving new. I mean everywhere we're trying to drive awareness and get new people in. But if there's favorable reimbursement, then we want to -- if there's clear benefits of bilateral hearing, we want to promote that.

And that's obviously only of the people who actually get implants in the first place and that's still a tiny fraction of the addressable.

And that's 15%, 1-5?

1-5, yes.

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

Okay. Thank you all for joining and look forward to talking again in February. Thank you.

Thanks very much. You're outside of conference.