Thank you for standing by, and welcome to the Cochlear Limited FY 2024 Results Analyst and Media Briefing. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. 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, for joining for our FY 2024 results, update. Let's, let's get started. As, as always, we like to start with, with our mission. Our mission is the inspiration for employees at Cochlear, but it 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, let's, let's get into having a look at FY 2024.
So the clear highlight of the year for us was helping over 47,000 people hear with one or two of our implants, and in doing so, we created over AUD 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 five pillars that we show here. So I'm gonna talk about a lifetime of hearing solutions and a healthy, 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. Very importantly, our people, 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 engaged 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 there was 1,000 roles filled for people outside Cochlear in the year, and 37%, so another 400 roles, were actually filled by people within Cochlear. And to do all that, we had 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.
This is all part of providing broader experience across Cochlear with Richard Brook stepping down, Anthony Bishop moving to President of EMEA, and Stu, who's with us today, moving from CFO to the President of APAC, and that being effective all from the first of January. 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 the financial summary.
Strong year for revenue up to AUD 2.258 billion, 15% gross, 12% in constant currency. I will talk through the elements of that in terms of the cochlear implants, services, and acoustics just in a few minutes. Strong profit performance, 387, up 27%. Obviously, currency part of that with the 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. 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 and the next couple of years, that'll take about one percentage point off the margin from 18 down to 17, but our long-range outlook and goals there are unchanged. And overall, we remain in a very strong financial position, significant cash on the balance sheet, the opportunity to lift the dividend up 24% for the full year to AUD 410.
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. So cochlear implants being 59% of revenue, critical driver of overall performance, a core piece.
The core piece of our strategy here, particularly driving developed market growth, and developed markets. Right, in developed markets, as you know, it's the 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, where 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 to develop positive 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, and 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 seniors.
As part of that, we see increasing 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, in overall developed markets, it worked as we expected. It came out where we expected. We said at the half that we'd seen unusually high growth in children.
That moderated in the second half, again, as we expected it to, and we said at the half that we expected children growth to slow to normal. That has happened, but the seniors and adults continued. In our emerging markets, we saw 5% growth, with a really strong first half and a decline in the second half.
In terms of where we finished up for the year, this is 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 actually 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, our expectations. Stu will talk more to, for those impacts on, on the ASP that explain the gap between the 14% revenue growth and the 9%, implant unit growth. On the services, good, good growth in services.
You can see in the chart there that services, apart from the time around COVID, has had, 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's a dip 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. And Acoustics also 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 three 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 into markets with the 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, example of countries that where we now have reimbursement for Osia. We didn't a year ago. The age of implantation in the U.S. has moved just right late in the half, from 12 to five, again, which expands the market. We talked for a while about saying that that Acoustics implant opportunity is similar to the implant opportunity, very, very large. It's a 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 three segments. Now to jump onto our strategy, and I'm gonna 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 each year is continue to refine our learning and therefore our focus, particularly in these first two, 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 a significant investment in R&D, as you'd expect, 4% of sales, AUD 270 million. We made really good progress in the last year on meeting development milestones across a whole range of our development areas.
We remain excited by the opportunity we have for our products in the future, as well as the strength 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 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 the evidence is to do that.
And we certainly do have, from history, a small number of implants we did about 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 our growing hearing implant market. 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 with senior indications for cochlear implants are being referred routinely to implant clinics to be assessed. 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. Our results are giving us good confidence that the actions we are taking are having an impact.
But the parts that are 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 were a few points on cognition just from the last year. One is just recently, The Lancet updated what their analysis of the research into the modifiable causes of dementia.
Hearing loss remained the number one modifiable cause of dementia from their analysis of the literature. We know about the ACHIEVE study from Frank Lin, which showed that people at higher risk of dementia, that wearing hearing aids over three years reduced their 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 to be 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 these links between cognition, hearing loss, and treating hearing loss to slow cognitive decline, or even in this case, improve cognition, are critical, around, as are the broader links for healthy aging and providing that motivation, and that motivation not only for the individuals, but it's also about healthcare 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 gonna skip over these next couple of slides because I've already talked about about the people. There's a lot more information on our annual report on this as well.
Again, on environmental responsibility and our actions there, I've talked about them up front, and sustainability report forms part of our annual report, so you can read more there, as well. And then on the value and skills, in a minute, we'll just talk about this. But just two points I wanted to make from this slide. One is we make good progress on our cloud system 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.
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 and data standardization as well. And we closed the Oticon Medical CI acquisition. There's a picture here of the team in Vallauris in France. Some great cochlear implant knowledge that we've 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. Morning, everybody. Good to be with you. Dig's already spoken on the P&L, Dig's already spoken to the 12% constant currency revenue growth. I won't add anything to that. I'll take you to gross margin. So 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 some ASP, some pricing increases, offsetting the impact of some stock write-offs and some headwinds on ramp-up in Chengdu. If we start with the ASP increases, it's actually, it was actually up 5% in constant currency. That's abnormally high for us. Two of that 5 was driven by real price increases in developed markets, but 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. That was on ASP.
On stock, we took a write-down of about AUD 22 million for the full year, but again, that's abnormally high for us. The bulk of that was in half one, AUD 16 million in half one, 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 talk 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're gonna need, we need to write some stuff off. So that was what went through this year. And Chengdu has remained, as expected, about a half a percent 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, to get approval to sell them, come December this year as well.
Onto selling, marketing in general... Sorry, yeah, sounds like, thanks. That's up 10%. That's us continuing to invest to really underpin future growth. That's things like investing in standard of care, the COACH trial, ACHIEVE trial, Frank Lin, those kind of things, to try and establish that, try and make that genuine standard of care for treating severe to profound hearing loss. R&D, 12% up, and very much where we want to be, also 12% of revenue for the year.
Again, similar to the 75% gross margin and top line, long term, we want R&D to sit at about 12% of revenue. You'll note the cloud expense was slightly lower this year, down from AUD 38 million down to AUD 30 million. We're about AUD 90 million through our AUD 100 million and AUD 150 million program. That's, and so our plan at the moment is to have somewhere between AUD 30 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 have been 18 if we rebaselined on the same currency as well. And lastly, that one-off item, AUD 29.8 million, the vast bulk of that AUD 28 million of that is the integration costs to do with acquiring the Oticon Medical business.
The extra 1.8 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, working capital up 84, 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 good stock, so we're buffered from demand spikes. In property, plant, and equipment, you'll see AUD 28 million going in there.
The bulk of that went into Lane Cove in FY 2024. 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. You'll note the net cash, the decrease in net cash of AUD 41.9 million, AUD 42 million, but reminder that we did spend AUD 43 million on the share buyback in 2024.
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, AUD 28 million odd of that going into Lane Cove. We do think that number's gonna 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 a reminder of the AUD 43 million going out in the share buyback. And with that, I'm gonna hand you back to Dig.
Thank you, Stu, and on to the outlook before we then move over to questions. To give context for our outlook, is that we are targeting continuing to show the long run 10% sales revenue growth, there's 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 one or two implant piece to that. And that gives us a net profit guidance range of AUD 410 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%. Now, what that's meant is that we have had the opportunity to reinvest the extra in either more R&D, we've kept the R&D at 12%, or particularly opportunity to drive growth.
Given the opportunity, and we've said over a long period of time, it makes sense for us to continue to 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 to so that we keep investing.
And then a little bit more detail on that Cochlear cochlear implants 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 the.
Do what we can and what the whole therapy area does to streamline those post-surgical appointments, so that there is capacity up front for further assessment and enabling more people to get access to a significant lift in hearing outcomes, so they get 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. Osia, we have high expectations for growth of Osia with the OSI300 out there, with the expanded market access that we have, and we continue to work across a range of countries where we don't yet have Osia, and particularly across the Asia Pacific region, where there's a significant opportunity.
We are, 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-term in acoustics. 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's been bouncing around a bit recently, but this guidance is given at 66 and 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 about 18 months ago. Again, it's the same conditions, long-run share buyback that 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.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you're using a speakerphone, please pick up the handset to ask your question. The first question today comes from Andrew Goodsall from MST. Please go ahead.
Good morning, and thanks very much for taking my questions. 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, you know, just, just trying to get a bit of, interpretation around that particular number.
Yeah. Yeah. So certainly, Andrew, continued 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 2023, we had a strong, stronger second half than first half, so the comparable was up, but we continue to see good growth rates through that half. And again, particularly in the adults and seniors. So we saw the children revert back to normal. So in a sense, sort of a half on half, that was a drag on the H2. Albeit, it 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 have been attributed, attributed to a COVID sort of recovery, and I guess we're in more normalizing now?
I think, look, I think certainly in the earlier, you know, if you go back, we saw a bounce in 2021 coming out of 2020. Then they had hospital capacity constraints in 2022. We saw them opening up more in the end of 2022, and so certainly through into 2023, we saw some backlogs being worked through in some areas. I think, yeah, I think there are not lingering COVID effects now.
Perhaps possibly in the U.K., there's still backlog there. So no, I think we've seen a normalization. What we are seeing, we've seen a bit more is as the therapy area grows, which it is, gotta expand capacity across the whole value chain, audiology, surgery. We do see some bottlenecks, as I talked about in the Acoustics side.
And just a quick follow-up, one for Stu. Just the Oticon integration expenses, just any flow-through into 2025 with that?
No, we're expecting it to pretty much wash out of the result in 2025. But there's definitely integration costs associated with onboarding the staff and some changes that were made in Vallauris. But from 2025, we sort of expect business as usual for each of our functions and regions.
Just ballpark, the cost of opening up Chengdu or the cost that you've incurred that wouldn't be normal?
We put about AUD 90 million into the Chengdu site.
But just-
Appreciated, as now, now we're in production.
Oh, okay. But no sort of one-off costs in this last 12 months that you'd describe as sort of just getting doors open that-
No.
Weren't capitalized? Okay, no worries.
No.
Thank you.
But yeah, we're starting from zero. Yeah, we're zero volume a year ago, and we're getting it up to speed, but it'll take three or four years to get fully full capacity.
Great. Thanks very much.
Thank you.
Thank you.
The next question comes from David Low, from J.P. Morgan. Please go ahead.
Thanks very much for taking my questions. I might stay on 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 seniors 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 developed, developing markets as well, and given there's a lot of timing issues there, it seems a bounce back would be a reasonable assumption. Just wondering what you're thinking there, please.
Yeah, Andrew, I think I understand the question. So, we've only seen in adults and seniors double-digit growth continuing for a few years. We expect that to continue, and we see that there is capacity there to deliver that. I think with any, you know, 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. I'm not sure if that answers all your questions, but I think-
The other one was the emerging markets, given they were very-
I see.
Half into it. Does that recover?
Yeah. Yeah, so look, I mean, what the big impact there was was in India, where there was a reasonable amount of volume that just didn't occur at pretty low price. So 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. It certainly, we like to see good growth there because we're helping, you know, helping lots of children and their lifetime customers. But in terms of the overall financial impact, it's not all that significant.
And we've said over time that we do see the great thing about healthcare, as you all know, is that it certainly in the 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.
Okay, thanks for that. Just a couple of other quicker ones, I hope. The Acoustics market, you said that it's a similar-sized opportunity to Cochlear implants, which if I knew that, I'd forgotten. Where are we at in terms of the level of penetration? You know, maybe you could give us something around volumes versus Cochlear implants. We could assess sort of how big an opportunity that is, perhaps in dollars as well as volumes, please.
Yep. Yeah, so, so I think in terms of absolute numbers, very similar to Cochlear implants, and, and it's a less developed market, so it's even lower penetration, so under 5%. It is at a lower price point than, than Cochlear implants. So, you know, in terms of absolute dollars, it, it's probably, you know, 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, the evidence, the awareness, and, and, you know, 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 body of professionals that work with us to understand what's the evidence that would help us open up the market more.
'Cause what a lot of people do with acoustic, who have been through acoustic implants, they're getting hearing aids. Or they have often something like chronic otitis media, so that they've actually got an ear that it hurts, it's uncomfortable, and the treatment is more about the pain than it is about the hearing. And now what we wanna 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 when it works, it's fantastic, but has a pretty high rate of not working, and that's where 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've 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.
All right. I'll leave it there. Thanks very much.
Thanks, David.
Thank you. The next question comes from Saul Hadassin from Barrenjoey. Please go ahead.
Thanks. Good morning, Dig. Good morning, Stu. Dig, maybe just a comment, a question on, unit sales growth and your guidance for FY 2025, 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 2025, consistent with sort of what you've seen in the last couple of years?
Yeah, 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, and the reliability and quality of our products. If you always say there's far less opportunity for that, so it's much more about a market growth focus to our run rate, much more in line with market growth is our expectation.
Great. Then, Dig, just on the services commentary, you know, slowing revenue growth, not unexpected as it relates to where you are in the cycle of the N8 upgrade. But historically, there's been some commentary from Cochlear about trying to smooth, you know, the upgrade-
Yep
revenues through mid-cycle technology upgrades or the Kanso, et cetera. Just 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, actually don't see sort of negative revenue growth in a particular year?
Yeah, look, we are working very hard on that. And I think if you look back, as well as you would have over time, you've seen that it is smoother than it used to be. But there is still faster and slower growth rates in it. Yeah, as you say, look, things like the more frequent launches with the Osia 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 some progress made, more to be done. And I think part of it, too, 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, those two things, if you look back in time, they, they often are a little bit out of sync, just because there are resource trade-offs at a number of levels.
Great, thanks. Just if I could squeeze one more in for Stu. Stu, you mentioned on the call just with the cloud-based expenses coming through, I think you said AUD 30 to 38 million, roughly, per year, the next two years. You've guided to AUD 34 million for FY 2025. If I add up all the expenditure today, that gets me to just under AUD 130 million. So for FY 2026, is the expectation then that the whole program exceeds AUD 150 million? 'Cause otherwise, I would have thought it's about a AUD 20 million expense that you're facing in-
Mm-hmm
... in FY 2026.
Yeah, no, we're still looking at the plan currently about AUD 150 million. We're about 90 in, so we think, you know, some in that sort of 30-year-old range for the next couple of years, it'll move a bit. The exact number will move around a bit based on what we can sort of productively spend in year, but still, using the plan today, AUD 150 million.
Does it drop away meaningfully then, once that AUD 150 million is complete? Or does it again 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 old. 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...w ell, our plan is to absorb the ongoing running and improving costs of those in our standard sort of pro forma PNL for the future, gaining the 18 at the bottom, pre- and post-cloud by that stage.
All right. That's all I had. Thank you very much.
Thanks, Saul.
Thank you. The next question comes from Steve Wheen from Jarden. Please go ahead.
Yeah, good morning. A follow-up question on the services side. The second half, the revenue 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 that, to 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? Thanks.
Yeah. Yeah, Steve. So, all good questions. So that slowdown was sort of broadly in line with where we thought it would be. In terms of affordability, so there certainly is a co-pay in the U.S. and in a few other markets. And, you know, as with the inflation and tightening macroeconomic conditions, that possibly has some impacts. Now, well, the way we pick that up is we look at people who are sort of dropping out because of the waiting time between asking for one and getting insurance approval, or finding out what they'll have to pay.
We're not seeing, at this stage, a pickup in that dropout rate, but it's something we are monitoring carefully, and that, you know, 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. But in terms of penetration, there's still plenty, plenty of scope. You know, still, lots of opportunity to upgrade people, and, you know, it's on us to, which we're doing, to be able to help identify who can upgrade and be able to increase their awareness of an upgrade.
And as I said, there's, you know, there are some clinic capacity bottlenecks and clinics, as we want, will prioritize new implants over upgrades. And that makes perfect sense of what should happen from a societal perspective, is what we want to happen, too. So there is, there's a number of moving pieces on the services, but it's sort of coming panning out broadly in line with where we'd expected it to be.
Great. Thanks, Dig. 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 the 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 wanna 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 it, where it is right now.
Great. Thanks, guys.
Thanks, Steve.
Thank you. The next question comes from David Stanton from Jefferies. Go ahead.
Morning, team, and thanks very much for taking my questions. Look, I'd like some more color on what you're calling out in terms of surgical constraints. You know, what's driving that? Is there a focus on sort of other, more, emergency surgery that's emerging, particularly in the developed markets first?
Yeah, David, so where we're seeing surgical constraints, and first of all, constraints, we're seeing audiology as more of a bottleneck than surgery.
Right.
Where we do see surgery constraints, it's more, it is people-related. So from what we're hearing from anesthetists 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, you know, they can. So the operating theater is used to do three sets of grommets in the time it could be doing one CI. So there's, you know, where there are a few, but that, that's not significant across the globe. But yeah, that's more about other theater, sort of, theater staff needs to where we see it.
I think it's just natural as we grow, as the therapy area grows, the capacity has got to expand, and either it expands or something else has got to sort of get pushed a bit, pushed out of the way. You know, we've got a compelling case which helps us, but we've got to work that through, you know, hospital by hospital. But audiology is the one that's more restricted.
Understood. Thanks. I guess a follow-up, in terms of second half of 2024, you talked about in the emerging markets, some tender delays. I mean, are they delays, or do you think. You know, is your understanding that there may be cancellations being given? I mean, what I guess the question is, are they delays, or do you think you can get that volume back in time?
Yeah, we think it'll come back. Certainly, the children are definitely there. The money is there. We expect that those tenders will come back over time rather than canceled.
Understood. Final one from me, if that's okay. Cochlear used to talk to, you know, 55% 60% penetration of with a new implant into that upgrades market. Are we around that getting topping out around there at the moment, or is there more to go? I guess, as a follow-up to Steve's question.
Yeah, no, we're short, we're short of that level of penetration, so that's why we think there is more opportunity. And as we talked about, we measured our opportunity more about now, in a year, how many people are eligible for an upgrade in terms of their reimbursement? How many of those people are aware, and how many can we get?
But there's still definitely more opportunity. Yeah, and that will, you know, that's over the whole life of a sound processor until we launched the new one, and that was back in the days where we only had the omnidirectional version. We're only sort of 18 months to two years into that. It's typically more like a four or five-year cycle.
Thank you. Understood.
Thank you. The next question comes from Gretel Janu from Evans & Partners. Please go ahead.
Thank you. Good morning. I just wanna 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 2025 into the medium term? Thanks.
No, I think what’s happening here is, you’ve got to think about it as developed markets, emerging markets, and you’ve got to think within the segments of children and then adults and adults and seniors. We have seen a lift in the growth rate over the last few years, as we’ve talked about, and think that’s our strategy working. You know, when we look at saying around 10% this year, firstly, there’s not, you know, a lot of difference between 10 and higher single digits. That, we think that’s where we think that’s where the market is.
Okay, so... Do you expect that 10%?
Yeah
I guess, to continue more into past 25, I guess? Or is it just more of one-off factors
Yeah
Has led to the 10%?
No, yeah, we do expect that to continue. And remember, too, as the adult number of adults and seniors comes through, the proportion of children in the developed world continues to reduce. And that's the part that's not growing. So, you know, just on the math of that, the growth rate should improve very gradually over time, if we can keep driving the number of adults and seniors coming through.
And, and-
I don't think our outlook is substantially different to what we've seen in the past.
Great, understood. Thank you. And then just in terms of capital management, so you've announced that AUD 75 million dollar buyback. That's not really going to make a dent 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 wanna keep reinvesting back into the business.
Well, it is a long-term buyback, so that's AUD 70 million up to AUD 75 million is one year. What we said at the outset, and what we'll 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 one year.
Understood. Thank you very much.
Thank you. The next question comes from David Bailey from Macquarie. Please go ahead.
Yeah, thanks. Morning, Dig and Stu. Some questions there just around the industry growth rates. 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, thoughts around market share opportunities from here.
Yeah, so, look, first of all, we have a very strong market position, and a very strong product portfolio. We are in a competitive market. We talked before, Med-El are working on a TICI, drug-eluting electrode. We are doing both those things, as well. And yes, Sonova recently announced a deep neural network for noise reduction in hearing aids, and I think probably where we don't know is they'll 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 certainly one 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 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 as to the recruitment for that one? I couldn't see on the website, and potential timing for that one.
It's running, yes, 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 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. That'll happen, but it's gonna 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 some study on CI and cognition in Australia. They're at least as valuable as COACH. So we'll 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, yeah, we're disappointed by the progress of the COACH study. That's for sure. And it's one of the things that it's got to be arm's length for us, that means we can't also get involved in trying to speed it up.
Understood. And then just a quick one for Stu, maybe just the impact of currency for 2025. So obviously, the currency's looking pretty flat in terms of your guidance, but thinking through hedge movements, just your thoughts on what that could mean for earnings, either pre-tax or post-tax earnings for 2025?
Look, if I could forecast currency, I wouldn't be sitting here. We haven't changed our hedging policy. You know, we're sort of 80%+ hedged for six months, and then decreasing into a six-month tranche, going out, and that's really just to try and provide a bit of buffer and smoothing to the results. So when, you know, if there's a big swing, it's not coming through as a big shock. Yeah, don't want to get into trying to predict it. You know, there was obviously, w e benefited a bit last year. We're not assuming that that continues, but I'd love to have a reliable forecast on currencies.
Thanks very much.
Thanks, David.
Thank you. The next question comes from Andrew Paine from CLSA. Please go ahead.
Yeah, morning. Thanks for taking my question. Just coming back to the surgical capacity constraints and tenders, just trying to understand, like, what, how, how big a headwind was that in FY 2024? And, you know, are you expecting that to subside and, you know, essentially unwind in FY 2025, or is this kind of a multi-year journey you're on there?
Yeah, no, I think the only thing that surgical capacity is a, is a multi-year, year journey. There are always gonna be some capacity constraints somewhere, and the key is that, you know, we keep driving demand, removing those constraints, and we keep driving demand in. So I think those constraints didn't have a significant impact on our FY 2024 results.
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, you know, that probably will return in 2025. If it does, it would lift that CI growth rate number a bit further, but again, not a huge financial piece.
Yeah, okay. That, that makes sense. And, you also said direct-to-consumer is about 30% or greater than 30% of Cochlear implant surgeries. Just trying to understand what that was historically, and, you know, do you think it? What do you think it could grow to? Also, is there an ASP or margin impact there?
Yeah, the way we think about that is, it's a growing proportion of our surgeries. It should be 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% and we've got a target of Y%, what we're looking for is that as a proportion of our surgeries, it grows each year, because that's the measure of it as an 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 funding.
Okay. And sorry, is there ASP or margin impact there?
No. No, no.
Okay.
What we spend 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, you know, slowed that down, we would spend more on something else to drive growth.
Yeah. Okay, gotcha. Okay, thanks.
Thank you. The next question comes from Shane Storey from Wilsons Advisory. Please go ahead.
Yeah, good morning. My question is just back to just looking at where the profit ended up this year. I mean, when you look back at what prompted you to guide, I mean, upgrade the guidance in February, what would you say would be the most important factor or upside component that you saw then that some show up and to explain where we ended up this year?
So I'm not, not quite sure I understand your question, Shane. So we lifted the range obviously in half year, we landed in that range. You know, if you're looking at the revenue, then 60% of our revenue is from cochlear implants, so that's the biggest driver of outcome. So I'm not, not quite sure what you're asking.
Oh, no, I just, I guess when we looked at the top end of the revised guidance, let's say, AUD 400 million NPAT, yeah, just trying to think through the 'cause it seems most of the elements of interest, so in terms of the commentary have been reasonably in line. I'm just trying to understand what you felt the biggest contributor to the delta, say, from, you know, in missing the top end was.
Yeah. So first of all, we set a range. We're not gonna be aiming at the top end. We're aiming in the range. I think. 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. But all of those 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, you know, what did we think was gonna happen over the last half, I'd say pretty much everything we thought was gonna happen, happened, apart from those low-cost tenders not coming through.
No, that's exactly what I wanted to check. Thanks, Dig. That's all for me.
Okay, thank you.
Thank you. The next question comes from Craig Wong-Pan from RBC. Please go ahead.
Thank you. 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 2025 outlook, are you expecting negative services revenue growth in FY 2025, or just a lower level than the 12% growth you achieved for the full year of FY 24?
A lower level. But no, service will grow. We expect it to grow, but at a lower level.
Okay. And then just on the Oticon integration costs, I didn't quite understand the if there's any more costs to come through in FY 2025 or not, or is that done now?
Yeah, 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, won't use the word guidance, but sort of normal guardrails of, you know, 10% top line long term, 25% COGS, 12% on R&D, and then drop 18% at the bottom. And as we talked about on the 18%, there's probably a couple more years left of the cloud investment, so we'll be targeting that 18% pre-cloud impact.
Okay. My last question, just on the CapEx, that AUD 110 to 130 million, that's so some of that's going to Lane Cove and Malaysia. Just want to understand what those that investment's gonna be directed towards there.
Yeah, so it's all about adding capacity. So, basically, we think about that in terms of floor plate for the building. You know, do we need more bigger buildings? We don't think we do in the short term. We do longer term. We then look at the infrastructure within the building, and that's really a manufacturing, that's kind of three 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, you know, each stage of the process to either 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 into in 2025 expanding clean rooms and expanding and more investment in sort of plant and equipment, and then obviously the labor force that comes with it, but that's not CapEx.
Okay, thanks. That's very helpful.
Thanks, Craig.
Thank you. The next question comes from Lyanne Harrison from BofA. Please go ahead.
Yeah, good morning, all. If I could come back to Cochlear implants again. You know, developed market adults and seniors was quite strong for 2024 at 15% growth. Is that the sort of growth that we should be expecting or similar growth in 2025? Or is there a possibility it could track higher, given what you're doing with direct-to-consumer and the increased rate of audiologist referrals?
No, like, I think that's a reasonable expectation for 2025 to stick around there and the expectation that, you know, children grows by sort of 1 or 2%.
Okay, thank you. Just one more on price increases. What can we expect for 2025?
We don't expect price increases of significance through this year. I think we did on the back of Nucleus 8, we've done with that with Osia. You know, where there's opportunity and we will obviously seek it, but in terms of looking forward this year, I'd hold, yeah.
Okay. Thank you very much.
Thanks, Lyanne.
Thank you. The next question comes from Mathieu Chevrier from Citi. Please go ahead.
Hey, good morning. Thanks for taking my question. I just had a last one on CapEx beyond FY 25. How should we think about it, given that it's been a bit higher than what we were expecting in going into FY 25?
Yeah, like I said, we're just putting a bit more into more capacity. So yeah, in that sort of like 100 to 120 range, and I think given that, we are targeting that 10% growth, you know, that's gonna be an ongoing thing for us over the medium to long term.
Got it. So 100 to 110 is kind of the new BAU CapEx?
Yeah, about 100 to 120, I think.
Yeah. Yeah, excellent. Okay, thank you so much. That's all I have.
Thanks, Mathieu.
Thank you once again. To ask a question, please press star one on your phone. The next question comes from Laura Sutcliffe from UBS. Please go ahead.
Hello, thank you for taking my questions. Could I just go back to Chengdu for a second? Does what you said today about gross margin impact for 2025 impact any of your projections for when that turns from a headwind into a tailwind for you?
Not very much, kind of where we expected with, you know, 2025 will be the first year we'll be sort of producing all year. Certainly sound processors is all year, and implant hopefully for about half the year. We think, you know, it's a sort of four to five-year journey for that thing to get to full capacity. But that's very much where it's tracking where we expected.
All right, thanks. 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 two implants, or one, and to what degree there's any focus on changing that, versus trying to drive recruitment of completely new patients, as you try and further penetrate that large senior population?
Yeah, well, it's about 15% of seniors are getting bilateral. And both are opportunities, both bringing new people in, bilateral, but things sort of country by country, helps us think that through, is just what's the reimbursement? You know, if there is reimbursement, the easier reimbursement for bilaterals, then we wanna push that.
If that's really difficult, we're just gonna keep driving new. I mean, everywhere we're trying to drive awareness to get new people in, but if there's favorable reimbursement, then we wanna, there's clear benefits of bilateral hearing, we wanna promote that. And that's obviously only of the people who actually get implant in the first place, and that's still a tiny fraction of the addressable.
That, that's 15, 1-5?
One-five, yep.
Thanks very much.
Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Howitt for any closing remarks.
Look, yeah, thank you all for joining, and look forward to talking again in February. Thank you.