Thank you for standing by, and welcome to the Cochlear Limited FY 22 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 1 on your telephone keypad. I would now like to hand the conference over to Dig Howitt, Chief Executive Officer and President. Please go ahead.
Good morning, and thank you all for joining for our FY 22 results presentation. We'll go straight in, as you said, and then we'll have questions at the end. I'm gonna start with our mission as always. Our mission has been a wonderful guide for us over the history of Cochlear, but particularly over the last 2.5 years, where obviously we have seen waves of COVID come through, the impact of COVID on hospitals in terms of hospital waiting lists, restrictions on immigration, which have caused staff shortages in hospitals restricting access to care, supply chain disruption, which we all have heard and seen, and more recently, inflation.
Despite all those things, we have, as we set out to do 2.5 years ago, emerged from this period with a stronger organization, with our long-term strategy intact. Not only intact, but strengthened, and strengthened because of increased awareness of the importance of treating hearing loss. That's come both from mask-wearing and people many people realizing they were subconsciously lipreading, and it's also come from the impacts of isolation on people and the importance of being able to communicate and connect with others. Our long-term strategy is strengthened and intact. Our competitive position has also strengthened. Our market share has risen since pre-COVID, and we continue to hold a higher share, and particularly across developed markets. Our organization is also stronger. Our organization is critical. We're a knowledge business.
The capability and skill of our people is important, as is the culture, which is really how we work together. We've strengthened our people and our culture over the last two and a half years. The result of all of that is that we've been able to deliver record results in 2022. Record sales revenue up 10% and record revenue on each of the revenue lines, cochlear implants, services, and acoustics. Our net profit is also a record at AUD 277 million, and that's after including cloud-related costs. If we look a bit further into the P&L, we have managed our costs with the gross margin back at 75% and our net profit margin before cloud expenses at 18%, both in line with our long-term targets.
Clearly, our balance sheet is very strong, both the cash position and the strong cash flow that we saw in the last year. In terms of the outlook for 2023, we expect the strong performance to continue as we see hospitals continuing to reopen and open up more capacity. We'll get to the details of the guidance a bit later. I'll now step through each of the revenue lines. cochlear implants, we saw 5% unit growth as we continued to recover from COVID. In developed markets, we saw strong growth in the second half. Remember in the first half, developed markets were a bit soft, and the emerging markets were strong. In the second half, we saw developed markets recovering, and emerging markets more stable.
Now as we look across the world, across the developed markets, we are well above pre-COVID levels with the U.S. small decline in surgeries in the U.S. in 2022. Half on half in 2022, we saw growth in the U.S. We also see a number of clinics in the U.S. with patient backlogs, and we expect those patient backlogs to work down through the year as hospital capacity opens up. Western Europe has also recovered strongly, and particularly strongly through 2022. There was a longer impact of COVID through Western Europe. It's certainly very pleasing to see the recovery through 2022.
We still do see some variability across country, with the UK still below or only just getting back to to COVID level, to pre-COVID levels. In emerging markets, we've always said that we expected emerging markets to take longer to recover. That continues to be true. We have seen very strong performance in China and through the Middle East. Whereas in India and Brazil, we saw good recovery through 2022, but they are still below pre-COVID levels. Onto services. You can see here in this chart, we've seen very long-run growth in services, obviously interrupted by COVID as clinic capacity was curtailed. Looking at both halves of 2022, we saw a clinic capacity reopening, and very good growth in services, and obviously driven by upgrades.
As we've said to this, the driver here is the growing recipient base. That growing recipient base wanting to upgrade to the latest technology. Certainly pleased to see this level of sales and services, and that being 5 years after the launch of Nucleus 7, it's good to see that strength. We move on to acoustics. Our record revenue gain in acoustics too, both HAs were strong. In acoustics, again, we've said that there is a significant growth opportunity. One of the keys to getting that growth opportunity is for us to build scale. To get scale is getting the product portfolio right and then using that scale to be able to raise awareness and build the clinical evidence to support the long-run growth of acoustics.
The opportunity for acoustic implants is in competing with both hearing aids and reconstructive surgery. To build the evidence and awareness, we need scale to do that. It's certainly pleasing to see that growth in acoustics. Continue to be pleased with the success of the Osia 2 system. We've said with Osia 2 that the rollout will take a number of years because we are going carefully country by country, getting regulatory approval, making sure that we can get reimbursement at a price that represents the value in the system. That takes time, but we have seen good progress in Western Europe and the UK and Germany. Particularly over the last year, we continue to see good performance in Osia, and through 2023, we will expand the markets where we are offering Osia.
Baha 6 Max sound processor has also driven upgrades and new Baha implants, and we continue to see great opportunity for more traditional Baha system moving forward. If we now move to sort of looking at the business through how we create value. We've restructured last year how we present and are gonna present in line with our value creation opportunity this year and what our goals are and what we have achieved. Importantly, our mission drives what we do. It's why we started the presentation with it.
Our strategy, which is based around the growth opportunities, our strategic priorities of making sure that we retain our market leadership position, we grow the hearing implant market, and that we deliver sustainable revenue and earnings growth over time, all supported by the strength of the organization and continuing to build and strengthen the organization to support our customer base and to support future growth. I now step through each of the areas of value creation, starting with a healthier and more productive society. Clearly that's an area where we do create significant value for people and for society as a whole. This year we've been able to quantify that value. We know that cochlear implants and acoustic implants are cost-effective. There's an increasing number of studies on the effectiveness, cost-effectiveness of cochlear implants.
This year there's also been a study on the societal value created from enabling people to hear with cochlear implants. Over the last year, we've helped more than 40,000 people hear with either one or two implants. We're acknowledging that obviously the number of implants we shipped is higher than that across acoustic and Cochlear, but a number of people get bilateral solutions. The net, I think a conservative estimate of the net societal benefit of hearing or providing hearing to those people is over AUD 6 billion across the lifetime of the recipients. That comes through lower cost education, better educational outcomes, improved employment and productivity opportunities, and the value of improvements in quality of life.
To support this growth and the value that we create, we continue to work on our growth segment strategies, our developed market growth strategies. Which is very much about raising awareness, increasing access, and building a clinical path from hearing aids through to implants. There's been good progress in that regard in the last year with the World Health Organization continuing to advocate for the treatment of hearing loss in both children and adults, and advocating for adult hearing screening. An initiative that we're driving on living guidelines. We have 50 professionals from around the world, 21 countries around the world are building on the work that was done in the consensus statement to get clear and consistent guidelines for indications for cochlear implants, treatment, and post surgical treatment and care for people.
Again, taking that to country-level guidelines helps build this clear and consistent treatment pathway, which is critical to our work on standard of care. Market access continues to be important, and we continue to work around the world on broadening indications, broadening reimbursement, and you can see here some of the examples of the successes in the past year, and we continue to work in many countries on this area. In the last year, the Cochlear Foundation announced a partnership with the Malala Fund aimed at children in emerging countries and the importance of hearing loss to a good education and obviously a good education being critical for society and for future economic success. If we now move on to empowered customers, we do
That, that's why people wanna be able to hear, or get their hearing back, is be empowered to live their life to the fullest. One of the important things there is providing care, particularly through a chronic phase, in a more convenient way. Our Remote Care solutions do that. We're the first implant company to offer Remote Care solutions for both cochlear and acoustic implants. Adding Remote Assist this year, which enables clinicians to connect via video, through smartphones to the recipient, and giving the clinician the ability to change some of the parameters in the processor.
Again, it saves clinic appointments, it frees up clinic capacity, and clearly is far more convenient for recipients right around the world. We continue to expand the Cochlear Family with another 20% increase in membership to 260,000 members, more than 260,000 members. Recognizing that we've shipped over 700,000 implants over the last 41 years, we've still got scope to continue to grow the Cochlear Family membership. The third area is about a lifetime of hearing solutions. This very much gets to our innovation.
We're spending over AUD 200 million on R&D this year at 13% of revenue, a little above our long-term target of 12%, and clearly where we have the opportunity to increase our R&D spend within the parameters we set for the P&L, we all wanna do that because we have so many things that we are building into our portfolio and continue to develop our product and service portfolio. We have got just very recently approval CE mark for Cochlear's Nucleus 8 sound processor. This continues our long history of advancing the development of sound processors. We will launch the processor later in this half in Europe, and we expect to launch in other countries through this half as we receive regulatory approvals.
Today is not the launch of Nucleus 8, so we're not gonna go into the details of the features today, just to anticipate some questions for later on. We continue to expand the access to Baha 6, which is very well accepted and driving some of that growth that we're seeing in acoustics. Through the year, we launched the Nucleus 7S and the Nucleus 7SE. These are variants of Nucleus 7, aimed at a tiered offering in emerging markets. This both increases our competitiveness in these markets and also reduces the cost of offering our portfolio in those markets. Both clearly important in terms of succeeding in emerging markets over the long run. Our people are critically important to the organization.
We are a technology business, and therefore, the knowledge and skill of our people is critical to our success. We continue to grow the organization, to build the capability in the organization, and very deliberately shape our culture as we grow to make sure that we are positioned for future growth and supporting our customers into the future. As we continue to shape our culture, we wanna maintain a high level of employee engagement, and we have that. People are very passionate about our mission and about the work we do to help people with hearing loss. We've expanded also the range of incentives for employees across the year, broadened the base of incentives, increased the number of people and consistency of how reward is offered right across the business.
This is important for global alignment and global execution of our strategy, and we continue to work hard on diversity and inclusion. We set ourselves a target of achieving at least 40% women in senior management roles. We set a target of achieving that by June 2023, and we've achieved that 18%, sorry, 18 months ahead of when we expected to. Clearly, we are not finished on that front, and we continue to work hard on diversity and inclusion. That applies to the board as well, with 33% of our board women and, transition to Alison in, as chair this year as well. Here in Australia too, we have formalized our commitment to recognition and, reconciliation, through our first Reconciliation Action Plan in the year.
The final area of value is very important. It's about delivering sustained value over time. Clearly, this gets to our financial performance, but it's also about our contribution to the environment more broadly. We are announcing today emission reduction targets that we are targeting net zero emissions from our operations, Scope 1 and 2, by 2030 and across our whole value chain, so Scope 1, 2, and 3 by 2050. These targets are aligned with the Science Based Targets initiative. This builds on the travel reduction targets that we have previously announced. You know, we've done a lot of work in the last year converting our manufacturing facilities to renewable energy, which is an important part of our Scope 1 and 2 emissions.
Bearing in mind that we are a very small emitter overall, but it's still critically important that we play an appropriate role in the global effort to reduce carbon emissions. Stu, I'm gonna hand over to Stu to talk about our financial position, but clearly strong profitability, strong management of costs. We are reporting our profit with and without the cloud computing expenses. We've talked previously about this accounting change. It's very important that we upgrade our platforms, build alignment and consistency across the organization to support future growth, and to support our customer base and provide them the service that they expect. As we've said, we will spend AUD 100 million-AUD 150 million over four or five years going through this process of upgrading our platforms and processes.
I'll come back to Oticon Medical at the end, but now I'm gonna hand over to Stu.
Thanks, Dig. Morning, everybody. We'll jump to the P&L. Dig's already spoken to revenue, so I won't add anything further there. If we go to gross margin, you'll see we're happily back at 75%. That's our long-term target, up 2 points from last year. You might remember last year we had a few headwinds impacting that line, specifically not being able to run the plant at full speed due to COVID. We had some stock write-offs and also some Kanso 2 launch costs that all hit in 2021. We've had a much cleaner year on that front in 2022, and that's why we're back at that 75. We do anticipate being there or thereabout in 2023.
We can see at least about 0.5% headwind coming in 2024 as the Chengdu commissioning costs start to roll through. SG&A, we're up 12%. We're getting back closer to a normal level of spend here. That activity is very much focused on either growth now, driving people into the referral channel, or future growth, sort of underwriting that channel to try and make it stronger and more likely that someone comes out the end with a Cochlear implant, and that's things like standard of care and the market access work that Dig's just referred to. R&D, we aim to be 12% of revenue. We slightly exceeded that in 2022, coming in at 13%. Significant jump in admin expenses. You'll see up 22% there. There's three factors.
The biggest one is just continued investment in non-cloud IT. That's very much customer-focused IT investment. It's things like some of the back-end work on connected care. It's things like cyber security and privacy, as well as FCE-related IT costs. We don't anticipate that rate of growth to be as high next year. We're also seeing growth in insurance costs. We saw growth in insurance costs in 2022. Again, looking forward, we expect that to moderate a bit into 2023, and we also had some Oticon transaction expenses in that line this year as well. Cloud 21.6. As we flagged this time last year, we're now just over 1 year into about a 4- or 5-year journey.
We're still on track for AUD 100 million-AUD 150 million total cost of that journey as we transform the core systems and the processes that run on them. If we look forward to 2023, we expect that spend to go up to about AUD 36 million. That'll be about AUD 25 million after tax, and it'll stay there in 2024 before it starts to come down again as we get through the bulk of that journey. Because the accounting standard change only came in about a year ago, we are not changing our ultimate focus, which is that 18% net profit margin, but we will be reporting that as a pre-cloud number. We're not gonna be changing anything just due to the accounting change.
We'll keep reporting a pre- and post-cloud number for the next three or four years while we go through that journey. Last thing I wanna call out on this page is just the growth rate and the underlying net profit number. You'll see that the reported change is 18% and the constant currency change is only 10%. The reason for that delta is we're cycling about AUD 16 million of FX losses in 2021 related to balance sheet items. That was a strong Aussie dollar appreciation in 2021. Though that wasn't repeated in 2022, but that's why those numbers are as different as they are. If we jump to the balance sheet, capital employed pretty stable across the whole year. You'll see working capital up.
That's partly a function of just selling more, the best reason, and also some deliberate choices to invest more in inventory, raw materials, componentry, and finished goods in the warehouse and closer to customer, just making sure that we maintain that absolute surety of supply to our customers. The manufacturing and logistics guys have done a stellar job in the last two years navigating a whole bunch of hurdles and making it pretty much invisible to the customer. We will continue to take the opportunity where they're presented for strategic buys to make sure that we always are in stock. You'll also see the investment and other financial assets line there, the -AUD 38.9.
That's a net number, which includes both us putting more cash into some innovation fund investments, specifically Precisis, Epiminder and Nyxoah, but then also devaluation. The largest of those, the devaluation of the Nyxoah value. You may recall we own 18% of Nyxoah. It's listed in the U.S. It's a small mid startup that's listed. That whole category has been pretty heavily impacted this year with financial market headwinds. We don't see any company-specific issues to be concerned about with Nyxoah. Given where it is in its journey, it's entirely in line with our expectation. Overall, we're still sitting very comfortably on AUD 580-odd million of cash, and most pleasingly, that was AUD 22 million up versus last year.
If we jump to actually the cash flow in a little bit more detail. Again, best driver of that is just stronger trading results. Hence the AUD 56 million contribution from higher EBIT in the first line there. We did also again make some more investments in working capital. Again, that's all about putting more stock into the manufacturing system to make sure that supply stays strong. I think it's worth calling out on the income tax line. We did get a second tax refund. We got a similar sized one last year, and again, one in 2022 of about AUD 62 million. That's based off overpayments from prior years. We're expecting one more year of large tax return or refund.
Should be about AUD 40 million in 2023, and then after that, we should be back to a more normal tax incurred, tax paid scenario. Last thing of note here is the AUD 61.7 million at the other net investments line. Again, that's us putting cash into Nyxoah, Epiminder and Precisis. That's an abnormally high level of spend for us on innovation fund investments. Next year we expect that to be much more back to sort of normal levels in that sort of AUD 20 million-AUD 30 million range. Finally, onto dividends. Final dividend, we're gonna be AUD 1.45. That's AUD 3 for the whole year, and that's 18% up, entirely in line with the underlying net profit. The AUD 1.45 is gonna be 40% franked as we rebuild our reserves.
The total payout ratio for the whole year, just a slight hair above our long-term target of 70%. We'll be paying out 71% for FY 2022.
With that, I'll hand you back to Dig Howitt for the outlook.
Thanks, Stu. So just finishing with the outlook before we go to questions. So our guidance range for net profit is AUD 290-AUD 305. That number is obviously inclusive of the increase in cloud computing that Stu talked about. When we take that, when we back out the cloud computing out of both years, that increase is between 8% and 13%. You know, that guidance obviously anticipates strong sales growth and maintaining an underlying net profit before cloud computing of 18%. We do expect the net profit to be weighted towards the second half this year for two reasons. One is we expect hospitals to open up through the year, as we've seen happen over the last six months.
We expect that to continue to happen through the year, therefore, surgery rates increasing through the year. Secondly, with the availability of Nucleus 8 coming in and starting in Q2, we expect to see some of our sales pushed into the second half and obviously launch costs hitting us in the first half. So that'll be quite different to the split that we saw this year in 2022, where we had a strong first half profit. We had that because remember, we had Delta variant starting in 2022, and we held back our spending earlier in 2022 while we waited to see what impact that would have in sales.
We were pleased to see strong sales performance early in 2022, and then we obviously lifted our spending in the second half and our investment in R&D and in growth to hit that 18% net profit margin. We will continue to invest in R&D and growth activities. Stu has spoken about cloud computing. We do give guidance on the currency, and we've added the euro in this year. Given the volatility and change in the euro over the last year, we thought it was important to guide there as well. Also on CapEx, around AUD 80 million, in line with this year. Our dividend policy, again, we're targeting 70%. Now, the guidance doesn't factor in the acquisition of Oticon Medical. Obviously, that's going through a process with competition regulators.
It's expected that process will be completed and closing before the end of the calendar year. Obviously we need to wait for that to happen before we say anything about the broader impact on our performance. Our guidance doesn't include a more material disruption from COVID or to hospital capacity. Clearly, there is still some risk of that, you know, in the world at the moment. We continue to see waves of COVID. There continues to be some uncertainty. Clearly there are still some risks out there. Flagging that more significant impact of those risks does not form part of our guidance. With that, we'll close off on the presentation and move 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 question, please press star then two. If you're using a speakerphone, please pick up the handset to ask your question. The first question comes from Saul Hadassin from Barrenjoey. Please go ahead.
Good morning, Dig. Good morning, Stu. Thanks for taking my questions. Dig, just a question on Cochlear unit sales for fiscal '22. If we go back and look at the last half before COVID hit and just annualize those units, it looks like units for this year are about in line with where that would've been back in FY 2020, assuming COVID hadn't arrived. I guess the question is: Do you still think there's a significant amount of patients who are still waiting as part of a backlog to be implanted into FY '23?
A separate part to that question is: What do you think or what do you estimate the unit sales growth rate to do globally, you know, over the next 12 months, assuming COVID is not as disruptive as it was, say, in FY '20, FY '21? Thanks.
Yeah. Saul, a couple of things. We obviously expect that the overall unit growth to increase this year from the 5% that we recorded in 2022. What we have seen is, you know, the drivers of that, there are still some backlogs. I said there's some clinics in the U.S. with backlogs. The NHS in the U.K. has backlogs, I think, of just about every surgery. Australia, there is some backlogs to come through as well. The majority of that uplift will come from growth, as it should do. That's a consequence of our growth strategies, of the opportunity, and of clinics reopening and freeing up. I think also we expect to see continued growth in emerging markets, both growth and recovery.
Just also flagging, as we've said many times, that there is less stability in emerging market sales and less predictability. They do move around more. You know, we're confident of that outlook, as you said, just with the caveat, obviously, if there's a more material disruption, then that changes. You know, our sales are, as I said, well above where we were in 2019, the last full year. Expect to see good growth in Cochlear implant units this year.
Thanks. If I could just push you on that.
Yep.
I mean, what's your expectation, say, medium to long term? What's your expectation as to how quickly the industry can grow in terms of that unit sales? Historically, you know, I think the range has varied from anywhere as low as maybe 5% up to as high as 15%, based on some of the commentary from your competitors in the past. What do you think is a sustainable rate of CI unit sales in, you know?
Over, say, the next five years.
Now, look, it's in that range. You know, if you think about, you know, what are we trying to do, is we wanna aim more-
More toward the lower end of that range.
Yeah. I'm coming there. I'm getting there.
Sorry.
We wanna aim broadly around 10% revenue growth. We expect to see, you know, as we've been saying, faster growth in acoustics and in services, and therefore that implies slightly less than that in CI growth rates.
Got it. Thank you, Dig. That's great. That's all I had.
No worries at all. Thank you.
Thank you. The next question comes from David Low from JP Morgan. Please go ahead.
Thanks very much. I mean, if we could just start with the N8 launch. Could I just get you to talk through previous experience? I mean, I think we can see back to what happened to sales with the N7 when it came out. But if I could just get you to touch on likely timing for U.S. launch and likely implications for this year. Should we expect a bulge in services revenue next year as you see the full benefit, please?
I'm not gonna go into specifics of country launch times. When we said Q2 for Europe, we expect the markets to come in through this half as we receive further regulatory approvals. Typically, what we see, and you can look back in the past, is a lift in services revenue when we put a new product out there. Equally, a new product has historically been good for share in new system sales as well. We'll have that benefit. We're anticipating that benefit at least through the second half of this year and the full year in 2024.
That does create a good opportunity for us in 2024. Equally, if you look at, you know, the services growth rate, it's been pretty consistent over the last 10 years. Just backing out the COVID impact. As we talked before, we used to see bigger swings in services upgrade revenue on new product launches than we do now. I think that's just part the size of the base and scale, and part people understand upgrades and know when they come about and know when they're eligible.
Okay, thanks for that. Just my other question. Yeah, that was helpful. Thank you. The other question is on cloud computing. I mean, I hear the comment that the range of spend will be AUD 100 million-AUD 150 million. That's quite a large range. I think also this, the FY 2022 numbers came in a little bit above what was being guided, if I understood correctly. Just sort of wondering how you think we should think about that 100 to 150. You know, what period it'll be fully spent. Sounds like 2023, 2024. Just a little bit more sort of detail on that would be helpful, please.
We can provide a little bit more. We were in line with what we expected to firstly in 2022. As I said, go up to AUD 36 million pre-tax in 2023 and hold there in 2024, and then start to roll off from 2025. You can sort of add up what that gets you. That gets you between AUD 100 million and AUD 150 million. You know, that's where we
Love
Where we expect to come in. We're one year into a four- or five-year journey. We are doing it. It's not like we've agreed a lump sum price up front. We are doing it a system at a time. That's largely to not be taking on too much risk. You know, we can't afford to be doing anything that's gonna impact customers. This is not a space we wanna take a lot of risk.
It'd be fair to say it's not particularly easy to predict and hence you've given us a pretty wide range.
Yeah. No, I think that's fair. The other reason for this too is this is whether it's 100 or 150 is immaterial to our long-term value. What's material is the changes and transformation that we get out of this and the ability to scale the business, the ability to be more agile, and support a much larger customer base and have much better data for driving growth. That's where the value comes in on this.
Okay, great. Thank you very much.
The next question comes from Andrew Goodsall from MST Marquee. Please go ahead.
Thanks very much for taking my questions. The first one, just looking at the next three years plus, you've got the N8, you've got Oticon, you've got an R&D pipeline that looks pretty busy with a multi-channel implant. You've got China commissioning. Just looks like some of your busiest sort of execution period. Just gonna get your thoughts on, I guess, from our perspective, you know, what we should expect over those next few years. You know, am I on the right track here that it's just gonna be a busy execution period and your capacity to do that?
Yeah, Andrew. Good question. Yeah, look, certainly will be a busy execution period. That's good. That's what we want. We've got, you know, we've had, you know, a long journey of R&D investment, and, you know, with some projects that take a long time to come to fruition. We have a very full pipeline, and we've talked about before that, you know, the longer we go, the more of that comes to market, and it's always busy to launch new products. It's also very exciting to do it as well. Look, we're very confident in our future pipeline. I think we've shown over time that we have a very good ability to execute.
I think just what we've done in the last two years, having the gross margin back at 75% despite all the supply chain issues and costs and disruptions. We're capable from an execution front and, you know, we like the challenge of bringing great new products to market, and we expect to continue to do that over the next few years.
Just in terms of follow-up, just with Oticon, just any clarity on sort of how you're seeing those costs? I know you gave us a pretty big number to start with, up to 60. Just how you think those costs will fall for our forecast?
No, I think just stick with that range for now. We're in, you know, in that detailed due diligence phase, and we don't anticipate putting any update out, on that until we get through closing.
Okay, no problem. Thanks very much.
Thanks, Andrew.
The next question comes from Steve Wheen from Jarden. Please go ahead.
Yeah, good morning, Dig and Stu. Just wanted to ask around the launch of the Nucleus 8, what sort of launch costs you factored into your guidance in the first half? Again, on the guidance, what sort of shortfall as people sit on their hands waiting for that launch to come into the market, what is anticipating the impact of that will be in your guidance?
Steve, I think that's more detail than we'd wanna give out and perhaps more detail than we can accurately forecast. You know, we've obviously got plans around how we think the year will play out. You know, we always manage to a full year set of numbers. All we're doing is just signaling that the second half will be stronger than the first half, and that'll be different to 2022, and I think that's as far as we wanna go, or I think as far as we can accurately go at this stage.
Even with regards to the launch costs?
I think the launch costs. Again, we have an idea of what the launch costs are. We don't wanna disclose exactly what they are. Again, in terms of the year, you know, we'll see an impact in the first half, but in terms of sort of materiality over time, it's not there.
Just moving to sort of a more broader question. CMS has obviously proposed to expand the eligibility criteria-
Yeah
For cochlear implants, which there seem to be no, in terms of the public commentary, no aversion to that. I just wonder, from your perspective, how this might ultimately look. Is it a big expansion for eligibility in terms of your ability to target an expanded market going forward?
Yes, it's a good question. The CMS change, which is in process, in consultation, is to lift the hearing test score from less than 40% to less than 60% in best-aided condition in the U.S. That's obviously a significant change in terms of the level of hearing. It's certainly more in line with the performance that people get with cochlear implants and the point at which they're best to transition to a Cochlear implant. It's an important change to come through. Now, it's not an automatic issue of as soon as there's approval, all of these extra people roll up at clinics. You know, still the big challenge is getting people out of the hearing aid channel and getting them into implant clinics.
One of the things this change helps us do is be clear on the criteria that hearing aid clinics should think about when they're assessing candidates. It's certainly helpful in terms of the pipeline, helpful for longer run growth. It's not a step change on approval. I'll put this in the, you know, it's in the category of standard of care, which is a long-run program to get adults with significant hearing loss access to the best product for them. The indications are a critical piece of that, and that's where this comes in.
Awareness of an evidence showing the cochlear implants are the best available solution is important, and that's where the COACH trial that is being run in the UK, that's a head-to-head randomized study between cochlear implants and hearing aids is important. And the work that Frank Lin and team are doing at Johns Hopkins and many others now around the world on the importance of healthy hearing to healthy aging. All of that. All of these things go together to build out standard of care over time, as does the work on living guidelines. This is one element of an important and comprehensive strategy aimed at driving standard of care over time and really opening up access to hearing implants for adults and seniors.
Yeah, great. Can I just ask one more just on the implants that you've done in the second half of 2022, what the prevalence of single-sided deafness was? If you could just give any sort of you know high-level commentary around you know the success you're having now that you have that label expansion.
Actually, don't have specific numbers to hand here, Steve, but certainly important. As we've said in the past, this was seeking this approval in the U.S. was very much a competitiveness issue that MED-EL had an indication for asymmetric hearing loss, single-sided deafness. That meant that they were picking up some candidates that we thought we should get. Us getting that indication was important in the first instance from competitiveness. I guess we said in the announcement, we think there's about 60,000 people a year in the U.S. who suffer from single-sided deafness. So certainly a good pool to have, and it increases the magnitude of the clinical opportunity. I go back to the standard of care.
Our work has gotta be turning that clinical opportunity into genuine demand, which is people lined up at clinics. That's all the things I've talked about in standard of care apply equally to single-sided hearing loss as they do to bilateral loss. These indication expenses are really important, but they're not the single feature in driving growth.
Sure. Thanks very much, Steve.
Thanks, Dig.
The next question comes from Gretel Janu from Credit Suisse. Please go ahead.
Thanks. Good morning. Just firstly on cochlear implants. Just looking at the ASP, it looks to have slightly weakened in the second half relative to first half, despite the sound of things where you saw a much more improved developed market environment in that second half. Can you comment on these dynamics and what's happening with the ASP?
Our ASP's been pretty flat through the year. I think it was about a 1% decline across the year. No, we're not seeing anything new or anything different from a, Gretel, from an ASP perspective.
I would have thought second half you would've seen slightly stronger ASP given the growth was skewed to developed markets.
No, actually, part of this too is that what we've seen in the recovery in emerging markets is a little bit less in government tenders and a bit more in private pay. Actually in the first half, we saw a rise in ASP in emerging markets.
Understood. That makes sense then. Secondly, just in terms of the inventory build in the second half, I guess how much of this is just purely building safety stock as opposed to getting ready for the N8? A bit more of a longer-term question about inventory. They're now roughly 30% higher relative to pre-COVID levels. Is this now the new norm, or do we expect further increases from here?
Yeah, good questions, Gretel. Look, the bulk of the uplift is more safety stock driven. Is it the new normal? It's certainly the new normal for now. I think until we get through COVID and the disruptions that we continue to see there, yeah, I think it's safe to assume that, yeah, this is a good level. As I said, we'll continue to look for opportunities to further underwrite safety of supply. We'd much rather have a bit more stock and make sure we're never letting a customer down.
We should expect a little bit more of an inventory build in FY23?
Current number's about right. It feels about right. It will be somewhat driven by circumstance in the year.
Great. Thank you very much.
The next question comes from John Deakin-Bell from Citi. Please go ahead.
Good morning. Stu just a clarification, if you can. You talked about in the Cochlear implant side that there was some impact from access to operating theaters, but the acoustic business grew and didn't seem to be the same problem. Can you just kind of explain to us how or why the acoustic patients had access to theaters and the cochlear implant patients didn't? Or was it just more a country mix issue?
Yeah, John. Good question. Now remember in acoustics, we have two things. One is that we include. The acoustics upgrades go through the acoustics line. A lot of the Baha 6 sales are actually upgrades that fit in there. The second thing is that just Osia is growing, and that's helped lift that number. That said, actually acoustics has more challenge on operating theater capacity than CI does in most countries. There are certainly constraints through there, but it's masked by Osia being new and by the significant upgrades on Baha 6 Max.
Thank you. Maybe just to back to that question about ASP, but asking in a slightly different way. If there's a recession in the U.S. and possibly Europe, and then if inflation continues to be a problem, can you just talk about how you think about your business being impacted on, you know, the cost side? Costs will go up, but can you actually put prices up, or does that challenge your margins?
Look, I think managing through inflation is, I think, new for anyone who's joined the workforce in the last 30 years. I think, you know, it's hard to be too prescriptive on what will happen. We do have in markets where we do have the opportunity to move price then, you know, we will look to do that. Clearly there are a number of markets where, you know, there's particularly more socialized healthcare, where we don't have that opportunity. You know, that does put some pressure on us. Clearly, we've gotta, you know, manage costs and manage more efficiently, and that's the nature of any business. We've gotta get better operationally every year. We've gotta be finding ways of getting efficiency.
The work that we're doing on transformation will definitely provide us with the opportunity to get scale over time. Remembering that our biggest part of our cost is people. To the extent inflation hits us, it's mostly gonna be through what happens with remuneration across the countries in which we operate and what we're seeing at the moment. You know, certainly seeing pay costs rise faster than they have in a while, but you know, still at a quite manageable level.
That 18% net profit margin target, regardless of the inflation environment, you're comfortable that it can be maintained?
Yeah, look, certainly from what we can see at the moment, yes. As I said, you know, inflation is new, and if inflation sits at high levels for a number of years, you know, that might be different, but that's a new situation for us that we'll see. We're certainly confident from what we can see now of maintaining that margin through 2023.
Okay. Thanks very much, Dig.
The next question comes from Sasha Krien from Morgan Stanley. Please go ahead.
Good morning, Dig, and good morning, Stu. I hope you're both well. Yeah, my question also on costs. You know, the gross margin pretty good today, OpEx a little higher than what I thought, but certainly in the noise. Given what we are observing across many sub-sectors of healthcare with respect to staff and componentry and global supply chains, you know, those impacts aren't really observable in your numbers. I'm wondering if the pandemic's introduced some efficiencies within your business, which is offsetting some of that.
Yeah. No, look, it's a good question, and yes, to a degree. So we've certainly seen significant drops in things like travel and conferences. They're coming back. They started to come back more heavily in 2022. We're still not back at full sort of pre-COVID levels. I think particularly things like travel, I'm not sure we ever will get back to 100% of pre-COVID level 'cause I think everyone's realized there's a number of things that are just more efficient to do online. That said, you know, with getting in front of customers for the sales staff, particularly, is still a very high priority. I think there's a degree of moderation there.
It has forced us to think differently about, certainly, you know, where we put stock in the supply chain and how much stock we hold. I guess the other thing is, a lot of the stock and componentry, we have material buffers there. I think on average for a year, if we think about 2023, at least the first three quarters of the year, we're making stuff with items we procured more than a year ago. Again, probably a bit more insulation there as well.
Great. Thanks, Stu. A follow-up, please. So last couple of presentations, I think, units have been a little bit softer than what we thought, but, you know, certainly offset by processor and processor upgrade and service revenue. You know, feedback has been that, you know, the clinics not having the patients throughput or new patients throughput, sorry, and access to theaters are really been focusing on drilling into the install base, if you like, to extract revenue that way. So I'm wondering, you know, as things more open up and particularly as you talk to the launch of the N8, is the N8 gonna be soaking up more audiologist time, so we might still consider somewhat of a suppression to unit growth, or is that not the right way to think about it?
No, I think as you said earlier, Shaun, we expect to see unit growth lifts through this year. You know, that's a good point. Nucleus 8 and upgrades can take clinic capacity away. One of the things that we've done more of through COVID is to be able to do more upgrades with less or no intervention from the clinic in a number of countries. That you know comes from having maps in the cloud and Cochlear Link. So there's some things we've been working on over time to reduce the load on clinics to avoid you know some of these bottlenecks.
Great. Thanks, Dig. Squeeze last one in, please. Typically you've talked with launches in the past with upgrades. Something like 50% of the install base by year three would be a kinda rough target. I'm wondering with some of these more patient tactile systems you have at the moment, like, well, Cochlear Remote Check, you're talking to Remote Assist, that you could expect a greater penetration rates of the install base. Or is it kind of reaching for the same absolute numbers, if you like, but over a bigger base? If that question makes sense.
Yeah. I think probably a little bit too early to tell. I think things like Remote Check, it's still very early days. You know, going forward on a much longer horizon, yes, it should give us greater connectivity with patients and more frequent interaction as well, and that will all help 'cause I think one of the biggest barriers, if not the biggest barrier, is often just awareness around upgrading. Yeah, in the next one or two years, it's you know we're still very much aiming for that 50% round number.
Great. Thank you, Stu. Stu, thank you, Dig. Appreciate your responses.
No problem. Thanks, Shaun.
The next question comes from Lyanne Harrison from Bank of America. Please go ahead.
Yeah. Good morning, Dig. Good morning, Stu. If I could come back to services, can you talk a little bit. Obviously, we've had a huge backlog of upgrades because of COVID, and then now that the clinics have reopened, you know, we're having strong growth through the services upgrade. Has that backlog been worked through, or do you think that there's still some way to go? The second part to my question is coming back to Sean's question about proportion of your installed base of upgraders. Given the recent strength in upgrades, you know, what sort of implications you might have there for the Nucleus 8 over the next twelve months following launch?
I'll start on that one. I think that the biggest driver of upgrades in any year is the number of people who reach their five-year point where they're eligible for another upgrade. Given our growth, that number grows each year. That's the biggest driver. To the extent that there's a backlog from COVID, it's a much smaller impact on the numbers. Hopefully, I think that answers the first bit. On the second bit on Nucleus 8, I think I sort of talked a bit about this one in the earlier questions that we, you know, people. Again, it's that when people become eligible for their upgrade, sort of for many dictates when they get it.
You know, with Nucleus 8 coming, you know, probably we would. That's why we've got the profits loaded to the second half. We'd expect some people to hold off on a Nucleus 7 over the next few months and wait for a Nucleus 8. You know, to some degree, that will be there.
Okay. Thank you. If I could squeeze one more question in on acoustics. Obviously, some very good growth there with the new launches. You mentioned the United States and obviously the challenges in the UK. Can you shed some color on what you're seeing in Germany?
Yes. We're pleased with how the role of Osia is going in Germany. We think Germany has never been a very big Baha market. It's certainly got a big opportunity. I think what we're seeing is when we go, we bring Osia to a market that doesn't have a lot of Baha, it takes some while to build up the patient pipelines, to build the surgeon's understanding of who's a candidate, and to build awareness of the product. So pleased with how we're going, but see that it's a long run. This is a long run growth opportunity. I mean, Osia is effectively a new category.
While it treats some of the sort of similar patient group with Baha, the intervention, the effectiveness of it very much a new category, and it takes time to build a new category out.
Okay. Thank you very much.
Thanks again.
The next question comes from Chris Cooper from Goldman Sachs. Please go ahead.
Morning. Thank you. Dig, I appreciate there's backlogs in most of your geographies here. Can I just ask how you're seeing surgery volumes at this stage of the pandemic? Has there been a sequential change in recent months? You know, going back to backlogs, at current rates of surgery volumes, what is your best guess about how long it's gonna take to pay down those backlogs?
A few comments. First on backlogs. The backlogs are not uniform. And it's some at a country level, like the UK, for example. Others are at a clinic level, which is in the U.S. You know, we know a number of U.S. clinics with backlogs. We also know a number of U.S. clinics that have no backlog and are able to see people straight away. The backlog isn't uniform and does vary, as I say, country level and at a clinic level. Sorry, I've just gone down. Chris Cooper, that dropped the second half of your question on backlogs.
I was after a sort of mark-to-market assessment on where you're seeing surgery volumes right now relative to-
Sorry. Yeah.
how they've been through most of fiscal 2022.
Yeah. What we saw through the second half of 2022 was an increase in the surgery volumes through the developed world. You know, it gives us some confidence that some of these restrictions are leaving and hospitals are opening or capacity is increasing again. Yeah, it's that increase through the second half that was positive, and we expect to see that continuing through 2023. Hence, you know, the outlook for growth in CI units and the waiting into the second half as capacity opens up through the year.
Okay, thanks. Perhaps a philosophical question around your net margin. For this year, 2023, if I back solve the guidance, you're implicitly guiding to 9% sales growth at the very top end. On this call, Dig, you spoke about a sort of mid to longer term ambition of exceeding 10%, and you also described the revenue outlook for this year as strong. My question, I guess, is to what extent are those comments conservatism, I guess, for this year in your guidance? Or to what extent are they just a sort of rigid strategy to not allow net margin to exceed that 18% level, even if, you know, revenue and leverage would suggest it is possible?
First, start with the last part. No, we're holding. We're very clear that we're holding to a net margin of 18%. But it's not about getting leverage. We are getting leverage in the business. It's about investing for growth. And as we get leverage, we're gonna keep reinvesting, as we should, given the low penetration and the significant opportunity that we have in front of us. In terms of your interpretation of the guidance, no, I'm not quite sure how you've worked that out. We're saying pre-cloud. If you're looking at the 18% net margin, we're expecting. We're guiding to an 8%-13% increase in profit with a constant profit margin from 2022 into 2023. That guides you on the revenue range.
The math is very crudely, if I just take the top end of your underlying net profit guidance of AUD 3 or AUD 5, and then just sort of.
Yeah
Crudely back out the 17% net margin guidance, including the cloud costs for this year, that gets me to sort of an implicit top line of about 9% growth.
No. Better off to go off pre-NPAT, pre-COVID, 8%-13% growth in net profit.
Yeah, remembering the cloud's gonna be higher next year. It was about AUD 0.01 off this year. It'll be slightly higher than that next year, but that's why we're staying focused on that pre-cloud number.
Understood. Okay. Thanks for the help.
The next question comes from David Stanton from Jefferies. Please go ahead.
Morning, team, and thanks very much for taking my questions. In terms of the integration costs, just to follow up on a previous question, should we think of those as being sort of front-loaded into the second half of FY 2023 of those AUD 30-AUD 60 you talked about?
That's as good as, yeah, look, as good an assumption as any at the moment. You know, it depends on the timing of closing as to what extent they're in 2023 versus go into 2024.
Yeah, I think, certainly within the first 12 months of when we take it on.
Understood. Thank you. One other question just sort of been asked, but if we could sort of talk to R&D as a percentage of sales in F23. Should we see more like the 12 number compared to the 13% number we saw in 2022?
Yes.
Yep, absolutely.
Okay. Two others from me. D&A in 2023 compared to, you know, in absolute terms, compared to 2023, I guess we should be still seeing a step-up in depreciation, at least, into 2023 compared to 2022.
Pretty consistent between to 2023. I think it was AUD 3 million difference. I haven't got the number in front of me. I think it was something like that. It won't move materially.
Understood. Final question, tax rate for 2023. Any color on that, please?
Broadly about 26%. Three years ago, we were running at about 28%. The R&D tax incentive knocks off about 2 points. 26% is it.
Thanks very much, team. Greatly appreciate it.
Thanks, Dave.
See you, mate.
The next question comes from David Bailey from Macquarie. Please go ahead.
Yeah, morning, Dig and Stu. Just following on from one of Chris's questions, maybe. 8%-13% NPAT guidance ex cloud. Are you holding that margin, 8%-13% revenue growth? Given you've announced the launch of the N8, or you announced the, you know, the launch, but that won't be rolled out. I mean, is the right way to think about the top line as being more weighted to CI, less services, and probably a bit more accretive? Is that how you're sort of thinking about revenue growth for 2023?
I think broadly, David, there's a timing issue of when N8 goes out, you know, I think we'd still. I think that, you know, at a broad level, that's a good way to think about it. The extent of services will just be a little bit around timing.
Yeah, there's really two big dynamics that we can see in 2023. One is not related to N8. It's kind of more return to CI. That's, you know, a slow gradual return in the US and the continuation of a long-term return in places like Western Europe. Then there's overlay on that.
Got it. Just in relation to the OTC change for hearing aids in the U.S., just any initial thoughts you have, might have around that? Just sort of wondering if it's, you know, in the near term anyway, it might just cause some people not to see an audiologist, which gives you a temporary slowdown in new patients. Or do you think it's not really an issue overall?
No, I don't think it has any short-term impact on implants sales. I think overall, for people with hearing loss, this is very good. Anything that increases access for people, which this is aimed to do by increasing access, lowering costs, getting more people to take care of their hearing and getting used to taking care of their hearing and hearing well, all of that I think is very helpful in the long run as people lose their hearing and continue to lose their hearing. That out of this hopefully expect to get good outcomes. Many of them will reach a point where a good outcome is getting implanted.
Great. Thanks, Dig Howitt.
Thanks, David.
Thank you. The next question comes from David Low from EMP. Please go ahead.
Oh, thank you. Cochlear has traditionally played close to its core business of hearing restoration. Noting the additional investment into your innovation fund for projects like Epiminder and Precisis, do you envisage future diversification of your implant business into areas like electrical stimulation, diagnostics, monitoring, neuroprotection, electroceuticals, regenerative technologies, et cetera, outside of that core auditory domain?
Yeah, David, good question. Firstly, we're very focused on hearing. We've got a huge opportunity to grow our business in hearing, and that's where really all our focus goes. We have started this, you know, investment a few years ago. What we're looking at there is we have very powerful technology from implantable electrical stimulation. There may be some opportunity to use that in other fields. What we're doing with the innovation fund is just exploring that opportunity at this stage and no more than that.
Great. Thank you. My other question on the OTC hearing aids has already been asked, so I'll leave it there. Thank you.
No worries. Thanks, David.
Thank you once again. To ask a question, please press star one on your phone. The next question comes from Craig Wong-Pan from RBC. Please go ahead.
Thanks. Just a question on the new Nucleus 7- S and 7- SE that's been launched in emerging markets. Just want to know what the main difference was to the Nucleus 7 and what sort of models were previously being sold in those emerging markets.
Okay, Craig, I'll give you a high level answer to that, won't go to specifics. So the versions of Nucleus 7, just with the slightly different and obviously lesser S-feature set, but still very good hearing performance. What we've done historically in emerging markets is sell older generations of processors. So again, people get good hearing outcomes with them. The benefit of moving to a newer platform is that it's easier to keep that platform in the market. We see the life cycles of electronic components shortening. It's harder for us to maintain some of the older products and therefore, over time it's more cost effective to maintain the newer platforms across the emerging market portfolio.
Okay. Thanks. Does that mean if you're selling one of your newer sound processors, then that could be an opportunity to gain further share in those emerging markets?
I think it's about making sure we retain our competitiveness. We have a very good share in emerging markets. It's not as high as our share in developed markets, and that's largely because a lot of business in emerging markets is price-based, and therefore easier for others to compete with us, harder when it's on features. What we're doing is just making sure that we've got a flexible and effective feature set that we can you know maintain our margins at when the prices are lower.
Just my last question, the gross margin drag in FY 24 from the Chinese manufacturing facility, just wondering why there's not a drag coming through in FY 23.
That drag only shows up when you start selling the stock, and so we're still going through the sort of qualification, certification phase in 2023.
Okay, great. Thank you.
The next question is a follow-up from David Low from J.P. Morgan. Please go ahead.
Thanks very much. Just a quick one. The FX impact on FY 2023, I mean, the Aussie dollar is a little bit lower, and obviously, US dollar strength. Just wondering how that's impacting. Then just a quick update on your thoughts or your plans for that large cash balance and whether you've given more consideration to returning some of it, please.
Yeah. Look, David, as Dig said, we're assuming sort of 0.70 USD going in and 0.68 EUR. That's probably as good as any, given where the spot rates are at right now. Guidance is certainly given with those as a caveat to it. We'll pay close attention to those through the year. Obviously, Aussie dollar appreciating hurts us. Aussie dollar depreciating helps us. The second one, just remind me.
Cash balance.
Oh, cash. Yeah. Yeah. Remain very, very comfortable sitting on that balance. Obviously, Oticon, if it gets the nod from the regulators, will take a small bite out of that. Yeah, still very comfortable holding it at level for now.
Just to follow up, Dig, on the FX, the U.S. dollar and euro have moved in opposite directions.
Yeah.
The net impact basically neutral.
That was the question. Great. Thanks very much.
Thank you. The next question comes from Jackson Lee from Insignia Financial. Please go ahead.
Hi, guys. Can you hear me? Hello?
Yes. Yep. Hi, Jackson.
Yes, yes. Sorry about that. Hi. So just trying to understand the sort of demographic split in your sales. Look, correct me if I'm wrong, but my understanding is that in your sort of developed markets, you have a sort of 50-50 split between children and seniors, and then in the emerging you have sort of mostly children. Is sort of one doing better than the other? Can you sort of split the sort of maybe growth rate between the demographic segments?
Jackson, first up, yes, in emerging markets it's mostly children, virtually all children. Small numbers of adults coming through. In developed markets, it depends. Some markets are at 50-50, typically through Western Europe, but across Germany, U.S., Australia, it's 25% children, 75% adults and seniors. We don't explicitly split out the growth rates of the two across emerging and developed. What we do say is that emerging is more variable, 'cause there are more factors that influence what goes on in emerging markets.
Okay. Thank you. That's all I had. Thank you.
Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Howitt.
Okay. Let's we'll finish up there. Thanks all for joining and thank you for questions. Look forward to talking again in six months' time.
Thank you. That does conclude our conference for today. Thanks for participating. You may now disconnect.