Half Year 2025 Cochlear Ltd Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Andrew Goodsall - MST Marquee - Analyst : Just asking -- first question is asking around that second half. You're obviously expecting quite a big second half. I've sort of calculated about 15% unit sales growth. So yes, just trying to get you to characterize sort of what sort of movement you've seen in these first couple of months of the half and sort of, I guess, what that's pinned on? And maybe for China contract in there, perhaps that's a tailwind for you?

Question: Andrew Goodsall - MST Marquee - Analyst : Very comprehensive, but it does -- no, no it's very -- it probably means it wasn't China because I think the contract started in March or that process starts in March.

Question: Andrew Goodsall - MST Marquee - Analyst : Just a follow-on, more just maybe one for Sarah or Stu. Just thinking about the hedge at second half, always trying to nail this down a bit more -- a bit better than I do. But with the drop in the AU dollar versus US spot rate, what's your sort of just broadly sort of rough impact for the second half hedge effect?

Question: Andrew Goodsall - MST Marquee - Analyst : So probably still to come in with a slight negative though, if you're hedged above the spot?

Question: David Low - JPMorgan - Analyst : Just can we start with the service revenue? And I hear the explanations. But, I guess, some of the feedback we get is that it's much more difficult these days to show a clinical or a hearing outcome benefit with the latest processor. And that being the case, insurers or payers are more reluctant to pay for the next generation, certainly quite as quickly as in the past. I was just wondering, one, do you think that's a factor? Two, what can be done about it?

Question: David Low - JPMorgan - Analyst : Thank you. And just on related, I see the hearing aid companies are introducing AI-supported devices and claiming better hearing outcomes. Can you talk at all about where Cochlear is at with similar development?

Question: David Low - JPMorgan - Analyst : Right. And just one other. I mean, so going back to Andrew's question on unit sales. So an uplift in the second half, yet you've announced the new product is coming. How much have you allowed for the fact that there will be some postponement. I mean, frankly, I would have thought potential recipients who become aware that there's a new version and next-generation version coming are likely to postpone and that will have a detrimental impact on sales this half. Just wondering how you've thought about that, please?

Question: Saul Hadassin - Barrenjoey - Analyst : Dig, can I just ask you about the upgrade sales again? Maybe you've flagged again the Kanso 3 release. These sort of mid upgrade cycle releases, can you talk to your thoughts about the recovery in Services revenues beyond FY25? I guess, what I'm trying to work out is to what extent do you think N8 will continue to be a drag on the base you had a very strong first 12 months. I assume an N9 is not due out for several years. So to what extent do you think the Kanso 3 can resolve some of that softness as you head towards the mid and late part of the N8 upgrade cycle?

Question: Saul Hadassin - Barrenjoey - Analyst : Thanks, Dig. And if I could just one question for Stu. Stu, can you just get the other income for the half, just noticed a couple of items in there. Can you talk to what the other in other income is? Is that gain on investments? Or is that doubling of that profit this half versus PCP?

Question: David Stanton - Jefferies - Analyst : In terms of -- perhaps start with one for Stu and/or Sarah. In terms of gross margin, you talked to the fact that Chengdu will impact this year, but into next year, should we be thinking that the gross margin will get back to its long-run average? Is that the way to think about it?

Question: David Stanton - Jefferies - Analyst : Understood. And then just want to confirm, you're still targeting circa 18% NPAT margin over the longer term for the business?

Question: David Stanton - Jefferies - Analyst : Understood. Okay. Very good. And then, I guess, two competing things in terms of that, what we're all talking about that circa 15% growth in the second half in terms of unit sales. How much of that is going to be driven positively by visibility of referral rates? Do you get a better look at what's in the pipeline than perhaps you did even two, three years ago. And if so what's the reason versus the impact of -- we continue to hear developed -- in the developed world at least, you've got lower surgical support staff, which is sort of somewhat alluded to a little bit, I guess. How do you sort of offset the two of those going forward?

Question: Steve Wheen - Jarden - Analyst : I just had a quick question on the new implants. Just wondering whether or not that's been approved by the FDA yet to give you the confidence to announce the launch date, probably asking money from the point of view you've been looking for signs of clinical trials on this and have -- came up with not very much. So just wondering where it stands from an improvement point of view?

Question: Steve Wheen - Jarden - Analyst : And the clinical trial has been complete?

Question: Steve Wheen - Jarden - Analyst : Okay. Just switching to the Nucleus 8, just I'm not sure if I missed this, but do you quote a number as to what sort of penetration you've already achieved with the eligible cohort for upgrading?

Question: Steve Wheen - Jarden - Analyst : Okay. And then the last one, just trying to think about how we treat this cloud increase in the investment. There obviously was a balance of that spend, which was -- you were previously absorbing into the underlying numbers for FY26. So when you give guidance for '26, will you be taking all of that out and putting it below the line or leaving the amount that was originally in and just putting the extension of your project below the line?

Question: Steve Wheen - Jarden - Analyst : So we'll get an upgrade in the underlying -- we'll get a big upgrade in the underlying relative to the way we're expecting or forecasting it and then -- and the total amount will go below the line?

Question: Steve Wheen - Jarden - Analyst : Okay. Got it. That's all for me. Thanks.

Question: Mathieu Chevrier - Citi - Analyst : My first one was just on Cochlear implants, the ASP benefit that you have in the first half. And I guess from -- that was from the mix shift, how do you see that evolving in the second half? And then how do you see the new implant impacting that in '26 and onwards? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 13, 2025 / 11:00PM, COH.AX - Half Year 2025 Cochlear Ltd Earnings Call

Question: Mathieu Chevrier - Citi - Analyst : Yeah. Okay. And then in terms of how you're thinking about the potential penetration rate of upgrades over time, as what happened in the last kind of 6, 12 months made you reconsider where that could land over time?

Question: Craig Wong-Pan - RBC Capital Markets - Analyst : In Services, which region experienced the largest declines? Or was it fairly broad-based fall in Services revenues by region this half?

Question: Craig Wong-Pan - RBC Capital Markets - Analyst : Okay. And then, Dig, you mentioned about the cloud systems and the benefits of that allowing you to target patients to upgrade or target them for an upgrade. But the full benefits of that aren't sort of there yet. I mean when do you expect to see the benefits of those cloud systems helping you drive upgrade Services revenues? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 13, 2025 / 11:00PM, COH.AX - Half Year 2025 Cochlear Ltd Earnings Call

Question: Craig Wong-Pan - RBC Capital Markets - Analyst : And then my last question, just on the CapEx at your full year results last year, you guided to CapEx of $110 million to $130 million. Just wondering whether you're still expecting that level of CapEx this year?

Question: Sacha Krien - Evans & Partners - Analyst : First question, just on developed market pediatric implants. Just wondering if you can talk a little bit about the outlook there. Do we sort of expect growth to plateau -- or penetration, I should say, to plateau? Or are there still opportunities for further penetration and possibly increases in bilateral implantation as a proportion of surgeries?

Question: Sacha Krien - Evans & Partners - Analyst : Okay. Second question. We're hearing about some good outcomes on residual hearing out of some trials in Melbourne. I'm just wondering if there's an opportunity to expand that more broadly and achieve better outcomes on that globally? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 13, 2025 / 11:00PM, COH.AX - Half Year 2025 Cochlear Ltd Earnings Call

Question: Sacha Krien - Evans & Partners - Analyst : Okay. And just one clarification question on the Chengdu ramp up. Just wondering what capacity you're talking to when you talk about the ramp-up? Is it the 10K that's been being quoted?

Question: Laura Sutcliffe - UBS - Analyst : The first one is just a bit of a revisit on the unit growth expectation for the year. Is there anything that you're expecting in the second half that you wouldn't class as underlying? And what should we think about as a kind of a fair run rate? Is it going to -- is the first half more of a fair run rate? Or is the second half more of a fair run rate? Or is it something in the middle?

Question: Laura Sutcliffe - UBS - Analyst : Okay. That's clear. And then just secondly, on bottlenecks in the system and trying to tie together a few of the comments that you've made around maybe waiting times and things like that over past earnings. Is it the case that some of the greater visibility that you've got into the pipeline, if I can call it that, of patients can help you be part of the solution to people falling out of the funnel, waiting too long, getting around some of these bottlenecks? Or is it really a case of just sit back, wait and see, let awareness increase and then sort of the benefits will come in time?

Question: Lyanne Harrison - BofA Global Research - Analyst : Just to continue on Laura's line of questioning, with those bottlenecks in audiology, are they getting worse? Or is it a matter of just -- has it been stable over the last 6 to 12 months, but still seeing bottlenecks?

Question: Lyanne Harrison - BofA Global Research - Analyst : Okay. But effectively, we're starting to see more people move through the funnel as you continue to do your work there as well as the audiologists? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 13, 2025 / 11:00PM, COH.AX - Half Year 2025 Cochlear Ltd Earnings Call

Question: Lyanne Harrison - BofA Global Research - Analyst : Okay. And then if I could move on to the emerging markets, we saw private pay, it was a good tailwind in this half. Can you comment on what's really driving that? And do you expect that to continue over the next six months?

Question: Lyanne Harrison - BofA Global Research - Analyst : Okay. And if I could come back to Services, obviously, some challenges there with Services revenue. But given what you're trying to do more around creating awareness and working out who is eligible for an upgrade. Are we likely to see an increase in the sales and marketing spend as you target those customers over the next six months?

Question: Lyanne Harrison - BofA Global Research - Analyst : Okay. And just one last question around the cloud costs, about $120 million balance for '26, '27. How will that be phased over those two years?

Question: Steve Wheen - Jarden - Analyst : This is a question for Stu. I'm just following up on the comment about Nyxoah. And I was looking at your annual report for FY24, and it talks to the fair value going through the comprehensive income line. I'm only raising it because the stock is up like 22% in the half. So just trying to understand

Question: Steve Wheen - Jarden - Analyst : Do you know the other side of -- we've got the one side on the balance sheet, do you know what the other side of that entry is or where it is?

Question: Steve Wheen - Jarden - Analyst : Okay.