Earnings Transcript for COH.AX - Q4 Fiscal Year 2020

Dig Howitt: Good morning everybody and thank you for joining Cochlear F '20 Results Presentation. So I'm going to give a bit of an overview with some highlights of the results then hand over to Brent, who we will talk through some of the financial data and will come back to me to wrap up on strategy and outlook and then move on to Q&A. Okay, let's go. So I just with our mission this time around and our mission has always been important for us, but I think never more so than in the last few months, when we had to navigate COVID-19 and it's really, I think helped us keep our people focused on our customers and focused on building awareness and what can we do to strengthen our product portfolio year-on-year. Just to jump inside your overlook, had a look at the results by now saying that we had $238 million loss on the back of the patent litigation and the reduction in sales coming from COVID-19. You can see that obviously COVID-19 is pretty hard in the second half with our second half sales down 22% Cochlear Implant units down, the services was down, acoustics was down, and I'll get into the detail of some of that in a few minutes. And our underlying profit was AUD 154 million when you back out to the AMF litigation and profit from our investments. I think just a minute of the patent litigation. I think it's important as you saw yesterday, that we've reached agreement interest in costs. We have reserved our right for a Supreme Court appeal and really this just wraps this issue up and we can put it behind us and move forward. You'd be obviously well aware of the capital raising we did through the year and that's really strengthened our balance sheet, given the enormous uncertainty that we face back in March and I think to a large degree, we still face. But that strength in our balance sheet enables us to continue to invest both in market leadership and retaining and driving growth and we'll talk about those things over the next little while as well. We have seen since the March recovery in the surgeries and that's positive; however, there is still a long way to go. And we'll talk a bit about the uncertainty that comes with that. Given that uncertainty, we will not be providing guidance for F21. And we’re also suspending our dividend until we see trading conditions improving and improve on a sustainable basis. If we just look back now over the year, we did in the first half, had a very strong start and that continued through the mid-March. We were clearly gaining share particularly on the back of the Nucleus profile Series implant. And I think we continue to say that we have gained share as surgeries have recovered over the last few months. As emerging markets sustained very strong first half benefiting from the significant investments we've been making over the last few years, but emerging markets have also been significantly impacted at a slightly different times to develop markets. We'll talk a bit about that. As we've talked about before, COVID-19 was a significant impact - very significant decline in elective surgeries in April, started to see a little bit of recovery in May and are pleasingly in the three larger markets; China, in the U.S. and Germany we still see some good recovery through June, albeit, remembering that this recovery includes catch up surgeries as well and we'll talk a little bit more about that as we go forward. And Services and Acoustics, which we'll also talk about, have been materially affected by clinic closures and priority being put to new cochlear implants surgeries over Services and Acoustic surgeries. As we went into the pandemic, as we saw COVID-19 expand across the world, we were very clear that we want to be able to continue to invest and continue to build our market position and our market growth activities. We have received approval for seven important new products that really does strengthen our product portfolio and I’ll talk a little bit about that in the outlook section. But, let's say, we would - as we came into this year, it was very important that we regain market share through developed markets and we have done that and with the strength of the portfolio now, what we've seen in the last few months, we think there is more opportunity for us to strengthen our competitive positioning and gain some share as we move forward. We've also had to evolve and adapt our awareness programs, both the direct-to-consumer and the hearing aid channel to make those programs much more virtual. We have done that and we've also taken the opportunity with significant time in clinics and in the hearing aid channel and many places with surgeries to be able to do quite a bit of training around our products, around the direction we're taking, and we hope that that - we know that is strengthen our relationships, we hope that also continues to help us to set us up for the future. We’ve provided a quite detailed guidance in our release on costs. And really what I want to say here is, that we did reduce non-essential spending, we reduced CapEx, as we saw COVID-19 hit and we did that through Q4. However, we're also very clear that our strength comes from our people, and therefore we wanted to make sure that we retain our people, so that we can continue to have strong customer relationships to drive growth, and to drive our R&D portfolio and with people making up two-thirds of our operating costs, that obviously puts a limit on the extent to which we can pay cost back. And we very strongly believe it's the right decision to retain our people and continue to invest, because there is a genuine opportunity for us to continue though the crisis to strengthen our market position. Now, I've got - just got to run through each of the segments and just draw attention to some of the insight that we're getting in each of these segments. Starting with cochlear implants. So I said we're gaining share in cochlear implants in developed markets. We think our product portfolio and our presence with our clinics and with candidates over the last few months has helped us to continue to gain share. You can see in the chat, a very significant beginning in the second half on our sales. And as we’re seeing some recovery, which is very pleasing and as I said in the U.S., Germany, good recovery, Benelux, Australia are also going quite well. We are seeing variability between clinics and very significant variability between countries. So there is still quite a way to go before we would confidently say that the surgery market has recovered, and we're back where we were. We're certainly not in that stage. And emerging markets had a very strong first half, up 20%. We managed through our China shutdown for surgeries from late January. Did recover quite quickly and we see good growth in China over the last few months, which is pleasing and we have been investing in China over the last few years. And we have across other emerging markets; the outlook is not nearly as strong India and Latin America still have significant numbers of COVID-19 cases and low surgery rates. And we also have a number of our emerging markets that are heavily reliant on oil revenue for the health of their economies and with the oil price down that poses some risk across some other small markets. Moving onto Services, in Services, the outlook of Services over the longer run is very strong. We have a strong product portfolio, we have a growing base. The introduction and acceptance of connectivity, Cochlear Link, Remote Check, Remote programming; all provide good reasons for people to upgrade to clinics to encourage people to upgrade to latest technology, which is connected. However, in the short run, we do expect to see and we are seeing limits in clinic capacity strips, creating upgrades. So longer run, the outlook looks good; shorter run a bit tougher and we can see that here in the second half with services reasonably affected by the clinic closures. Onto Acoustics, and Acoustics, again, we reported at the first half that we've lost some share and there was deferral because of anticipation of OSIA 2, we launched on OSIA 2 in February, just before in the U.S., just before in March when things started to shut down. We are seeing a very, very positive feedback from OSIA 2, and very good providing surgeries from OSIA 2 in the U.S., and we definitely believe, as we said before, I have - that the OSIA 2 System is a very important addition to our portfolio for the Acoustic segment. However, it will take us some time to get the regulatory approvals and to get appropriate reimbursement across a range of markets. From the Baha perspective, we've seen some recovery in surgeries, particularly in the U.S. However, in the U.K., Acoustic implants are still - surgeries are still not happening and the U.K. is the second largest market for Acoustic implants. So, while the U.K. doesn't do surgeries, we expect to see a continued impact on our Acoustic revenue. So with that, I’m going to hand over to Brent to talk about some of the results in detail, and I will come back with our outlook.

Brent Cubis: Thanks Dig. I won't spend too much time on opinion, because Dig's already touched on it. I think there were three main call outs that I would like to point your direction to. The things we're really happy with are the - we've maintained a gross margin more or less where it was a year ago, and that's despite the drop in volumes we had towards the end of the year, particularly as we went to one shift or so in the last month. I think that's a good achievement as we went over to get the recoveries from overhead when we reduce that volume, so we're happy with that in the gross margin, and that's only because of the good work around the warranty, which we've seen over the last few years, which we've spoken about in previous results. Dig mentioned, our costs have managed to fall and we made a deliberate effort in the last few months to pull that back. That's despite two-thirds of our cost - being staff costs. And you can see that reduction there, which is highlighted 8% down in sales and marketing and so forth, but it's mainly the discretionary spend. And I think that's important to highlight that we did pull back on that, but we’re still able to invest in areas, which are important, as Dig mentioned all staff are still in a business, because that's the case of our success going forward. I think the other important thing to call out is that all the AMF costs now have now been recognized in the P&L, and that's at the bottom there. That's the net amount after tax. It's about - is about AUD500 million gross and the difference in the tax rate, the reason why that's not a straight 30% is because not all the amount was tax deductible. Some of the original payment was not deductible. So that's the reason for the less than 30% between the AUD500 million gross and the AUD416 million that you see on our P&L. In terms of the other income, we'll touch on that in a sec. The other income and expenses on the next slide, and the FX contract losses. They're only up until March this year. Last year, we had AUD0.67 versus AUD0.75 for contracts, which is why the amount is greater than a year ago, because a year ago, our rate was around AUD0.72, close to contracts at the time. So there's only about nine months’ worth of FX contract losses there, and we’ll touched on those in a sec. It's important to note too that the investments in the Innovation Fund have continued to go well, which you can see at the bottom there as well. In terms of the other expenses, because it was important to us to call these out, more for transparency, but just to help you with going forward and looking on with any modeling. These are more non-recurring in nature. And you can see there, we did benefit from the government assistance, particularly in the U.S. with the CARES Act, which happened in May, which the Trump Administration introduced and we’re a big beneficiary of that. And as Dig has outlined in previous announcements, we did claim JobKeeper which started out with a big reduction in income in April. And if it wasn’t for that, a number of our people in manufacturing actually wouldn't benefit from the JobKeeper amount, which was passed through to them when we went back to one shift. So I think that was an important program. So last year of the cycle release and - so that’s - that one won't be there going forward. And as I mentioned before, we brought forward all the foreign exchange contracts up to April, because they were ineffective, because we could see the reduction in income going forward. And there wouldn't be any use for those contracts, so that's why you can see them there, which has been extended this year. Plus we had the non-cash write down for Carina and the Otoconsult which was the FOX investment a couple of years ago. And there is some more information of that in our results, which you can read on. In terms of the, our cash flow, normally, this is my favorite slide, and it's still is, I think if you back out the impacts of the AMF litigation halfway, a bit further up before 2020, and you add to that to the operating cash flow of AUD157 million negative, you get a number of AUD263 million positive, which is more or less, the underlying cash flow and compare that to a year ago, it's only about AUD33 million less than a year ago. So in the scheme of things, I think that's pretty good given we have COVID. And if you're looking at the reason for the underlying cash been so much greater than the underlying P&L of AUD153 million, the main reasons - main contributing factors to that are the non-cash items that I mentioned before on the previous page like, the Carina and the Otoconsult write-downs and some doubtful debt provisions, which were all non-cash, plus the impact of the good collections in receivables. So that's the main reason for the improvement over the underlying P&L. The other thing to point out there is the taxes are a little bit less than last year and I'll touch on that in a sec, with our tax refund that we're expecting to receive next year in the first half. The CapEx has gone up with the finish of the China manufacturing facility, which actually finished last week and the fit out of the Denver office over in - which happened this year as well. We've already touched on the acquisition of the intangibles and the Nyxoah investment as well in the first half and. The payment of the lease liabilities at the bottom, that's the principal portion of the leased under the new accounting standards. In terms of our net debt and financial position, you can see here this had impacted - it's almost up AUD600 million previous compared to last year. The AMF case you might ask the question, we see all these cash and why we got that AMF loan there. In the February results, you would recall that we actually had a U.S. dollar facility in place, in case we lost the AMF case, which we did and that was a good decision, we had that U.S. dollar facility there. At the time of the capital raise, the dollar was pretty volatile, it was around AUD0.57. If we paid that out in Australian dollars compared to now, it would have cost us about another AUD100 million. We actually step about amount in early June and that the rate had improved a little bit, but even compared to today, if we paid in Australian dollars, it would be another AUD50 million. So I think it was a wise decision to take that facility out in U.S. dollars and we're in no rush to really pay that off and we now have the benefit of that with the U.S. dollar at around AUD0.70. We've been buying some of that, so we will slowly start paying that down over the next few months, using the combination of our U.S. receipts, and what we have available there on the balance sheet. It's also - because we did cancel those FX contracts, which I mentioned on the previous page, we have a natural hedge there in the next six months with that loan. So it's a good way to manage that FX exposure as well. In terms, so if you're looking at how we've actually used our capital raise at the end of the day, it's really - a bit over AUD1 billion that we rose, less the AMF payment, it's almost the amount you see there in our net debt position at the end of the year. And finally, in terms of the capital employed, as I mentioned before, back in March when COVID hit, I was really happy with the way the business responded around the world to how we're managing our cash. We really rallied the troupes to be focused on not only receivables, which you can see there, and that's not only just a function of reduction in sales, but it's a good result of a focus by the - everyone around the world in chasing debtors, and a good control over our payout - over our discretionary spend and you can see the result of that pull back in the last quarter, when our credit is actually felt and normally, you would expect that to go up in a growing business. We're not too worried about the inventory going up. That was an insurance policy at the time, we didn't know what would happen. And we didn't know what would happen with borders around the world, so we kept the manufacturing plant going all the way up on two shifts up until late May or so. And that built up the inventory levels as a safety buffer around the world in case there were any border closures or we even had a COVID case in a manufacturing plant here. So, we will now bring those back to historical levels going forward, but we're not too worried about that inventory jump there, it was a one-off, and it was a good insurance policy to have. You can see the other improved - other net impacts of the capital and CapEx and so forth underneath. As I mentioned before, we're expecting a tax rate refund next year, which is part of the change in the other net liabilities at the bottom, netted off with the amount for the AMS pre judgment interest, which we announced yesterday with the ASX release. So if you grab our balance sheet, and you see the improvement in our net assets from that AUD675 million or so, that's mainly the combination of the AUD115 million you see there and the previous page of AUD560 million. Back over to you, Dig. I'll let you talk about the dividend.

Dig Howitt: Thanks Brent. Yes, just to cover off from the dividend, as we've said, we won't - we've not done - final dividend and we will continue to look for sustained improvement in trading conditions and cash flow before the board resumes dividend. Okay, so have a look at the outlook. So first of all, our strategy is unchanged. We've had to debt how we've implemented some of our strategy and as you'd expect in the changing market with the core is unchanged. We do want to retain market leadership, and I think with the strength of our product portfolio, the strength of our field teams around the world and their presence, particularly over the last three months, we are in a strong position. We know we have to drive growth as the market leader and very clear that we have to invest in awareness, in access, in the evidence to support expanding access for hearing implants for people right around the world. And we aim over the longer run to deliver consistent revenue and earnings growth. Obviously, this year has challenged that. But the important point for us now is really through F21, is to really be focusing on those first two

Operator: [Operator Instructions] Your first question comes from Lyanne Harrison with Bank of America.

Lyanne Harrison: It's good to hear that volumes are starting to recover. I was wondering if you could provide a little bit more color on the recovery in key markets, pretty clear between pediatrics and adults. And could you mention the backlog and catch-up, is it safe to say that pediatrics are pretty much on quota and it's just adults that are in backlog and how is the adults fairing in the United States, Germany and Australia?

Dig Howitt: Yes, thanks Lyanne, good questions. And let's yes, the pediatrics have been prioritized just about everywhere and from best we can tell through developed markets, that the reason to backlog of pediatrics. We think for adults, certainly the backlog is also largely caught up. And that's part of the driver for the strong numbers in June and July. And if we look in the U.S., Germany, and Australia, we're actually seeing the mix of surgeries, not too far from where we were and where we were, was about - in those three markets, about 25% pediatric, 75% adults and seniors, with a higher proportion of seniors in the U.S. and Australia than in Germany. We're not quite back to 25%-75%. But we're not too far away. So that's I think encouraging in respect of people who are well down in the pipeline, I'd often say, so you were well down the pipeline didn't give up after spending a few months at home from COVID-19. I will say what we're going to watch, we are watching closely for now is adults and seniors entering the pipeline, and people who have just gone through a few months at home with a significant hearing loss and coming out of that saying, I'm actually more worried about other aspects of my health, or now I really do want to get something done about hearing loss. So I'm going to get into that nine months pipeline of the referrals and assessment. So we're certainly seeing some new introductions of adults, the decision of the pipeline, but it's too early to tell if it is in the same proportions that we were seeing six months ago.

Lyanne Harrison: And just to follow up on that, you mentioned the pipeline, I know you from the early comments you mentioned that about 80% at clinics were back operating. Do you get a sense of - and you obviously talked about social distancing within those clinics. Do you get a sense of what proportion of capacity those clinics are operating at?

Dig Howitt: It's very hard to know right now we think generally clinic capacity from an audiological perspective, it's still below normal because of social distancing and cleaning procedures and so on. So it's hard to put a number on it and it definitely varies by country. So significantly down in the U.K., whereas in the U.S., it's now or going to be a little bit short of where we were. So far, we haven't seen from a surgical capacity perspective, we haven't seen restrictions on surgeries coming back and - in our market where we've seen good volumes come through, in obviously markets where the volume is still down like in the U.K. It's - there's not enough coming through to really test out surgical capacity.

Operator: Your next question comes from Saul Hadassin with UBS.

Saul Hadassin: Just the first one, maybe just a bit more color, obviously the release talks to the developed region effectively seeing normal growth or growth consistent with where you were in June, July period last year. Can you give us a bit of color as to specifically say, the U.S. and Germany, does that imply you've actually got high unit sales of those two months versus last units with some of the other countries like Italy and Spain where those volumes are below, just a bit more color on what you're seeing in the U.S. and Germany would be great.

Dig Howitt: Yes, first-of-all, a little bit more because it's - I think a few things to note certainly, that the U.S. and Germany being the biggest Cochlear implant markets. Without good performance there, we couldn't get back to being sort of reasonably in line across June and July. And U.S. and Germany have recovered better than some of our other markets, but we also got new markets like Korea. Korea is just containing to grow, all the way through last year and COVID don't seem impacted how people work, but it did impact clinic volumes, a little surgery volumes. So certainly seeing a real mix, I think the other thing, we just got to - just to bear in mind too, that we launched the Profile Plus at the end of June last year in the U.S., so June sales were probably a bit down on where they would normally be, just given that launch and that launch was obviously telegraphed given we've launched in Europe a little bit ahead of that.

Saul Hadassin: So, maybe just push on the U.S. if I could, but there you're saying the U.S. volumes are effectively reasonably flat or they're actually up on June, July last year?

Dig Howitt: I'm not going to guide too much to the specifics, but they're reasonably flat. I think we were slightly ahead but remembering, I think what that indicates is capacity because of the catch up, rather than its demand is restored and we can only, what I certainly don't want to leave the impression that the margin is restored and we can all just look forward from the year, what that does show is that there is good surgical capacity and that's allowed to catch-up of deferred surgeries to happen.

Saul Hadassin: And just one for Brent if I could. Brent, just taking into consideration all the different other expense lines that you were incurred in FY20 and I guess on the assumption that you do you get some government assistance into FY21 and that effectively none of the other items recur, that translates to maybe, call it a AUD30 million rough income benefit in FY21? Is there anything that would not see that benefit wash through in FY21, any other potential write-downs or foreign exchange contract terminations?

Brent Cubis: Yes, the main thing to keep in mind, we've got STI coming back in F21, because we had big benefit of that in F20 and we've called that out in some of the commentary. But at the end of the day, the balance sheet has never been cleaner, so I think you, it's a nice padding gift. So I think it's looking very good. And I think we've got a good handle on costs going forward and we know where to invest and so forth across the business to drive growth.

Saul Hadassin: And the Carina write down, so just to complete that the Carina write down, does that imply that, that middle ear implant as a product is I guess no longer viewed as a significant growth opportunity or just some comments on that?

Dig Howitt: Yes, I'll take that one. Yes, look, so we've had the Carina implant in the markets from just about 2013 and we really saw very low volumes over the seven years and the outlook for was what we think that there is an opportunity for us an implant like Carina, which was implanted into the middle ear, had an implantable microphone. We don't think it was the right configuration to really unlock that segment. So it just made sense at the end that we were losing quite a bit of money on it. And couldn't see a way out of that certainly and at the end, made sense for us to seek sales, while we will continue to support all of those customers who had one of the Carina implants.

Operator: Your next question comes from Chris Cooper with Goldman Sachs.

Chris Cooper: Dig, just a clarification, one, please on a comment you made to an earlier question there. So I believe you said that around half of the driver of the strong numbers, you are seeing in June and July was due to catch up or backlog. I'm not sure whether we started to interpret that half proportion literally, but how do we interpret that, if I have to say the delta between the sharp decline we saw in early April back towards the kind of flattish number in developed markets in June, July, around half of that was the backlog, is that the intention of the comment?

Dig Howitt: Chris, I don't think I've said half and if I did, I didn't mean to it, because now it's very hard for us to tell exactly what that split is and so therefore, we wouldn't want to try and guess what the split is. I mean we're getting that - the way we get at is sort of, anecdotally back from our field people, as they're talking to audiologists and talking to surgeons what's your mix look like. And certainly what we're seeing is that those catch up surgeries, we think we're largely through them. Therefore, they were a lesser and lesser part as we move through June and July, if that'd be okay.

Chris Cooper: And given we're largely through, is that to say as of June, July we were largely through and then maybe August, we just stepped back a little bit in terms of volumes from where we were given your comments on capacity and the fact that we're still slightly below pre-COVID levels?

Dig Howitt: I think that's usually uncertain, we don't know. We don't know, if - certainly they won't - there is not catch up to top up the volume. What we are watching closely is what's coming through in terms of referrals and scheduled surgeries and we're just not in a position to say, to be able to make a meaningful comment on what's going to happen there over the next few months. We will watch closely and at the time of our AGM, we'll give a trading update on what we've seen and what - insight we get into the pipeline, but right now we can't do that.

Chris Cooper: And just a last one, just on the market share gains, please - I don't know, I'd appreciate again that sort of based on feedback you have with your practitioners, but do you have any sense of the trajectory of this from here? Clearly you had a period there for most of the fiscal year where you probably had the leading product in the market in my opinion? At what point do you expect that to kind of get back to a sort of more normalized position? I appreciate one of your competitors' business had some material challenges in the period, which is giving you a further tailwind. Is there something that can continue to persist for fiscal '21 or do you expect that to revert back to a sort of more normalized sort of market share position?

Dig Howitt: I think we have an opportunity to take some more share in '21, but it's - our share is obviously very high. So in terms of the overall impact of that, it not going to be hugely significant, but we are launching these four products that we've just had approved. I think, that builds our leadership position, there is good reasons why we put each of those products into the market. And so we think customers and candidates will respond to that. And one of the things we've made sure we've done over the last few months that our field teams is staying very, very connected with professionals, with candidates. And so I think that, that will make a difference as well, but I wouldn't put a number on it by any stretch, but I - we do think that we have a further opportunity at least in the shorter run.

Operator: Your next question comes from Andrew Goodsall with MST Marquee.

Andrew Goodsall: Thanks very much for taking my question. Perhaps, just looking at your cost base, it's obviously a lot of the costs, SG&A and corporate overheads and so on, sort of well, held pretty flat during this period. Just trying to think forward as you return to grow, how are you thinking about those costs and sort of where the opportunities might be to get some leverage?

Dig Howitt: Well, Andrew, to get to first - thanks for the question. In terms of opportunity to get leverage, I mean we just - we want to get back - first off, we want to get the revenue back to the level we had sort back in February and then grow from there, because our cost base is largely set around the revenue that we did have. We have obviously reduced discretionary spending, I mean, out - travel and sort of conference expenses are of a reasonably significant cost for us, that's going to be close to zero. And I think it will be a while before they come back. And we will continue - we have given some guidance at a high level by the line items, but we'll continue to invest in R&D and in key markets, we will continue to put some more people on the ground, if we believe that putting them there will help us gain share or drive - drive programs. Then, I mean, we would like to get back to having a P&L that looks largely as it was before this happened in terms of percentage of sales into R&D, into SG&A, our net profit as a percentage of revenue. At this stage, we are aiming to get back to where we were, albeit, this uncertainty on how long that will take. And you know what, we're seeing some good recovery in some of those developed markets, there's still uncertainty and emerging - all of our sales are important, obviously, in terms of supporting our cost base and driving profitability and in emerging markets, there are some really significant challenges, I think certainly over the next 12 months.

Andrew Goodsall: And just a follow-up, I guess, just in terms of the way in which we're operating the business on a day-to-day basis. Previously, this was heavily a business I guess what people were out visiting clinics and so on, and I'm just trying to understand how that's evolved and whether in fact that does provide benefit to the incumbent like yourselves as sort of dominant market share, because I imagine it's quite difficult for the other players to launch products or trying and prosecute their case before clinics at the moment?

Dig Howitt: I think, yes, look certainly which - apart from a few countries, virtually all our interactions with clinics and professionals are virtual I think, because we've all found over the last few months, those interactions are easier if you already know who you're talking to, and already have a repo or a level of respect. So I think, yeah, there's some value in incumbency and the relationships we built and that's one of the reasons why we say, very quickly, we want to retain our people because they've built these relationships, they have the respect and that's very valuable and we want to maintain that.

Operator: Your next question comes from Sean Laaman with Morgan Stanley.

Sean Laaman: I'm thinking gentlemen more forward on what might be some of the permanent reshaping of the Cochlear implant market as a result of COVID and the market share gains that you've observed short-term today. How much of that is due to sort of the connected angle, through programs such as Remote Check and Cochlear Link and the Cochlear provider networks and is there any sort of sense of the uptake of Remote Check or is it too early? Thank you.

Dig Howitt: Yes, look, it's hard to disaggregate what it is we've done that supports market share, apart from when there is a very obvious issue, like MRI as we had 18 months ago. But I think our connected solutions are certainly very much appreciated even more so. I mean - I think, what we've seen with the move to telehealth more broadly is a real opportunity for telehealth connected solutions, and we've been working towards this for several years, that I think that the timing has worked well for us in terms of selling Remote Check in so a bid with the FDA, at the same time that COVID hit. As we brought Remote Check out, it's still early days, we have seen a rapid take up in the markets in which it is available, but it's still very early in terms of the lifecycle of this product, in terms of the evolution of how customers and clinics use it and in terms of the feature set that we currently have compared to what we could offer in the future. Things like Cochlear Link have been valuable, particularly in the U.S. and parts of Europe for a long time. And that's just been reinforced over the last few months when we do for example, have next in the cloud, and be able to replace, replace sound processors directly to people's homes, do that all remotely, I mean, those sorts of things have been appreciated for a while, but even more so recently.

Sean Laaman: Thank you, Dig, in which able to give us a snapshot where you are on penetration rates of the N7 and the reimbursement situation with the Kanso 2? So are we thinking self-pay, mostly or not?

Dig Howitt: So Kanso 2 first, no - it's a normal sound processor, so it will be, we'll have the same reimbursement as Nucleus 7 in most markets and now in some markets, there's a registration process that can take a few months, that beyond the regulatory process of registration process for the reimbursement. And - but a bit - I think the way to look at that is so as people become eligible for an upgrade, they now have a choice. They don't have to choose between connected or not, which is what they had with Nucleus 7 and Kanso, with Nucleus 7 and Kanso 2, both solutions are connected, it's then just a wearing option choice, you want it behind the year or off the year. So we think therefore it will sort of take upgrade share from Nucleus 7 to some extent, and that will vary by market. I think we'll probably see some level of private pay in a few markets where people add a second processor on top of their reimbursed one.

Operator: So our next question comes from David Bailey with Macquarie.

David Bailey: Just following up from Sean's question, actually it's on the Kanso 2, it looks like the base of improved features coming through on connectivity side, but also on the rechargeable battery, it looks like it's a positive change. Just wondering if you had any feedback to date as to some of these feature changes relative to the initial version the Kanso?

Dig Howitt: It's early days. So we haven't officially launched yet. We were in a very early stage, but the feedback we have had is certainly positive. People have been asking us to put a rechargeable battery into the option - I'm sorry, rechargeable battery into Kanso and that's what we've done and the connectivity, we know is already very well received. So we will see as it rolls out, but early reception is positive and always when we're developing these products, we are listening to the customer feedback on features that they benefit, that they value and try to incorporate in.

David Bailey: Yes. And then just also on the CPN just wondering if you could give us a bit of a sense as to how the number of clinics has changed over the past 12 months or so? And then will you expect that to get to over the next 12 to 24 and how that might help drive growth over the next couple of years?

Dig Howitt: Yes, so we continued to add CPN clinics last year. It's around about 400 now. So that right - did slow a little bit over the last few months as you'd expect. Our focus looking forward is two-fold, it's one to continue to add CPNs, but also to get more - to do more education and get more referrals from our existing CPN. So we certainly see a range of levels of referral across CPNs and there was more to be gained by us working with those CPNs that are referring at a lower rate and some of the others to understand why that is and how we could help to identify more candidates that should referred because we know that they are out there, I mean, down in all of the numbers, there's a load of - but all of that every, hearing aid clinic that's working with high-powered hearing aids, is seeing potential Cochlear implant candidates. And so part of our CPN plan from here is actually lift the right of referrals, but continuing the education.

Operator: Your next question comes from Gretel Janu with Credit Suisse.

Gretel Janu: Firstly, just on the outlook for upgrades, is the current constraint coming from the clinic perspective and low capacity there? Or are patients unwilling to get an upgrade at the moment. So the fact that we are in a recessionary environment, because that leading people to defer getting and operate at this point in time?

Dig Howitt: We don't think at this stage that it is a recessionary environment, although that could have some impact in the U.S., both in terms of the insurance plans that have co-pays, people might be less willing to do a copay right now and obviously, insurance is tied to employment in the U.S. so with unemployment rising, there's potential impact there, but the majority of the impact is clinic capacity.

Gretel Janu: And then, just in terms of - in the U.S., what is the typical out of pocket payments for an upgrade?

Dig Howitt: It's all over the place.

Brent Cubis: You could be AUD2,000 or something like that AUD1,500 but the best thing we've done is actually lock-in contracts, for our insurers over that, we've probably got 70% of the market covered. So people know what they're up for upfront and that's reduced the uncertainty, because that was often a reason why people might then go ahead with an upgrade.

Dig Howitt: And some of these co-pays are on an annual deductible. So if they have other medical payments through the year, they don't have a co-pays if they get an upgrade at the end of the year, but there is a very big range.

Brent Cubis: We also have third party financing which is available as well for some of that co-pay, which has been used quite a lot over the last few years.

Gretel Janu: And then just on Acoustics and the U.K. markets there, have you - do you have any insight in terms of when surgeries will start, so would you know, what's kind of pushing those when back at the moment?

Dig Howitt: We're - look, we're pushing - it's a decision made between some VNHs and hospitals and the surgeons. We are pushing that obviously, the surgeries restart, because there's this clear need, a clear need for treatment. But we don't have insight into how long that will take, and that's --

Gretel Janu: Thanks very much.

Dig Howitt: The uncertainty in variability that we see.

Operator: Your next question comes from David Stanton with Jefferies.

David Stanton: Look, I just wanted to follow-up really on what a recovery looks like. So for you guys particularly in Cochlear implants, you say 80% of Cochlear implant clinics are open approximately. We've had a feedback that it is a little bit tougher than normal for patients to have surgery for a Cochlear implant, it sounds like you're not seeing that to any great extent those and that's my first question.

Dig Howitt: Yes, look, I think it's probably a bit more difficult but if you look our - if you look at the numbers, we're not saying that have an impact and we're not - we're hearing some difficulty, but not - if you go back to March, there was talk about you have Cochlear implants going to be lined up between behind hips and knees and all sorts of things and very few will get done, that's - so, it's probably making, is that's not what we're seeing and that doesn't mean that if you want surgery tomorrow, you schedule tomorrow and off you go. But it's certainly not the level of constraint that we thought it could be in March in the U.S. and Germany. However, in the U.K. it is.

David Stanton: Understood. And then I guess overall, though, would it be fair to say that today, you're more - there's - you'll bring up the potential, I guess for more a W shape recovery than perhaps initially through in March of potential V shaped recovery? Is that what you're basically saying?

Dig Howitt: Yes, look, I think one of things interesting over that time is, I think the clarity over the shape of it, there is very little more clarity of the shape of that recovery. W is quite possible, as we said earlier, don't think it's going to be linear, just because I think what we're all seeing is that it's pretty easy for infections to spread and that puts and get back - puts pressure on hospitals, it leads to restrictions on what people can do and how they can move around, all of that's going to have not only an impact on scheduled surgeries, but it's probably going to have an impact on the pipeline. And so, we just - while we're encouraged by what we say, we just don't know and certainly, it's likely get quite a lot of time until we can have confidence that the system works without impact of COVID-19.

David Stanton: That helps. And then finally from me, is it, is it on - on the basis of what you just said then, really as simple as there needs to be a vaccine for Cochlear implantation rights too, well to be as solid as they have been historically? Is it is simple as that or can you - can you and the industry I mean, in particular the hospitals work around not having a vaccine over the medium term? Thank you.

Dig Howitt: Yes, I think a backseat will certainly make it much easier and I think otherwise, I think if a vaccine doesn't come along in the near term, I think people will find a way, but that's just where the uncertainty is, this is just very hard to now - what will happen and we're seeing that right now, the countries in reasonably similar circumstances, if you look at infection rates have different surgery rates. So in some countries, they just got on with it, in others that I've said, no, we're not going to. So I think some have shown there is a way, but just - very had to look into the crystal ball right now. And so here's what, is what we think could happen.

Operator: Your next question comes from David Low with JPMorgan.

David Low: Maybe, following on from Dave's questions, so you've talked about the catch-up being largely done. You've talked about clinics operating below normal capacity. So it feels like you're telling us that June, July was probably going to sit above where we're going to be in the next couple of months until that clinic capacity starts to pick up or am I missing something?

Dig Howitt: I think we just don't know.

David Low: Sure

Dig Howitt: Honestly we don't know.

David Low: Would you help my logic?

Dig Howitt: Yes, it's good look - I think it's good logic. Yeah, I mean there is certainly - there is risk of the surgeries coming down - it's much because of the pipeline as anything.

David Low: Yes.

Dig Howitt: Just I think we just don't know.

David Low: Yes.

Brent Cubis: No, but if I catch-up is down in the pipeline, the clinics are below capacity presumably the pipeline, it's hard to be growing on where it was in previous periods.

Dig Howitt: Yes. Look, I'm not sure we just don't know at the moment.

David Low: Sure, no I'll take that.

Dig Howitt: And just to put a bit of color on, I think, clinics are prioritizing their capacity too and I think that's why we're seeing services down a bit, then if they have got a patient time, they will prioritize new patient, new surgery of an upgrade for an existing one. And that makes perfect sense from a health outcome perspective, getting someone to implant being able to hear, should have a higher priority than helping someone feel better through already - through an upgrade and that's pretty complex to think sort of capacity.

David Low: I will stop laboring that point. Just a couple of other quick ones then. Brent, you talked about the gross margin being placed with where it ended up. Can I get you to talk a little bit about where it's likely to be. I mean, given that I presumed like production capacity is got to remain below where it was historically?

Brent Cubis: So David, I think we did flag this at the last time with Chengdu opening. We expect that margin to fall a little bit because we obviously won't have that capacity and with less more capacity and we got to absorb those overheads up there and quickly, that we're probably pushing that back a bit. We're waiting to see when we really ramp up that in Chengdu but as Dig has mentioned before, it's ready to go, but we won't be going as quickly as we thought. So it will be staggered approach. So I would expect that margin to fall a little bit.

David Low: If we pulled the Chinese impact out or the new plant impact out, could you maintain gross margins with the existing facilities?

Brent Cubis: Yes, I think we could because we've, I think we won't expect back to two shifts now and it's going well.

Dig Howitt: And obviously some of the turn up sales coming through too.

David Low: Yes of course, and a final, a last one from me and I know this calls probably going overdone, government assistance, any expectations into '21, as we're unclear as to what you were saying there?

Dig Howitt: We certainly will have some coming through in '21. At this stage, we're not sure how much or is it that - in terms of the team there is that we got last year across several countries all sort of working on slightly different schemes that's it's there, but you look and it's important. These are important programs, but we haven't got a number on what we think it will be.

David Low: Could it be as big as it was in '20?

Brent Cubis: Not - yeah, I'll --

Dig Howitt: Not yet. Probably not.

Brent Cubis: Yes, okay, there is some in Europe. So we're still working those and below that depends on, you actually have to get through this summer and spring.

David Low: Okay, look, last one for me, the dividend, you talked about not re-implementing a dividend until sustained profit to a back, I mean what variables should we as outsiders be looking at those the signals there?

Dig Howitt: I mean, we will look - so we will have a look, we'll - I think I don't know if we can say much more than we got to cash flow have sustained profit. So, I mean in February ' 21, we will see how we went in this first half. If we are profitable in the first half, then is it, and we think, yeah, that looks okay, there is a reasonable prospect of a dividend if we're not, then I think there won't be.

David Low: Okay.

Dig Howitt: There won't be any franking for a while, David. We can do that.

David Low: Fair enough. Thanks very much.

Operator: Your next question comes from Steve Wheen with E&P.

Steve Wheen: Sorry, I just wanted to clarify your comment, do you - just on the opportunity to take more share in '21. That's clearly a reference to the product launches that you've got, but I'm just curious as to your perspective on whether you've recovered the lost share from the MRI and whether you're also continuing to see benefit from the recall that Advanced Bionics has because I note there, the MAUDE Report for - with the FDA is continuing to show performance related issues?

Dig Howitt: So we've certainly recovered the share that we lost through MRI and with respect to the reasons so that we might win share from any - from our competitors, it's obviously two fold. It's what we do well, what we do well, whether that's sales service or product and how do they stack up against that, again, in terms of their service and their product, I think don't probably want to say on - from a competitive perspective.

Steve Wheen: Okay. I mean, in terms of feedback, I mean are you still hearing any disquiet from surgeons just with relates - with regards to that recall?

Dig Howitt: Look, I think we're certainly hearing a bit from surgeons on what they're seeing from a performance perspective, and I think I've said before, we have seen some of that going back into '19, yeah, and obviously as we talk to surgeons, anyone talk to surgeons, they will often give us some insight into what they're saying, but I think, there's been - calls that some of - either you or some of your peers have done and I think the feedback that comes on those is consistent with what we're hearing.

Steve Wheen: Yes. Just lastly, just on China, you've seen a quick recovery. Is that in the tender market or outside of the tender markets? The point being is that, I noticed the central government tenders were recently awarded, but very low volumes to yourself. Could you sort of explain what dynamics are playing into that recovery in China?

Dig Howitt: So, the recovery is very much through the private pay segment and what we've seen - and some of that goes through provincial tenders, what we've seen happening over the last few years is devolution of the tenders and some of the money to the provinces and to them to either run their own tenders or run forms of reimbursement programs which really then ends up in private pay. So we will wait to see, I mean, yet so in detail the next five-year plan to see what there from a national tender perspective, I think we've been saying over the last few years, and so a decrease it has much less importance than it has in the past in terms of not only overall sales, but also our China sales.

Steve Wheen: And just to pick up on something else, in China is there any sign of that replacement cycle coming through processes as yet?

Dig Howitt: Not from a national funding perspective, but again in a private pay market, we are seeing a reasonable uptake of upgrades.

Operator: Your next question comes from John Deakin Bell with Citigroup.

John Deakin-Bell: Thanks Dig. I'll be very brief, so I was just interested in your comments around the emerging market, you've made a number of comments, I think there's a significant challenges over the next 12 months et cetera. I mean, given that the majority of the cases are pediatric, I'm assuming that plenty of these kids being born still, are they just not presenting to the hospitals or are you just saying you're concerned because the hospital systems are overwhelmed with the number of COVID cases and if that diminishes sort to advance back as quickly as it has done in some of the major markets?

Dig Howitt: It's a little bit of everything. It's both local - lockdowns in India has had a very long period of trying to lockdown the society and the economy. Now that stops people presenting. The hospitals can be overwhelmed, that reduces capacity and remembering in most of these markets, there's no so routine screening, so that to - the diagnosis typically depends on the parents recognizing that there is something unusual about their child, their child is not responding to sound. I think there is a risk that with people at home, therefore potentially build - there's stimulus that parents don't notice or may miss their child's hearing. So I think it's certainly a more - it's a bigger issue than just the hospitals are overwhelmed that as soon as they get on top of it, it will all be okay, again. I think there'll be a real gap in the pipeline as well as in the hospitals and it's still I think - if you look at India and some of the Latin American countries, they I'd say are behind what we've seen in other countries, in terms of just the - when the infections really started to rise, they haven't taken off yet. So we are still a few months behind what we're seeing in other countries. So it's just very hard to know, but I'm not optimistic of a quick return to normal in several of those countries, which obviously has an impact on our revenue over time as well.

Operator: There are no further questions at this time. I'll now hand back to Mr. Howitt for closing remarks.

Dig Howitt: Okay, then thanks all for joining. It's been a complicated year and we're trying to set ourselves it up to the future. I do want to finish just by thanking Brent, as you would know, this is Brent's last result with Cochlear, and I do want to acknowledge the right work that he has done from us, from a cash management, financial control perspective, just to name a few things to bring our global finance team strongly together and if you look at our balance sheet, we are in a very strong position, looking forward to be able to take on the uncertainty and the challenges in front of us. We do want to publicly thank and acknowledge what Brent has done for us.

Brent Cubis: Thank you. Thank you, Dig and good luck for '21.

Dig Howitt: Thank you all.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.