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Earnings Transcript for COH.AX - Q4 Fiscal Year 2021

Operator: Thank you for standing by and welcome to the Cochlear Limited 2021 Full Year Results Briefing. All participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.
Dig Howitt: Good morning everyone and thank you for joining for our results presentation today. So, let's get started. I'll start with our mission, as always, our mission has played a very important guide for us over the challenges of the last year and certainly a unifying purpose for all of our employees, as we have, over the last year, seek to strengthen our market position and really set ourselves up for the future. And as part of setting ourselves up for the future, we've not only refreshed our strategy in the last year to refine it based on what we've learned, but also got clearer about how it is that Cochlear creates value across society as a whole. And there's more details on this in our annual report, now Sustainability Report. But here, there's really five areas in which Cochlear creates value across society. The first of those is a healthier, more productive society and that's clear from helping people hear and hear better, they're empowered, they're able to achieve their potential, and would be more productive in society. The second one about empowering our customers is really all about making sure that both recipients and professional customers get convenient solutions, have confidence in our solutions, and are able to either deliver care or live their lives as fully as they can. Third area being a lifetime of hearing solutions. It's really about investment in R&D and our continuing extension of the capability of our products of the hearing outcomes of our customers and their lifetime commitment to working with and supporting customers so that they get the best hearing experience they can throughout their lives. Our employees thriving peoples very important part of the value we create with over 4,000 people around the world having higher levels of engagement commitment to our mission and our customers and we've seen that over the last year is very, very important part of that how we create value overall. And finally, their sustained value and our financial performance is obviously critical. And for us as a company, it's critical for our customers who need support through their lifetime that we are financially strong and stable. And we also want to deliver the results that we do and the benefits that come from Cochlear and environmentally sustainable way. So, you can read more on that in our annual report or our sustainability report. A quite important move for us to be clear on how it is we create value as a company overall. So with that, let's move on to the results summary F 2021. We did deliver record CI units and sales revenue in the last year, which was a result of solid and pleasing recovery from the depths of Q4 in F 2020. So, you can see here the CI units are up 15%, up 7% on 2019 and we compared back to 2019 in this result, because it was the last COVID unaffected year. So, it gives a -- I think a good indication of just how the business is performing. We did set out in 2021 to set -- the really important thing that we did in 2021 was to set ourselves up for 2022 and beyond. And while financial performance was important in 2021, it was really about consolidating and strengthening our market position. We were able not only to keep all of our people -- actually increase employment through the years, we saw markets recovering. And in being able to do that and strengthening our presence out in the field, particularly about provide terrific support for our customers. And that has helped us not only grow the market and support our long-term growth, but also helped us with some share gains in some very important markets. Our underlying profit -- net profit of AUD237 million is up 54% on last year. Our net profit margin around 16% is well above F 2020 and still below that 80% long run target and obviously, we want to move back to that 18% over time as markets fully recover from COVID. There are number of one-offs in our statutory net profit as you can see our results. And very strong cash flow and Stu will talk to this later that strong cash flow has enabled us to move back to a dividend payout of 70% and that's obviously a sign of the confidence over the medium to long-term of that continuing confidence in the market growth opportunity and the opportunity that we have in front of us. And I'll finish up with our guidance that you can see here at the bottom of this slide. So, moving on to slide five and our Cochlear implant sales. We did really see improving momentum across countries in the last year, really what we saw, I think, when we look back, is that the countries where the COVID impact was short and reopened quickly, they have recovered the fastest and I really on a trajectory that we were on in 2019. And the U.S. is a good example of that. There was a very significant sharp lockdown in Q4 of 2020. As you saw in our half year results, U.S. -- and our updates review, the U.S. had recovered well. We've seen very strong growth in the U.S. through F 2021 and we expect that to continue into 2022. Similarly, in Japan and Korea that were less affected in that first hit in Q4, we've seen strong growth in those two markets as well, albeit Japan has been a bit softer more lately on the on the Delta variant. It’s a little bit different to what we've seen in Western Europe. In Western Europe, we saw that the impact of lockdowns or the waves and restriction were extended, the response in the health community and by government was more protracted and there we've seen it take a longer time for the markets to recover. And so as we said, across Western Europe, our overall Cochlear implant units are still below -- just below where they were in F 2019. What we've seen through the year is a continuing recovery, albeit that recovery in some countries impacted by growing waves -- waves infection. But as we look forward to 2022 and we see rising rates of vaccination, we're anticipating certainly through Europe, we'll continuing opening up and a continuing recovery of Cochlear implant sales through Western Europe. So, that overall growth that we've seen is clearly coming from some share gains in key markets, definitely underlying growth in those markets that had the shorter shutdowns. And certainly in the first half, some impact of rescheduled surgeries from Q4, helping support the sales. In emerging markets, the story is similar in that the shorter the shutdown, the faster response. But what we're seeing in emerging markets, which we do normally see too, is a much broader variation in across countries. So, China, for example, which had shut first, opened first as bounced back very strongly, and we've seen very good growth in China. Similarly, Eastern Europe and Middle East have performed well through the last year and are recovering. Whereas if you look at Brazil and India, which we read about in the press, the impact of COVID, there have been much more significant on society, on healthcare systems and we expecting there to see a longer and more protracted recovery in a longer time before we're back at the levels that we were in F 2019. But still with cost emerging markets overall, our sales are up 10% on 2020 and they are above where we were in F 2019 on average. Obviously underlying that, there's significant variations across the companies -- the countries. In services, so nice to see a record there in services up 5% in cost of currency on 2019 that will up on 2020. As we've said through the year that the access to clinics has restricted upgrades in a number of markets, so certainly pleasing to see that growth and the launch of Kanso 2 and Nucleus 7 for N 22 being part of helping drive upgrades. We remain confident here of the medium term outlook, the installed base continues to grow and we know that that's the biggest driver of upgrades and clearly with some restrictions through the second half of 2020 and through parts of 2021 in driving -- in access to upgrades and therefore the services revenue, we do anticipate there to be a medium term growth continuing. The expansion of the Cochlear family membership to 270,000 up 19% is just -- is very important in helping us maintain and improve engagement with customers, to connect better to hopefully lift upgrades over time, but very importantly, to get direct feedback on the performance of our products on how they fit in with people's lifestyles, enabling us to collect clinical data and also be able to refine our products and services over time. Onto the Acoustics outlook on slide seven, Acoustics performance. Acoustics is still in recovery, you can see here that their sales are not yet back at the levels that we saw in 2017, 2018, and 2019 and that's clearly improving in the second half with the launch of Baha 6 Max, the launch of Osia now is well-established in the U.S. and we'll continue to see excellent feedback from surgeons and from customers on the simplicity and the performance with Osia. We're very keen, very confident of the medium term outlook here. Also said with Osia that it will take us some time to get regulatory approvals, country-by-country to get reimbursement because it does in some countries -- in many countries, actually is going to be in a new category. And that will take us some time to expand around the world. We did get CE Mark during the last half and have started rollout across some European countries and early days there, but also getting good feedback. So, the outlook for growth in Acoustics is very positive. Some good signs for recovering from a dip in 2020, I'm very confident that we'll go back past those peaks to 2017, 2018, 2019 when we look at the strength of our product portfolio, and the opportunity that Osia provides us to really expand access as we get the regulatory approvals and the reimbursement. Okay, so that's a look at our three revenue segments. Now, I want to move on just to looking at how what we achieved from a strategy perspective and looking at our strategic priorities over the last year. So, we did -- we have in the last 18 months received FDA approval for eight products. And you can see those here the Osia system, Baha 6 Max, Nucleus, Kanso 2, Custom Sound Pro fitting software, SmartNav, Remote Check, Nucleus 7 for N 22 and the Nucleus Profile Plus Slim 24 Electrode. So, importantly, what you can see here is that we continue to advance every element of our system. That's an advantage of our scale, and important for our market leadership is that we address the whole therapy and improvements in the whole therapy. And that means improving each of the elements that go into delivering the therapy. That's important part of our competitive advantage and certainly our scale in R&D enables us to deliver a broad portfolio. And obviously, we continue to invest in R&D and have a strong pipeline of future releases. We also know that an important part of our market leadership, number slide nine is delivering world-class customer experience. And that in part comes from the quality of our products and our technology whether that's Kanso or Nucleus 7. But it also comes through the service and support that our field teams around the world provide to both professional customers and to recipients. And we know that the easier we can make their lives, the more we can do to improve clinical efficiency or remove non-billable time from clinics. That's where our connecting care solutions can assist; the more we do to streamline overall care, improved care, and lower the cost of care and strengthen the opportunities for growth and our market position. We have launched CoPilot which is a rehabilitation app for adults just in the last few months. The uptake of volatility days, the uptake of that app has exceeded our internal forecasts; certainly the feedback has been very positive. And this is an effort really is aimed at engaging with our customers and helping them get the best performance they can from the hearing implant system and really helping them adapt to and understand the potential of it. So, a whole range of skills training, plus tips and tricks as well, but very good response in early days from that app. And Cochlear family I've mentioned, but also the -- I think rolling out of the SmartNav and Custom Sound fitting Pro, again that’s really aimed at helping our professional customers deliver better care over time and reduce the costs of care. Moving onto market growth and our activities there, some very good progress on access and awareness in the last year. So, our consumer facing activities here, which is a direct-to-consumer promotion as a global program now, we continue to grow leads and grow surgeries from our DTC campaigns right around the world. We continue to work hard on referrals from the hearing channel, knowing that referrals from the hearing channel are essential part of executing our strategy and our future growth. That is where for the adults and seniors segment, virtually all of our future customers are wearing high-powered hearing aids at the moment would get better performance if they got a Cochlear implant, but don't -- are not getting referred and there's not a clear referral path. So, our work in the hearing aid channel is really to educate and develop those referral pathways that’s where the Cochlear provider network or through cycle and we continue to learn and expand those programs again seeing increasing referrals from these programs. On the longer run, we want to want to make Cochlear implantation the standard-of-care for adults and seniors as it is already for children born with severe to profound hearing loss, we want to make it the standard-of-care for adults with severe to profound hearing loss. This is a longer run program and it aims not only to build out on the referral channel, but really build on the advocacy and the awareness. So, important milestones in the last year with the World Health Organization's World Report on Hearing calling on governments to prioritize hearing health care, recognizing Cochlear implants as a very effective solution for people with severe to profound loss. The publication of the consensus statement on adult hearing loss and Cochlear implants in August of last year was also a very important milestone in helping establish clear clinical guidelines and clinical referral paths. And for the first time, there is a global advocacy voice for consumers. And this is the Cochlear Implant International Community of Action and again, advocacy and advocacy by recipients to directly to governments and professionals are very important part of building out standard-of-care. All of that enables expanded market access and we saw in the last year, so again some examples where market access programs are at work and expansions in market access with indication expansion in Belgium, leading to significant growth in the number of implants there despite impacts of COVID. And in France expanded reimbursement for Acoustic implants, in particular, upgrades for Acoustic implants has led to strong growth in our Acoustic business in France as well. Market access work, I've moved on to slide 11, now is grounded in strong clinical evidence and particularly, studies of cost effectiveness. Two very important studies -- independent studies coming out in the last year in Sweden and in the Netherlands. The Netherland's study concluding that Cochlear implants was beneficial and cost-effective across all age groups. The Swedish study also showing significant cost effectiveness and actually showed cost effectiveness in line with hip and knee replacements and then posed the question as to where hearing loss is as prevalent as the need for knee and hip replacement, why isn't Cochlear implant as widely available or is widely used as a therapy in adults and seniors when it is so cost-effective and cost-effective is measured in cost improvement and quality of life. So, a very high benchmark. And as you know, we've also started with the University of Nottingham, entered into a contract to conduct a clinical random control trial of Cochlear implants against high powered hearing aids for people with severe to profound hearing loss, that's people with a 70 decibel hearing loss or worse. And that's built to build -- that trial will take a few years to run, but it really aims to build out the evidence showing the genuine effectiveness of Cochlear implants compared to hearing aids for those within indications and that's again, all part of this longer run work on standard-of-care and making Cochlear implants standard-of-care for adults and seniors with severe to profound loss. On to delivering consistent revenue and earnings growth and Stu has got to talk to the detail of this, but in summary, we continue to invest to grow through 2021 and we will continue to do that because of the significant growth opportunity that we have. And as always, we want to maximize our spending on growth while spending enough to make sure we retain our leadership position in the market. We continue to work on operational improvement and we head-started a multi-year program to upgrade our processes and systems across the business that will improve agility and our customer experience even further. And clearly we're in a strong financial position. So, with that, I'm going to hand over to Stu to talk through some of the details of the P&L and the balance sheet.
Stu Sayers: Thanks Dig. Morning everybody. You've heard a lot about sales revenue already, I won't add anything to that. On the P&L, we didn't jump down to our gross margin, you'll see where we're down two percentage points there, we want to be back at that 75% point long-term, about half of that drop was a function of the Australian dollar appreciating and that obviously hits our sales line more than it helps our purchasing power on the cost line. Looking through the operating expenses, the selling, marketing, and general, we saw some pretty substantial federal savings coming through that line, but we also importantly, re-injected, the short-term incentive program and we continue to invest heavily to drive growth and growth driving activities through that line. We aim to preserve R&D activity as much as possible through COVID. You saw that in 2020, we did again in 2021. The long-term target there is to have that sitting at about 12% of revenue of slightly above because the revenue was slightly lower due to COVID. On to admin expenses, the increases there, its three things, the biggest is the D&O insurance, we continue to see significant premium increases there. Again, that returned to STI coming through that line and also to the extent that the growth activities require IT investments, some of that IT investment showing up on that administration line growth as well. For OpEx in total, it's sitting at 50% of sales revenue, that's a nice increase on F 2020. Pleasingly, it's also slightly ahead of where we were in F 2019, that number was 51% in cost and currency in F 2019. Our net financing costs the AUD8.4 million there, AUD7 million of that AUD8.4 million is the accounting treatment on leases. The remaining finance costs are very low, not surprisingly, given the strength of the balance sheet, and they've got us to the AUD236.7 million underlying NPAT at 16%. As Dig mentioned, long-term target, here remains 18% and we expect that number to improve going into next year. We then need to add back the windfall gains from -- on tax from the patent litigation payment we made and we also had some non-cash innovation fund upwards revaluations that get us down to the step profit number. We jump to the next slide; we'll look at cash flow. And again, we started here with very strong, underlying even performance and then we still had to pay out the final AMF payment that AUD104.4 million and so very pleasing that despite having to pay that that money out, we were still able to generate AUD107.6 million more of cash through F 2021. We always aim to be very strongly cash accretive and F 2021 was no different. The other thing to call out here is probably the CapEx line dropping AUD57.9 million and that's a function as we as we flagged at the last update that the two major site investments we've been making, Denver is now complete, Chengdu is very, very nearly complete. And so the bulk of those site-based CapEx have rolled off and we're back to sort of a normal situation now. If we jump to the next slide, so net cash, again, it's pretty straightforward, very pleasing to be throwing off AUD107.6 million for the year. If we jump to capital employed, big increases in trade receivables and trade payables, entirely driven by the fact we're just selling a lot more products, so moving in the right -- moving in for the right reasons. The other thing to call out here is that big increase in the investments and other financial assets learn, the AUD126.9 million, that's AUD18 million of us injecting cash into some of these investments. And the reminder is then normal cash value increases driven off either funding rounds, implied valuations or in the case of Nyxoah, the NASDAQ listing. And the other big move was that net liability line and improvement there that was two things. One, we made that final AMF payment, so the provision came down so that liability dropped; it increased slightly with a deferred tax liability off one of those innovation fund investments. So, on to dividends, we paid AUD1.15 at the half, we're going to pay AUD1.40 per share for the full year dividend. That takes us to AUD2.55 for the whole year, and again, really pleased that we are back at the dividend payout target of 70% or above of underlying NPAT for the full year. It is unfranked, we're still rebuilding our franking credit balance following the loss from F 2020 and we expect the stopping at a partially dividend again in F 2023. And with that, I'll head back to Dig.
Dig Howitt: Thanks Stu. Let's -- look at outlook. So, we're looking to 2022, we do expect to see continued growth in those countries where we're clearly back in growth trajectory, and also continuing recovery through Western Europe and sort of the parts of Asia-Pacific that have not yet recovered. As I said earlier on emerging markets, we think that some of those are going to take longer than F 2022 to fully recover. That's the expectation moment is that through Western Europe and that those markets will recover back to above 2019 in 2022. U.S. continuing to rise strongly. We will as always continue to invest in our long run growth opportunities and that will be focused on market growth activities and strengthening our competitive position. So, continue invest in growth, continuing to invest in R&D. Now, OpEx will continue to increase as we push those growth projects forward, particularly, as those markets are recovering. CapEx of range of AUD70 million to AUD90 million now that includes AUD20 million -- approximately AUD20 million that were related to major process and transformation IT systems upgrade. And that we have included in CapEx for the moment, obviously, with this change in the accounting standards under the treatment of cloud computing, and expenses associated with cloud computing, we're working through how much of that AUD20 million will we need to expense and how much will be capitalized. And we'll have an update as we go through the year on that. But our outlook at the moment assumes, is in line with the previous accounting interpretation that that would be capitalized. So, again, if we get to -- if we looked at the guidance, then we're guiding to between AUD265 million to AUD285 million, which is 12% to 20% increase on the F 2021 underlying profit. We expect our net profit margin to move back towards 18%, but we won't get there this year. And in part that's due to us continue to invest, while we are still having countries that are not back at full speed. And it makes sense for us to continue to invest rather than to moderate our spending, while we wait for those companies -- countries to recover, because it was very clear from everything we've seen from the ones that have recovered that there will be a continuing recovery. And in fact, what we're seeing out of COVID, as you'd increase focus on the importance of treating hearing loss, particularly in adults and seniors. Whether that's -- and that’s -- we're seeing that because of people spending more time in isolation, and the importance of communication when they are isolated and mask wearing. And what we've seen with mask wearing and we've talked about this before is that many people have hearing -- their hearing is worse than they thought it was. And they lip read to supplement their poor hearing and with mask wearing, they can't lip read and they're now realizing that they need to take more action. And we've seen many examples of that around the world over the last year people progressing towards implants, having had hearing loss for a long time and realizing that because of mask wearing that their hearing was much worse than they thought. So, on our guidance we do -- we are factoring into this near-term impact from COVID, I mean clearly we're seeing some of that in Australia at the moment that will be a very small part of our business, but we are seeing that impact. But there are also other countries on the back of the Delta variant where we've seen some slow down in a few places. Now, we factor that in to outlook. Clearly, if that gets materially worse from here or there are significant countries or portions of countries that get -- major countries that get shut down, then that would pose a risk to our guidance. So, we have factored in a level of disruption that we're seeing at the moment should that deteriorate, that would have an impact on our guidance. We've also talked about this cloud computing. So, we have not factored in what would need to be expensed as we work through that, we will provide an update. Clearly, there's no change to cash flow for whether this expense is categorized as a capital item or an OpEx item. We are committed to maintain our dividend policy to 70% payout ratio and the underlying assumption for currency here is the $0.74, seemed pretty reasonable earlier in the wake, obviously, the dollar has fallen towards the end of this week and we will we will see where it goes from here. Okay, so with that outlook, I think we now will move to Q&A.
Operator: Thank you. [Operator Instructions] Your first question comes from Steve Wheen of Jarden. Please go ahead.
Steve Wheen: Good morning, Dig and Stu. Thanks for taking my question. I just wanted to talk to the guidance, in particular, the impact in FY 2022 of commissioning the China plant and perhaps what that might look like in subsequent years? And then also within that guidance, the slowdown that you've been anticipating in some countries because of COVID, could you just sort of talk to which countries they are that are showing that sort of slowdown at this point? Thanks.
Dig Howitt: Okay. I'll talk to the second part of that and Stu can talk to the gross margin impact. Steve, good to hear from you. So, what we're seeing at the moment, clearly a bit of an impact in the East Coast of Australia on -- at the moment. We've certainly seen a little bit in Japan as well and a little bit around the Olympics. But now Japan has a state of emergency in several prefectures, which is limited access. A little bit of a slowdown in the Southeast of the U.S., as well. Florida and Texas, going on with the back of Delta. So, that's sort of -- they are the main area at the moment. India and Southeast Asia are slow and stayed slow. Now, that's not a -- it is delta, but that's not necessarily changing the trend, those markets have been down and staying down. So, that's what we're seeing at the moment, and obviously, with Delta, it is quite volatile. Things are moving quite quickly. Stu, you want to talk to the--
Steve Wheen: Sorry, Dig. Just on the on that slowdown, the U.S. just because the hospitalization rates have really ticked up, no sign of that having an effect in Cochlear implants?
Dig Howitt: We've -- in Southeast of the U.S., in Florida, we've seen a little bit of a slowdown. Most of the rest of U.S. is fine.
Steve Wheen: Yes.
Dig Howitt: Stu, do you want to talk to the Chengdu and gross margin?
Stu Sayers: Yes. So, Chengdu coming online, as obviously there's a significant learning curve, sort of ramp up period we go through. We're at the beginning of that. We'll start to see the impact of that in 2022 and then there is -- it should be peaking towards the mid to end of 2023. The scale of that -- at its height, that'll be about a one percentage point hit to gross margin. But despite that, we think we'll still be in an improved gross margin situation in 2022 relative to 2021.
Steve Wheen: Yes. Okay, great. And just on FX, you obviously, were winding down some of your hedging contracts, when COVID was hitting, impacting your sale. So, can you just sort of talk to what you've done since then? And then in the context of what the Aussie dollar versus the U.S. has done, is that largely -- that $0.74, to where it is today at $0.71.5, is that largely hedged? Or is there still some benefits that could come from that if they were to remain at that $0.71 type level?
Stu Sayers: Yes, sure. So, look we were under hedge book write-down at the beginning of COVID, because we just didn't have enough certainty around the cash flow outlook. We've rebuilt that book and solidly back within our policy ranges for between zero to six months out to sort of 24 months and beyond. Obviously, much more hedged, closer, less hedged over the medium to long-term. Relative -- and so given the recent drop -- that drop from sort of $0.74, down to $0.71, there's still a bit of benefit to flow through there. But we are -- we aim to be at least 80% hedged zero to six months and that's where we are right now.
Steve Wheen: Right. And last one from me. Just whether you're seeing any pressures in the supply chain, given the step-up in your volumes, maybe even related to semiconductors, just if you could cover off on that as well. That'd be great.
Dig Howitt: So, -- Steve, on the supply chain, we've ran our inventory at pretty high levels, we try to take a conservative approach there. So, we're certainly pretty well covered for semiconductors. That said, there are a lot of pre-launch supply chain, and there's a lot of electronic components. So, we're doing -- have done an enormous amount of work to understand where we are and we're pretty confident where we are and our ability to continue supply. There's always some risk on that as well. And now COVID presents some risk on the supply chain as well. But from what we can see, at the moment, we're confident of the ability to supply and to continue be able to grow our output, at least in line with our sales.
Steve Wheen: Right. Thanks, Dig, thanks Stu.
Dig Howitt: Thanks Steve.
Operator: Thank you. Your next question comes from David Lowe of JPMorgan. Please go ahead.
David Lowe: Thanks very much. Dig, could you start with the gross profit model -- sorry the net profit margin that you're targeting? We did notice that it fell away in the second half there just wondering sort of how you think about that in the short-term. I heard the commentary that it will -- the aim is to get back to 18% in the current financial year. And then if I could throw [ph] into the mix and your accounting change, and whether that's likely to change the long-term thinking on that target please?
Dig Howitt: Yes, David, no problem. So, first one, is that, that profit margin was lower in the second half and we said that the first half, but we really got a bit of a sort of a windfall in that first half of 2021 of the sales rebounding quickly, and we had pulled discretionary expenses out of the business as much as we could. And so we certainly said that at the half, we've had a good lift and we expect us to lift our spending in the second half, which we did. So, in the second half, our net profit margin was 15%, it was 178% in the first half. So, that's what gave us just 16% for the year, we expect we are going to lift it back up towards 18%. But as I said earlier, it's just -- while we've got countries where we can still see the potential, but they're not yet running at the sort of pre-COVID levels, it makes sense for us to continue to invest in anticipation, those sales coming back and pulling our spending back to just to get to an 18% margin. So, that's why it will take us a little while to grow back there. With respect to the cloud computing impact, look, that will just depend on the on the magnitude of this AUD20 million and we've said AUD100 million to AUD120 million over the next four or five years of what of that we have to expense, I think it's -- we're seeing is likely a bigger part of that. And a smaller part of that will need to be expensed; we'll need them to look at what that means for our margin outlook. And as I said, clearly, it's no impact on cash flow. But our priorities is and will remain that we continue to invest in R&D and invest in driving growth, and that should be largely impervious to unaffected by accounting changes.
David Lowe: Okay. No, that's helpful. Thanks. So, just with the guidance range that's out there, I mean, when you think about giving that range, at the bottom end, are we talking different profit margin being likely or is that not really -- I mean, that's a sort of a reasonably fixed part of it when you think about those numbers?
Dig Howitt: That depends a bit on what happens when we sort of, did give a range there, for reasons that the [indiscernible] could move around a bit, cost could move around a bit. And that what we guide on a net profit range, rather than sort of each of lines through the P&L. So, I think if I could add anything to that, if we're -- our bias as we see recoveries to keep investing. So, we will get that margin back up, but we'll make sure we invest. We don't starve investment as we do that.
David Lowe: Yes. No look, I'm sure pretty much every shareholder would prefer to add anyway. Look, last question for me. I did see the comment in the press release about market share gains. Can I get you to talk a little bit to what you're seeing there? I mean, obviously, we're quite sort of focused on the fact that some of the Advanced Bionics had their recall. It's more than a year ago now, just whether any sort of competitive dynamics, market share movements that you think you were calling out, please?
Dig Howitt: Yes. Look, I mean, it is a competitive market and we have -- as we say, we've got good strong competitors. And they will continue to launch new products as we do. Our customers want to see competition in the market as well. So they're always keen for competitors to succeed along with us. So I don't think the dynamics have changed, all that much. I mean look, we've definitely gained share across some key markets. We can see that look we definitely have in the US I don't want to get too specific on which markets we have. But there's certainly important markets where we picked up share over the last year. And obviously, we got to hold that and there's still some markets we are out there where we want to try and grow our share as well. So I don't want to go too much into the details of what our competitors are doing up and say they're good competitors and they'll keep launching products, but we're very confident that our product pipeline and the quality of our sales and service and field support for customers.
David Lowe: Okay, great. Thank you very much.
Dig Howitt: Thanks David.
Operator: Thank you. Your next question comes from Andrew Goodsall of MST Marquee. Please go ahead.
Andrew Goodsall: Thanks very much for taking my question. I think you mentioned you're working on a new process or upgrade. And I just want to understand, if COVID a factoring the typical five year sort of process or refresh cycle. And if that, what's your sort of thinking around where the next sort of upgrade cycle would start?
Dig Howitt: Okay. Yes, Andrew, I didn't say, we were working on a process, right. I said, it was the product--
Andrew Goodsall: It was a multiyear upgrade, I thought. I write-down but--
Dig Howitt: Okay. But yes, but you're right, we are always working on process separate work across the whole portfolio. So we are working on processor -- process and new implants that's and new software as we should. Look, I won't go into the details of as always into timing of any product launches. Look certainly, COVID makes it more difficult to operate that's certainly true. We showed that we can work through that with the launch of Kanso 2 in September last year and with countries in all sorts of states of locked down. So we can work through, but it does complicate running of clinical trials and things like that, certainly -- depending on the countries that you're in. So it's definitely a challenging time. But we're always going to have processes in development and at the moment with Kanso 2 still only being out there less than a year, and being very well received, at sort of doesn't make sense for us to try to rush anything else out to take away from what's a really strong product and performing very, very well.
Andrew Goodsall: No problem. And then just asking around the mix that you might be seeing at the moment is there any sort of preference to continue to prioritize pediatrics through the impound process and perhaps defer adults? And if that's the case, I know COVID is almost becoming normal now. Are you seeing a little bit of backlog in adults? Or are you seeing them sort of come through in the catch-up when reopens takes place?
Dig Howitt: So as a general rule, we're seeing the age distribution of surgery is the same now as it was pre-COVID and some seniors coming through at the same rate. That said, there are isolated areas, and we've got that in New South Wales right now. So in New South Wales elective surgeries has stopped in public and private hospitals, children still get go through. But at is not at the moment. So -- and we see that happen from time-to-time in places around the world, children go through adults, get held back and then there's a backlog to come through. So it does happen, but when we look at it in aggregate. The age mix looks very much as it did pre-COVID. Yes, and that it is -- I think that's important because it gives us real confidence that people are continuing to get there hearing loss treated. And as I said earlier, they're actually -- what we're seeing, there's a higher propensity in a number of places -- the people getting the hang loss traded.
Andrew Goodsall: That's good. And just a final one for me. Just in the Acoustics growth rates. Just trying to understand, how meaningful loss year is at this stage? And I guess, any other comments you've got just on the potential that is inside that segment?
Dig Howitt: Yes. So, Osia is certainly very significant in the US, where it's been out in the market. sort of around 70% of our Baha surgeons or switched over to Osia, as I said, a round number. Now that switch is good. What we're really after here is actually growth in getting new surgeons and broader indications and we think we can do that over time. So, I think that, shows the potential of the products. And as we roll out in other markets and get the reimbursement in place and get the counseling pipelines there do you expect to see in the bigger Baha markets a conversion from traditional Baha to Osia. But overall goal here is actually growing the entire market not just substituting one of our products with another one.
Andrew Goodsall: And is the price point meaningful relative to Baha price point in terms of just its contribution or making a more significant contribution in that mix?
Dig Howitt: It's important that we get a price increase over Baha. It's a better technology, it's more complicated technology, but that's a complication actually gives a much better outcome. So there's clearly additional value there and we want to get that value. And that's why we're taking some time to roll this out that we're choosing not to use Baha reimbursement codes unless the Baha pricing is very, very favorable, and to get new codes that give a price that reflects the value in the product.
Andrew Goodsall: Thank you very much. Terrific. Thank you.
Dig Howitt: Thanks, Andrew.
Operator: Thank you. Your next question comes from Sean Laaman of Morgan Stanley. Please go ahead.
Sean Laaman: Well. Thank you. Good morning, Dig and good morning Stu. Hope you are both well. First question, Dig, is there any commentary you can provide us on ASPs, whether there's been three implants, whether there's been any or any upcoming changes in country to ASPs? Or give us a sense of what any mix benefit or penalty could be?
Dig Howitt: Yes, Sean. And yes, we are going well. Thank you. We're not seeing significant changes in ASP. It continues to hold pretty steady. We've said over time. We said in the past that in Western Europe we would expect to see sort of some small ASP declines over time. I think from an outlook perspective that's still what we believe, but over the last year, no really significant moves in ASP.
Sean Laaman: Thanks, Dig. And second question, just looking at the growth on fiscal 2019 in services versus Cochlear implants, I think it was 5% and 10%, respectively. How would you think about that going forward? Is it just a more subdued recovery in services, hence, the lower growth rate? Or is sort of getting past the pandemic, we could expect a step-up in service growth to become more like Cochlear implant growth? Any commentary around that would be useful.
Dig Howitt: Yes. No, look, we expect -- I mean, if you look back at our history of services growth, that has been the fastest-growing part of the business up until COVID hit. And that's because that installed base grows year-on-year, and continues to grow. So that helps to support the growth there. So we would expect the services to continue to grow and to continue to grow at least the rate of the CI business perhaps not the rates that we saw from 2014 through 2019, but certainly, at least the rate that CI grow.
Sean Laaman: Thanks, Dig. And last question. Is there any updated commentary you can provide us on your progress with CPMs and cycle as a part of that?
Dig Howitt: Yes. So look, on cycle first, continue to see as we said in the past there that we're seeing a small, but growing number of referrals and that continues. So we are continue to see a lift in the referrals recycle. One of the investments that we're making is to put some more work into educating through cycle to try to lift those referrals further. So that's experiment that we're going to run through this year. On the CPM that program certainly matured in the US and with COVID we continue to see a good level of referrals. We continue to learn importantly about clinics that have a higher propensity to refer and those that don't. And so we can help target our efforts in which hearing aid clinics to run -- to try to work with. And we've over the last 18 months expanded that program into other countries. So certainly into Australia, we're working through a number of Western European countries now to work on those hearing aid referrals. And we can take what we've learned in the US and other places. We've got to tailor for local conditions. But we're doing that as we go and we do see this as a very important program to run build out the referrals and the growth of adults and seniors over time.
Sean Laaman: Great. Thanks. That's all the questions I have. Appreciate it.
Dig Howitt: No worries. Thanks, Sean.
Operator: Thank you. Your next question comes from Saul Hadassin of Barrenjoey. Please go ahead.
Saul Hadassin: Thanks. Good morning, Dig, good morning, Stu. If I could just start with a question on the commentary around NPAT margin improvement into FY 2022, I mean, you flagged in the commentary, China manufacturing and commissioning costs potentially impacting gross margin negatively over the next few years. And I'm assuming, you're targeting R&D, as a percentage of sales still around that 12% mark. So can you just talk to is it SG&A leverage that you're expecting to improve the NPAT margin over the next year or two?
Dig Howitt: Stu might just want to comment on this one. So we do expect -- and seems to have expect the gross margin to improve through 2022. So that that's definitely part of lifting the margin back up. We do want to hold our SG&A at around about that 50% that we've got there near sales, because that's where a lot of our longer-run growth investments go. So it's really not trying to push that gross margin back up and get efficiencies where we can across the business. Stu, do you want add any more to add on?
Stu Sayers: Yes, absolutely. Yes, Chengdu is going to negatively impact the gross margin percentage. But despite that, we still think we're going to see that improve in 2022, and that's a function of a bunch of factors, partly learning curve as we get up the yield curve on new products. There's a bit of FX in there. There is some -- we took some write-offs of obsolete stock in 2021. So a range of factors, but we think that we're confident we can see that gross margin improved despite any impact in Chengdu in 2022.
Saul Hadassin: Right. Second question was just looking at the implant ASPs in second half 2021 versus first half, pretty material decline in via ASP. Was that just recovery in Kanso in developing markets that saw that decrease half-on-half?
Dig Howitt: Yes. Yes, significant growth in the emerging markets in H2 over H1 in 2021.
Saul Hadassin: Thank you. And then just last question for either Dig or Stu. Just you've got over AUD 0.5 billion of net cash sitting on balance sheet. What would you decide that COVID is no longer a existential threat to the business in terms of liquidity and the Board or yourself decide that there's some flexibility in returning that capital in some form?
Dig Howitt: So, yes, good question. We're very comfortable sitting on a lot of cash right now. We're confident on the outlook, but there's no doubt there's still a bit of uncertainty out there. So we're in no rush to do anything with that cash. Hopefully, as vaccination rates increase and we see increasing stability in the recovery around the world, then we'll be in a position to do something with it. But right now, we're comfortable with just holding it there and being very focused on running the business well and investing in the long run growth opportunity.
Saul Hadassin: Okay. Thanks, guys. That's all I had.
Dig Howitt: Thanks Saul.
Operator: Thank you. Your next question comes from David Stanton of Jefferies. Please go ahead.
David Stanton: Good morning team and thanks for taking my questions. Look, I know it's tough, but I’d be interested in your views about overall market volume growth in Cochlear implants at present given that you've said where you think we're through the backlog in the average [indiscernible], I'm interested in understanding what you think overall market volume growth might be?
Dig Howitt: Yes, David, it’s a very tough question right now to put a number on. I think we're definitely seeing growth in the US. For example, here in Japan, we're seeing market growth, Australia definitely growth; Europe is steady, but still below where we were in 2019. Now there's a couple of countries in there, it's obviously agglomeration of several countries. There are some of those that are growing. But there are countries still with a long way to get back, I mean, the UK is one where there's still a significant backlog of surgeries for every procedure in the UK, and the UK is clearly opening up again now. That just to get through that backlog -- got to get through the backlog way before there's opportunity for growth. So things like that complicated. We have seen growth in Benelux on criteria expansion, which is shows the value of market access, but it's just like very hard now to give up a single number and say, here's what the growth rate is that I'm trying to say is that in markets where we have recovered, we are clearly seeing growth and underlying growth, not just recovery in those markets that are still recovering. It’s hard, very hard to know that the patients you see, they ones that have just been delayed, or they are genuinely new in part of growth. And we won't know that until they -- those markets really get back sort of through to the levels they were in 2019 and beyond, then would be in a better position to see.
David Stanton : Understood. That said though, how do you maintain those market share gains that you obviously picked up?
Dig Howitt: Look, I think we -- the competitors will find hard to take share back from us. And that's just the way it always is in this business, which is competitive. We've got to make sure that we do the few things really well, and one of those to make sure that we will continue to release really good product. And the other is to make sure that our presence in that field, the service levels we offer exceed those of our competitors. And we've got the scale, and I think experience to do that. So importantly, we maintain that. And if we roll out Connected Care to I think the solutions, which will take some time to roll out. We're clearly leading in that front. Those solutions do help lower the cost of care in clinics. They help improve clinic efficiency. So part of what we're doing here is making it easier for clinics to work with us than with our competitors. I mean, that as I said, it will take some time to roll out those connected solutions.
David Stanton : And you used to talk to 55% of patients of your installed base getting an upgrade. I'd be very interested to understand how that's going given the rollout of the RONDO. And sorry, excuse me the Kanso 2…
Dig Howitt: Kanso.
David Stanton : Yes, Kanso. How that's going forward? And where should that top out before we see potentially a new sound processor?
Dig Howitt: So it's again, a bit harder to tell just with COVID, but Stu, you want to talk a bit to just how we’re tracking through this. But I think, yes, certainly what we're seeing in Kanso a very strong uptake and a very good reception and we continue to see Nucleus 7 being taken up as well. So certainly more to run yet, but Stu you want to talk a bit more about that.
Stu Sayers: Yes. Absolutely. I think the fundamentals haven't changed that the people who are the sort of the addressable audience are those who got implanted or upgraded five or six years ago. And we have a very good handle on that population. And that Cochlear family growth means that we've got even better ability to reach out to that population as well. And that's continues to grow over time. We did see, as Dig mentioned, a some reluctance from patients to go into clinic. And oftentimes, it's that clinic visit the convey the prompt or a nudge to get them to contemplate upgrading. And also some of the clinics capacity was just shackled, diverted to focus more on new customers. So I think that's a temporary thing. We absolutely see that expect the sort of normal transmissions to resume there. And we haven't seen anything to make us think that ceiling would be any less than what it has been, if anything, hopefully slightly higher. But -- and again, we've seen really prolonged punch from N7, and that's been and then amplified by the Kanso 2 launch I think very, very strong. Yes. Correct. That's a long-term target. And we think we'll be back there next year.
David Stanton : Thank you.
Operator: Thank you. Your next question comes from John Deakin Bell of Citi. Please go ahead.
John Deakin Bell: Hi. Good morning. Thank you. And just a quick question on the gross margin. Stu you mentioned half of that impact was FX and is that there's some obsolete stock, but your revenue went up nearly $150 million and the gross margin went down, which is unusual. Is there something else that's going on that's impacting?
Stu Sayers: Look, as I said, FX is a big driver then as a host of other small factors, some of which were temporal, some of which is not. There are a couple of examples, as -- like I mentioned, Kanso 2, when we launch new products in particularly sound processors, we need to put a lot of demo kits out into the channel, and also a lot of working product as part of service kits. That's true for Kanso 2, that's true for OSIA as well. So there was a sort of a big blip of costs that rolled through in 2021. We also have that learning curve effects when we're manufacturing new products. We obviously have exceptionally high quality standards that we don't drop. But there is a yield curve would go up with new products, which typically takes between six months to two years depending on how complex the product is. So we had a bit of that flowing through in 2021 as well. And obviously, we took some write-downs on some obsolete stock as well. So I guess all of those contributed a bit. And some of that would expect to roll off in 2022, and that's why we're confident that even with some headwind from Chengdu, we can still drive that number up in 2022.
John Deakin Bell: Thank you. And does the mix between developed market and emerging market sales impact that? And can you just remind us what the rough split is between, like in CI units between those two segments?
Dig Howitt: So that the revenue splits about 80-20. We don't put out the CI units between developed and emerging. So certainly that mix stays pretty constant. So you can see a bit of an impact here and there. But over time, that mix is stayed pretty much the same size. Certainly, if we sell more than emerging market goes up, then that gross margin would come down a bit, because that mix stays pretty consistent with obviously moving too much for that.
John Deakin Bell: Understand. Thanks Dig. And just maybe on some longer-term questions, and then just following on from David’s question about the market growth that really longer-term, I mean, your LTI is I think at the midpoint 10% growth. And you’re looking at net profit margin that implies 10% revenue growth. Is that still the expectation that the long-term market can grow? And then maybe just within that question, I'm interested in your thoughts around this OTC legislation in the US and whether that ultimately will benefit your business by expanding the pool of patients who actually focus on that hearing?
Dig Howitt: Yes. Okay. So on the first one, yes, look those hurdles for our EPS growth for the LTI, which is between 13.75% [ph] to actually at 12.5% EPS growth were reset a couple of years ago. And that was obviously done in a line with sort of the prospects for the ability to grow the business. And we've been clear, we want to hold debt margin constant when we get back to 18%. So yes, you can imply in that what range we think our revenue growth will be over time. On OTC, yes, look, we do think it's a positive -- as it rolls out, if there's any more consumer electronics companies started to come out with hearing aids for mild hearing loss, I think the more that can be done to de-stigmatize hearing loss to make it not only acceptable, but actually common to be treated, the more people get used to actually good treatment of hearing loss, we think all of that sort of people will actually pay more attention to their hearing will recognize hopefully, when it deteriorates, and it will take more action to get the best treatments. So the goal of this anything that funnels more people in towards hearing aids in the first instance, I think will funnel more people towards Cochlear implants over time. So certainly we're supporters of that OTC legislation coming into effect and seeing more people get proper hearing treatment.
John Deakin Bell: Great. Thanks very much, Dig.
Dig Howitt: No problem. Yes.
Operator: Thank you. Your next question comes from David Bailey of Macquarie. Please go ahead.
David Bailey: Yes. Thanks very much. Good morning, everyone. I just follow-on for John's line of thinking there around longer-term outlooks, that head-to-head trial versus hearing aids, just a bit more commentary there about number of patients, how long you think that it might take to complete and then thinking about when that might start to fade into reimbursement guidelines, and which countries might be early adopters of that information to fit within the reimbursement criteria?
Dig Howitt: Yes. Look, David good questions. So it's early days in that trial and sort of about the work that's being done now is to scope out and confirm the size of the study. We got a pretty good idea on what that is, but I don't want to go public on it until that's just confirmed. The study will take a few years to run. So we'd be hoping that sort of around 2024 which reported now that's obviously a bit COVID dependence had run in clinical studies can be impacted now, but we think that's quite achievable. So from then I think getting an independent paper that assuming it does demonstrate significant advantage of Cochlear implants over hearing aids, we think it will, because that's what all our data to-date shows that we would start to use on across developed markets around the globe on to advocate for more access. That's important part of the referral network as well, that education, the clinical education of hearing acousticians, around what is the best therapy is important that's how medical therapies evolve as well. That the latest evidence and science does change, can change treatment, change treatment guidelines, and it can take some time to do that. But you've got to have that really high quality evidence to be in a position to be able to change to advocate and effectively lobby for changes in education that get the changes in referral practices.
David Bailey: Yes. Yes. Okay. So do you think, well, supposed hard to tell but do you think that will lead to an acceleration of uptake? So high growth from FY 2025 maybe if we're talking about a longer-term growth return, maybe that's up because it starts to ramp up on the back of this evidence?
Dig Howitt: Look, I mean, certainly why we're doing that is to -- is because we've got this huge opportunity, huge clinical opportunity that's not getting access, and we've got to do the work to actually get that opportunity turned into genuine demand. And we do that in the hope that it can certainly drive our growth rate. I think its hard to project sort of five years out on, will that growth rate accelerate or not? The potential is there for it to happen. But there's -- as always many hurdles in driving growth.
David Bailey: Yes. Yes. Okay. And just one quick near-term ones in relation to outlook. Just interested in the phasing or your expectations of phasing for unit sales over the over fiscal 2022. I think we're sort of bit flattish in first half and then increasing in the second half, your thoughts or expectations there? And then to some insulation -- in relation to that NPAT margin commentary, should we be expecting something closer to FY 2021? Or do we think we should be getting closer to the long-term target for the fiscal year 2022?
Dig Howitt: Okay. So look on the phasing, I mean, given that we hope to see and are seeing markets continue to recover. So the ones that haven't recovered yet, that happened on trajectory expected to be growth half on half, second half over first half. And look on the margin, look we will definitely be higher than 2021 and we want to lifted towards that 18%, but we won't get there in 2022.
David Bailey: Is the midpoint reasonable?
Dig Howitt: That's probably a good replace as any, I think.
David Bailey: Okay. Thanks very much.
Operator: Thank you. The next question comes from Chris Cooper of Goldman Sachs. Please go ahead.
Chris Cooper: Good morning. Thanks very much. So just on the volume growth you're currently seeing, I appreciate this isn't a perfect science at all. But just after really your best guess on how many of those are going to be new starts versus deferred procedures across the developed markets. I know in your comments towards the start, you mentioned reschedules were much greater proportion in first half than they were second. And I also noted, you expect the US market to develop well in 2022. So just piecing it all together, I just wanted to confirm that this means the level of new starts is above pre-COVID levels, despite the uncertainties you're currently seeing?
Dig Howitt: Yes, Chris, good question. So again, it depends on the country. That's absolutely true in the markets where we're above at 2019, Germany, Japan, Korea, the new states, they're clearly above. Across Western Europe, we're down. I suppose by definition, the number of surgeries because it's below F 2019 there are four new people getting through into surgeries. However, there are backlogs there to work through in some of these countries. So I'm not quite sure if that sort of answers your question. What we are seeing in our DTC work is good engagement from new potential, new candidates coming through. And in good numbers. What we see when there's a impact of COVID is that the -- protected impact of COVID in a country is it can take some time for them to get through the referral path sorry through the valuation path than into surgery.
Chris Cooper: Got it. Thanks. And so just specifically on the U.S., I mean, it doesn't sound as though there's any reliance here on any sort of material backlog in procedures to drive that sort of supportive commentary in 2022. This is purely new inquiries, new starts coming through the channel at this point?
Dig Howitt: Yes, in the U.S. Yes, definitely.
Chris Cooper: Yes. Got it. Okay. Thank you. And just on guidance, if you don't mind. So look you mentioned obviously, some impacts from COVID is factored, but also nothing that will significantly impact sales. So I just wanted to clarify where exactly you draw the line. And it sounds like U.S. is going okay, at the moment despite delta. So guess what you're saying here is you've kind of assumed status quo. And any deterioration in the other state outside of Florida and Texas, perhaps would be downside to the current guidance. Is that what you're expecting in how you put that the numbers?
Dig Howitt: Yes. So that's a reasonable way to look at it. We can see some things happening now in a few places I mentioned earlier. We've made an allowance for those in the outlook, if that deteriorated significantly or those areas expanded significantly, that would reflect guidance challenging.
Chris Cooper: Got it. Thank you. Just final one for me. Just on gross margin, sorry to come back to it. But look Stu, I noted your comment earlier, you are hopefully getting back to 75% long-term. I'm just curious. I mean, why is it that we can't get back to 75% much quicker. I know there's a dilution from the Chinese manufacturing plants. That was a big effects impact in 2021, which at this stage looks like it might normalize or go the other way. Why don't we get back to 75% in 2022, if not 2022 then 2023? It seems to me that there might be something else going on as well?
Stu Sayers: Look nothing I would want to draw a flag at this stage. Like I said, Chengdu, we think it's going to have a better percent headwind. But despite that, we still think it's going to be better in 2022 than 2021. So certainly nothing else going on that's causing us concern there. I guess the other thing, we're still got -- we had -- we still had some COVID related disruption in 2021 as well. We're very hopeful to not have any of that. But again, conscious that that may also be a factor in 2022 as well.
Chris Cooper: Do we get back to 75% in 20 through this year?
Stu Sayers: Look that's a fair way away. We'd certainly aim to be moving towards that target, wouldn't want to sort of promise that now. But that's certainly the intent is to try and move in that direction and apparently swing on how quickly we can get Chengdu ramped up as well.
Chris Cooper: Got it. Thanks for the help guys.
Operator: Thank you. Your next question comes from Lyanne Harrison of Bank of America. Please go ahead.
Lyanne Harrison: Good morning, Dig. Good morning, Stu. Just to follow-up on that question about volume growth. If I think about it another way. If I look at or think about the clinic capacity, what are you seeing there is clinic capacity in the U.S. and other key markets back to pre-COVID levels? Or is this still some way to go that could drive some of that new start momentum?
Dig Howitt: Thanks Lyanne. So, certainly, the US clinic capacity is right back where it was. In other markets, again, it is country specific. And as an obvious example in Australia clinic capacity right now is below where it should be. So certainly, that clinic capacity does get impacted by COVID. But I think the important thing here is these impacts of transit. They happen because of COVID outbreaks and local restrictions. There's not an ongoing concern on overall clinic capacity.
Lyanne Harrison: Okay. And could you give us a sense of Western Europe then. I guess, given that you mentioned, there was some delay in terms of catch up there with clinic capacity for Western Europe?
Dig Howitt: Look if -- so what we're seeing in Western Europe is growing optimism, just broadly as you're not just on CI, but more broadly that sort of coming back from summer holidays, vaccination rates up, people are looking forward to restarting the more open lifestyle that they had pre-COVID not back to pre-COVID but getting there. And I think we're starting to see the same thing from a clinic capacity perspective across Western Europe varying by country, but it's also varying within country talking to one of the managers in one of the European countries yesterday, who said is in their country, some of the clinics are back at full capacity, very busy, others are saying to be quiet or a bit tight. So, we are actually seeing some localized variation there too. But general strong sense of optimism across Europe on not just the unconquered place of opening up with vaccine rate rising and more freedom and sort of more free flow of people -- free flow of patients [ph].
Lyanne Harrison: Okay. And on Remote Check, how's that rollout progressing? And with clinic capacity increasing, are you seeing or is the market seeing some of the customers and patients prefer to come back into the clinic rather than conduct with checks remotely?
Dig Howitt: Yes. So Remote Check certainly in place with health progression. As we said, it takes some time to roll Remote Check out clinic by clinic because we've got to convince each clinic or hospital that we've complied with all of the cybersecurity and privacy arrangements that go along with transmitting health data from a patient back through to the clinic. Now we've done all that but it takes us some time so that role is progressing, it will take some time. Where it is implemented, we're seeing pleasing uptake from recipients and good, very good response from the clinicians as well on the value of being able check in and keep up to date performance of the patients without them having to come in. And certainly, COVID has definitely helped drive the impetus behind the need for telehealth and need for remote care. And that -- we're seeing that. Okay. As things open up, I expected certainly some clinics will say, yes, we were still really want to see people face to face. But I think that we're also -- I think we'll see more saying, what we are hearing is, is that this is a very good addition to the way that care is provided and helps make it more convenient. So we want to keep it.
Lyanne Harrison: Okay. And one final question is do that $100 million, $220 million spend, how should we think about it's being phased over the next four, five years even more heavily weighted to the first figures?
Stu Sayers: Look that -- so that's the computing related costs we were getting [indiscernible], probably as much as AUD20 million in F 2022. We're still going through the devil on the detail on what part of that is captured by that new effort guidance and -- or not? And then the second thing I think roughly, then spread out across the remaining years, it will ebb and flow a little bit depending on the specific activity.
Lyanne Harrison: Okay, great. Thank you very much.
Dig Howitt: Thanks Lyanne.
Operator: Thank you. Your next question comes from Gretel Janu of Credit Suisse. Please go ahead.
Gretel Janu: Thanks. Good morning, everyone. And thanks for all the data you've provided on the call so far. Just a quick question on the first half second half SKU for OpEx into FY 2022. So clearly, in FY 2021, it was very much SKU to second half. Do we expect this now to normalize and be more evenly spread in FY 2022?
Dig Howitt: So I just -- so Gretel, I actually got a [indiscernible] appointment, and they just called me in the middle of your question. That popped up on my computer, so I missed a little bit. So just on the spread of OpEx?
Gretel Janu: OpEx for FY 2022. Yes. Do we expect it to be more evenly spread in 2022 relative to 2021, where it was much more second half SKU?
Dig Howitt: Okay. Yes. So 2022, yes, sorry, more evenly spread. Yes.
Gretel Janu: Excellent. And then just going back to services. So I know, you gave quite a bit of commentary around the pent-up demand and clinics now becoming more open. I guess, just how much more kind of growth do you expect coming to FY 2022. And particularly first half from that pent-up demand. And then just secondly on Kanso 2, you have seen a very strong uptake, what percentage of people are paying for this product out of pocket, as opposed to through the insurance plan?
Dig Howitt: So Kanso 2 very small percentage are paying out of pocket, the vast majority of them sales are reimbursed or through insurance. Again, on the spread of sales through 2022, as I said earlier, we expect to see the sales growth through the year in line with the markets recovering. And I think it's worth noting on the clinic capacity and the places where it's been more incurred when they are open up, there will still be a prioritization and an appropriate prioritization of new patients and existing patients who have got issues. So again, I think it might take a little while for that upgrade growth to return. So those numbers more like pre-COVID. But the potential is still there and confident we can get it.
Gretel Janu: Perfect. That's all I had. Thanks very much.
Dig Howitt: Thanks. Thanks Gretel.
Operator: Thank you. There are no further questions at any time. I'll now hand back to Mr. Howitt for closing remarks.
Dig Howitt: Yes. Just to finish by saying thank you all for joining in and for questions today. And thank you, I look forward to seeing you again.
Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.