Company Interview / Cochlear focusing on R&D

Dig Howitt, CEO of Cochlear (ASX:COH), outlines the company's significant gains for the full year of 2024 with an underlying net profit rise of 27%, reaching $357 million AUD. Highlighting a sales increase of 15%, reaching $2.3 billion AUD, Cochlear has delivered a dividend of $4.10 per share, marking a rise of 24%. The company continues to set lofty targets, with a keen eye on sales growth estimated around 10% and a net profit margin set at 18%. Howitt remains unfazed by market fluctuations as Cochlear holds its focus on significant long-term growth opportunities and its robust and resilient strategy.

Howitt illuminates Cochlear's future growth strategy focusing on the untapped potential market of adults and seniors who would benefit from cochlear or acoustic implants. The CEO indicates that less than 5% of potential beneficiaries currently utilise the firm's advanced products, highlighting its unprecedented growth potential in an emerging market. Howitt also discusses Cochlear's significant investments, including a $270 million AUD commitment last year on research and development with a primary focus on continued product enhancement.

Howitt also details the recent acquisition of Oticon Medical from its parent company, Dumont. The acquisition, although incurring a $30 million AUD cost, reinforces Cochlear's commitment to providing lifetime support for its customers. Cochlear aims to bolster growth in emerging markets, despite recognising the potential variability due to macroeconomic conditions and political circumstances. Howitt also emphasises the growing market sector of hearing loss in children, especially in developing countries. Despite current market valuation concerns, CEO Dig Howitt remains committed to the further execution of Cochlear's comprehensive strategy.

Full unedited transcript:

 0:11

Hearing aid manufacturer cochlear has booked underlying net profit for full year 24 of $357 million. That's up 27%. Sales rose 15% to $2.3 billion. Cochlear has delivered a dividend of $4.10 per share for the financial year, which is a rise of 24%. It says it's continuing to target sales growth of around 10%, with net profit margin of 18%. Let's get the details from cochlear CEO Dick Howard, who joins me now. Dick. I know you can't control the market, but it doesn't seem to like your numbers.

0:45

Julie, we're we're focused on the long term. And, um, we had a good, very good result last year. We did in 23 as well. Uh, we have this, uh, huge growth opportunity in front of us in that there are just so many, um, adults and seniors in all countries in the world who would are losing their hearing um, and might be getting hearing aids are not necessarily getting a benefit from hearing aids that they would get from getting it. So we've got a great opportunity. We're very focused on our strategy. Um, and we continue to execute it. Uh, well. And that's showed up in in our results, the market will always move around on, on our results. But we're we're always looking out over the long term. All right. So you're also forecasting more growth in full year 25 underlying net profit guidance a 6 to 11% increase on this year. How are you hoping to achieve that.

1:38

Uh, through uh through getting uh, more people as I said, particularly adults, seniors, um, getting referred for cochlear implant. So our um, of the potential market of the the number of people who would benefit from a cochlear implant or an acoustic implant, fewer than 5% currently have an implant. Uh, so very few companies have that sort of growth potential and have a product like we do that is very effective, that changes, changes people's lives, improves health and well-being. Um, and is very cost effective too. So we're in a very good position. We've got a clear strategy, and we've got to just make sure we stay focused on, um, executing the strategy and growing. And we grow year on year for many years yet and trading conditions, then you're expecting to remain strong. Where are your key markets?

2:31

Uh, so the US is our biggest market. And that's true for pretty I think pretty much every medical device company. Um, but we have customers in 180 countries around the world. Um, uh, 90 more than 95% of our revenue comes from outside of Australia. So we are very global business, um, in, in our operations and our distribution. Uh, but the US is the, the biggest opportunity. But as I said earlier, we have the opportunity to grow in every country in the world. Let's talk a little bit as well I guess, about your strategy and what you're planning to do with some of the cash on your balance sheet. How are you planning on deploying some of that?

3:11

Yeah, so we are a business that generates a lot of cash organically. That enables us to pay a good dividend. It also enables us to fund, uh, significant investment in growth. And there's really two key areas that that we're investing and we invest through our personnel. The first of those is in R&D. Uh, we we commit to spending 12% of our revenue each year in R&D. That was just over $270 million last year. The opportunity to improve our products, to give better hearing outcomes for, uh, our customers, and to improve hearing over time for all of those people who already have one of our implants, is significant. The second area is investing in raising awareness. So as a saying earlier, hearing loss is one of the most prevalent medical conditions in the world and it is one of the least treated. And there's increasing evidence, uh, that shows that reading hearing loss as we age is a very important element of maintaining

4:11

our cognition as we age and maintaining our, our health. Uh, so as the evidence builds that supports the importance of treating hearing loss. Uh, we want to make sure that that evidence gets to people and that they understand that treating hearing loss is as important as any other medical condition as we age. There are really good options out there, and they will improve quality of life. Uh, they'll they potentially improve cognition. Um, and that creates value for, uh, for society. So that's, that's what we're focused on from an investment perspective. And part of that awareness to make sure that people with you and lots no nowhere to go or the professionals they know who to the refer them to. So as you say, a lot of spending in R&D in that space. How much is the technology advancing? What kind of I guess even implementation of the likes of AI and such are you using?

5:03

Yeah, we have a very broad range of, uh, activity in our R&D, and that means we have a very strong pipeline of products into the future. One of the areas that we're working on is, um, combining a, um, a steroid, a drug, uh, with our cochlear implant. And we've seen some good results on that in the last year. Uh, that that steroid reduces inflammation. Um, when the implants inserted into the electrode that, uh, over time, we believe could improve the health of the cochlear and, uh, potentially even enable it, enable better hearing. So areas like that. We are looking at the certainly scope for AI, uh, things like noise reduction, reducing background noise and, uh, filtering out unwanted noises so that someone can listen to the sounds that they try to listen to. Uh, this, this role for AI in that as, as there are for AI and

6:03

most of our internal efficiency and effectiveness. So like many companies, there's lots of opportunities for us in AI. Uh, we are actively working on some of those, and we are very careful not to, um, not to take on more, uh, than we can manage at a single time. Um, and also keeping context what role I could play in the, in the future of the business versus the many other things that we can and do invest in. Now, Dick, earlier in the year, you acquired Oticon Medical, and part of that acquisition did contribute to a one off, um, after tax, $30 million cost, I believe. How is that business going, though?

6:41

Yeah. So that, um, acquisition is just, um, now a couple of months since it closed. Um, and the importance of this was that Dumont's the company that owned Oticon medical cochlear implant business, uh, recognized that, um, once someone has an implant, they need, uh, lifetime support, that they rely on that hearing aid that that the implant for their life, for hearing, um, and therefore want to be backed by a company that is able to support them throughout their life with service and spares and accessories and so on. Um, what I realized was that that was a significant investment. They had a small, small business, um, and that, um, cochlear would be better placed to look after all of their customers for the lifetime. And so they came to us. Um, and that said, we have taken over responsibility for the 20,000 people around the world to have one of the Dumont implants, and we'll endeavour to be providing them support through

7:40

their lives. Uh, we also pick up some really experienced, uh, uh, cochlear implant, uh, engineers and clinicians. Uh, and that's good, too, because there aren't many cochlear implant companies in the, in the world. The skills are scarce. And it's great to be able to, uh, have some talented people or talented, experienced people join the cochlear team. When you talk about a lot of your sales occurring in developed markets, North America in particular, how is the emerging markets business faring and how much growth are you seeing there?

8:13

There's a huge opportunity for us to grow in emerging markets. We've seen over time that that growth is more variable. Um, it's more dependent on macroeconomic conditions and on, uh, political circumstances. Uh, but there is a significant opportunity and it's grown over a long time. And we saw that in, uh, in the last half, we, uh, had some really good growth in a number of emerging countries around the world, um, and then countries. So Argentina and India, where there were elections, um, in Argentina, there was a change of government. Uh, what we see and what we saw is often happens is that, um, coming up to election, governments can sometimes just not want to start new programs, want to hold back on on spending pending the outcome of the election. And we saw that that happened. So, um, we we think those programs will resume now. Um, and we'll continue to grow. But we over time have learnt, um, growth is not linear and harder to predict in the, in some of those emerging markets. It's also really tough to

9:13

talk about hearing loss in children, but you do have a growing contingent in that space, too.

9:20

Yeah. Look. Hearing loss in children is it's critical that, um, if a child is born without hearing that they get access to sound as quickly as possible. The brain only develops if it's stimulated. So a child born without hearing that doesn't get access to sound very quickly. Um, has to do a lot of work to, to catch up because that the that hearing part of the brain doesn't develop. Now in developed countries there is very good access. So Australia, for example, uh, has probably the world's best practice in terms of newborn hearing screening, a very clear referral path, um, onto, uh, an audiologist and a surgeon, uh, and then very, very good therapy providers so that many children with cochlear implants in Australia, uh, attend normal schooling, uh, have normal speech and language or speech and language in line with their hearing peers. Um, but that's not true across many of the emerging countries where, um, health systems are still developing, where there is less

10:20

funding available. And we certainly are active in, in those in many countries in explaining the benefits of newborn training. And in fact, we've had delegations from some Southeast Asian countries coming to Australia, uh, over the last year to learn about the Australian system of newborn hearing, screening and referral, uh, with a view to being able to implement that. They're back in their home countries. Okay. Now the dividend payout a lot of people hold your stock for this, um, up 24%. They'd have to be happy with that. Even though as we mentioned, the sell off today is occurring. Do you think you can continue that kind of dividend growth?

11:01

Yeah, we've we've had a long standing policy of paying out 70% of our net profit as the dividend. Um, the board reviews that policy each year as they should. Um, and we have a long term growth plan and that, that and we've said that we want to grow our revenue consistently over the long term. We want to reinvest in the business. So we want to hold our net profit margin constant at 18%. Um, while we're growing and have that profit margin will be a profitable company and therefore our dividend should grow as well. So certainly our expectation on the back of growth is to be able to grow that dividend over time as well. And what do you say to a number of analysts out there that say you're just too expensive?

11:45

Uh, look, that's that's for them to, uh, comment on the valuation of the shares. I don't, I don't uh, that's not my job. My job, along with the team here is just to run the company as well as we can and to raise awareness of hearing loss, uh, to execute on our strategy. And if we do that really well, others will work out what the value of, of the company is. And look at what we've seen over a very long period is the general consensus the value of cochlear is increased. You've seen we've seen that in the share price. Um, and we just got to focus on helping more people get access to hearing and uh, being really, really good at what we do.