F11 was another successful year of growth, on the long journey of providing life changing implantable technology for the hearing impaired, young and old. F11 was the first full year of Cochlear Nucleus 5, the best cochlear implant system ever. Market growth is driven by improved hearing outcomes (and technology has an important role in this), which, in a virtuous cycle, provides more resources for innovation benefiting all stakeholders. Successfully bringing to market innovative technology that is truly life changing underpins another year of growth.
Financial results: record revenues and earnings
Total revenue for F11 was $809.6 million, up 10% over F10. An appreciating Australian dollar masked the underlying sales growth, with sales in constant currency (i.e. restating F10 at F11 foreign exchange rates) up 17%.
Net profit after tax (NPAT) of $180.1 million, was up 16%, and earnings per share (EPS) of $3.18 was up 15%.
Cochlear implant unit sales were up 17% to 24,661 implants, with over 70% of cochlear implants sold being Cochlear Nucleus 5, the latest generation device.
Bone Anchored Solutions product sales (e.g. Baha) were $84.2 million (up 2% in constant currency).
All regions grew: Americas, with sales of $317.0 million up 16% in constant currency, with Europe up 14% in constant currency to $293.3 million, and Asia Pacific, the fastest growing region, with sales of $121.9 million up 31% in constant currency.
Free cash flow was $166 million, the same as that for F10, as capital expenditure for the new headquarters and manufacturing facility increased ($40 million in F11 versus $18 million in F10). F11 debtor days at 74 days were similar to the 72 days at the end of F10, while F11 inventories at $106.1 million (173 days) was up 2% on F10 (192 days). The final year dividend was increased 14% to $1.20 per share giving a full year dividend, of $2.25, up 13%.
Innovative products driving growth
Cochlear Nucleus 5 continues to be very well received by recipients and healthcare professionals. From a design perspective, Nucleus 5 improves not only recipient hearing performance, but further advances ergonomics, usability, miniaturisation and reliability.
The advanced microphone technology, digital signalling processing and other technologies, improve hearing performance in a very meaningful way, particularly in difficult listening environments. During the second half of F11, release 3 of Nucleus 5 was rolled out providing a number of enhancements, including an improved and simplified user interface for the wireless remote assistant, as well as software enabling backwards compatibility of the Nucleus 5 sound processor to Nucleus 24 cochlear implant recipients. Bringing the latest technology to recipients with older generation implants such as the Nucleus 24, reaffirms our lifelong commitment to recipients of Cochlear's implants.
F11 also saw the release of the Slim Straight Electrode as an addition to the portfolio of electrodes available on cochlear implants. Preservation of residual hearing (for electro-acoustic stimulation, or hybrid) remains an important area, and new electrode and new surgical techniques are driving better understandings of how to preserve residual hearing: a great example of where technology precedes science.
Innovation in the Baha products resulted in the launch of an improved Baha 3 System, and by 30 June, of Baha 3 Power, which replaces the Intenso product range.
During F11, recruitment for Phase 1a clinical trial of DACS (Direct Acoustic Cochlear Stimulator) was completed (n=15). Lots of information has been learnt from this series of recipients, and the clinical results for this device are very encouraging. DACS remains an area of significant research and development, and an important addition to the portfolio of implantable devices for the hearing impaired.
Cochlear has signed a technology development and licence agreement with GN ReSound for the use of certain GN ReSound technology with Cochlear's implantable hearing solutions. The emphasis of this agreement is to further enhance Cochlear's wireless technology capabilities.
Technologic innovation remains a key success driver for Cochlear, with research and development expenses up 15% to $109 million, or 13% of revenue.
Global HQ at Macquarie University: completed
Cochlear's new global headquarters was successfully completed in F11 and all Sydney based functions, except manufacturing, have relocated to the Macquarie building. Manufacturing will transfer as regulatory approvals are obtained.
Macquarie University has commenced work on an adjacent building, and together, these buildings will create a hearing precinct employing approximately 2,000 people involved in diverse aspects of hearing. This will act as a catalyst for global collaboration.
Cochlear implantation as an intervention is very multi-disciplinary, much more so than many other medical device areas, and placing Cochlear within a hearing precinct is a useful step ensuring Cochlear remains close to advances relevant to this field. Macquarie University is to be congratulated on its vision in creating this unique hearing precinct.
Aligning stakeholders' interests: total shareholder returns
The business of developing, manufacturing and supplying implantable devices for the hearing impaired, involves a lifelong commitment of support to recipients. For example, ensuring future external sound processors are backwards compatible to previous generation implants is fundamental to ensuring each recipient has a lifelong benefit from the implant. This lifelong commitment we take very seriously, hence our tag line: "Hear now. And always". This means, for example, that the long-term consequences of seemingly short-term decisions must be factored into everything we do.
From a shareholder perspective, that is good news, as the day-today business is truly about balancing the short and long term. It also makes it easier to ensure our business plans are linked with what drives shareholder returns. Total shareholder returns (TSR) (both absolute and relative) are key management metrics. Three year TSR is one of the performance hurdles for management's long-term incentive program (specifically TSR relative to the ASX 100). Three year TSR to 30 June 2011 was 70.8%, which placed Cochlear 4th out of the ASX 100 companies. While there are a lot of variables impacting share price over which management has no control, over the longer term share price does reflect management actions, and significant thought is given to connecting business strategy with shareholder returns.
Finally, and as expressed in the past, the passion and commitment of the approximately 2,500 employees of Cochlear are palpable, and remain a key success factor for Cochlear, and to all our employees, thank you. There is no less passion and commitment in the thousands of healthcare professionals globally that implant and support our products. Together, we can truly change the world of the hearing impaired.