Cochlear : COH FY17 Result Announcement

17 August 2017

• Net profit of $223.6m, up 18% in Australian dollars
• Sales revenue up 7% in Australian dollars (12% in constant currency1) to $1.2 billion, with 15% CC sales revenue growth in the second half
• Cochlear implant units up 8% to 32,554 (up 14% excluding Chinese Central Government tender units)
• Strong uplift in operating cash flows supporting the 17% increase in the final dividend
• FY18 net profit guidance of $240-250 million, based on an AUD/USD of 80 cents

A$m FY17 FY16 Change %

(reported)

Cochlear implant units 32,554 30,172  8%

(CC)

Sales revenue 1,239.7 1,158.1  7%  12%

Earnings before interest & tax (EBIT) 315.6 262.6  20%  15%

Net profit 223.6 188.9  18%  11%

Basic earnings per share $3.90 $3.31  18%

Final dividend per share $1.40 $1.20  17%

Total dividends per share $2.70 $2.30  17%

Franking % 100% 100%

Payout ratio % 69% 70%

1 Constant currency (CC) removes the impact of foreign exchange (FX) rate movements and FX contract gains/(losses) to facilitate comparability. See end note for further detail.

Cochlear's Chief Executive Officer, Chris Smith said, "The positive momentum we have experienced over the past few years has continued throughout FY17 with strong growth in sales revenue and units delivered across all regions, with reported net profit growing by 18%.

"Cochlear's market leadership position has strengthened with market growth and market share improvements throughout the year underpinned by successful new product launches, growing investment in direct-to-consumer marketing and sales force expansion.

"The core cochlear implant business grew strongly with CC revenue growth of 10% and unit growth of 8%.

"Developed market unit growth was particularly strong, increasing by 12%, with highlights including continued strong performances from the US and Western Europe.

"Emerging market units grew by around 20% (adjusted for the impact of lower Chinese Central Government tender units), with continuing strong growth in India and solid improvements in Latin America and Central & Eastern Europe.

"During the year, the Kanso® Sound Processor, our first off-the-ear sound processor, and the Nucleus® Profile Slim Modiolar (CI532) electrode, the world's slimmest electrode, were launched, with both products experiencing strong uptake.

"In July 2017, we introduced the Nucleus 7 Sound Processor, the world's first Made for iPhone cochlear implant sound processor, which will allow users to stream sound from an iPhone®, iPad® and iPod touch® directly to their sound processor, offering greater accessibility, connectivity and wireless solutions. The Nucleus 7 Sound Processor has received FDA and CE mark approval and will commence full commercial rollout in September.

"Cochlear continues to demonstrate its commitment to being the technology leader in our industry with ongoing investment in research and development (R&D). During the year we invested $152 million, 12% of sales revenue, in R&D with a pipeline of new products expected to be launched over the coming years.

"The Services business, which includes sound processor upgrades and accessories, delivered CC revenue growth of 10% driven by continuing demand for the Nucleus 6 Sound Processor and the popularity of the Kanso Sound Processor. Second half momentum was particularly strong with 17% CC sales growth, with upgrade penetration reaching around 40% across the developed markets.

"The Acoustics business had a strong year with sales growth of 26% in CC. Strong growth in both new system sales and upgrades was driven by the popularity of the Baha® 5 range of sound processors."

Mr Smith said, "Cochlear has continued to invest to drive growth, delivering a strong profit result with net profit up 18% to $224 million (11% in CC). Operating cash flow increased by 40% to $260 million, funding acquisitions and dividend payments with only a minimal increase in net debt."

"Cochlear's priorities are focused on the customer with initiatives aimed at maintaining technology leadership and accelerating market growth through global expansion of awareness and increased market access initiatives. With a growing recipient base, now numbering over 450,000, we are actively strengthening our servicing capability to provide products, programs and digital services to support the lifetime relationship with our recipients.

"We made progress against our business priorities which are focused on growing the core, building a service business, shaping the organisation and value creation. The key areas of focus have been on continuing to expand the sales force across major developed and emerging markets, expanding our direct-to-consumer programs in the US, Australia, Germany, UK and India and building greater engagement with our recipient base," said Mr Smith.

For FY18, Cochlear expects reported net profit to increase to $240-250 million, with currency headwinds expected to moderate strong underlying business growth.

Cochlear's President, Dig Howitt said, "Positive momentum continues across the business with the significant investments made in product development and market growth initiatives over the previous few years expected to underpin growth in FY18. In particular, we expect the launch of the Nucleus 7 Sound Processor, which commences its full market release from September, to contribute to both implant growth and upgrade demand over the coming years. The stronger Australian dollar will however have an impact on earnings, and is likely to reduce underlying net profit growth by a few percentage points in FY18.

"The balance sheet and free cash flow generation remain strong and we continue to target a dividend payout ratio of around 70% of net profit."

Key guidance considerations for FY18:

• expect solid momentum in unit growth to continue, which will be supported by further investment in market access and market growth activities;

• expect net profit to be weighted to the second half given the timing of the Nucleus 7 Sound Processor launch;

• expect R&D expenditure to be $160-170 million; and

• forecasting a weighted average AUD/USD exchange rate of 80 cents for FY18 versus 75 cents in FY17.

For further information, please contact:

Kristina Devon

Head of Investor Relations Email: kdevon@cochlear.com Ph: + 61 2 9611 6691

Piers Shervington

Senior Manager Corporate Affairs Email: pshervington@cochlear.com Ph: +61 2 9425 5416

Cochlear implant revenue grew 5% in Australian dollars (10% in CC) with unit growth of 8% (14% excluding the benefit of Chinese Central Government tender units). Globally, the average selling price declined modestly driven by currency, regional mix and some minor pricing reductions.

Developed markets grew units by 12% with highlights including continued strong performances from the US and Western Europe. Emerging markets units grew by around 20% (adjusted for Chinese Central Government tender units) with continuing strong growth in India with solid improvements in Latin America and Central & Eastern Europe.

Cochlear's first off-the-ear sound processor, Kanso, was released during the first half. Uptake has exceeded expectations and contributed to market share gains during the year. The electrode portfolio was expanded with the full market release of the new Slim Modiolar electrode in Europe, the US and Canada with a strong uptake of the electrode since launch.

The increase in sales revenue also reflects continued investments in market growth initiatives including direct-to-consumer activities and field expansion of over 100 people. These initiatives help build awareness of implantable hearing solutions and support further penetration into the adult segment.

Services sales revenue increased by 6% in Australian dollars (an increase of 10% in CC) driven by the continuing uptake of the Nucleus 6 Sound Processor and the popularity of the Kanso Sound Processor. Second half momentum was particularly strong with 17% CC sales growth.

Upgrade penetration since the release of the Nucleus 6 Sound Processor has been strong with close to 40% of recipients in developed markets upgrading their processors since it was first launched in September 2013, with penetration rates exceeding 50% in a number of key markets including Australia and the UK.

As part of the commitment to increase recipient engagement and provide recipients with a great customer experience, the business continued to rollout a number of service-oriented programs. Cochlear's recipient membership program, Cochlear Family, is growing rapidly, with membership growing by over 150%, to around 60,000 recipients, this year. Recruitment continues to be a priority with Cochlear Family members upgrading their sound processors at a significantly higher rate than that of non-members.