Cochlear Aktie

Thank you for standing by, and welcome to the Cochlear Investor Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.

Thanks, everyone, for joining on short notice this morning. As I said, we're going to make a few comments to open. What I'd like to do is talk through what are the issues that are impacting the business that have led to a lower sales and lower profit. What are the short-term implications of them for the P&L? And then I think perhaps most importantly, what are the implications for our longer-term strategy and how we implement strategy. So I want to make some comments on each of those, and then we'll open up for questions.

So starting off just with sort of what's happened more recently and what do we see that might be sitting behind that. And I'll start -- talk through each of the segments. I'm going to talk with developed market cochlear implants first and spend most of my time on that because it is the most significant piece.

So as we went into the second half, we had expectations for growth based on market growth and our Nexa share gains and share gains from Nexa. The contracting for Nexa is now complete. It's gone well, and we are seeing some of the share we talked about having lost in that contracting period being regained. We regained that share. However, the market growth is much lower than we expected. We're not sure for the -- obviously, for the year yet, but we think certainly below 5% for the year.

And particularly, I want to focus on the adults and seniors segment, which is the biggest part of the developed markets and our biggest growth opportunity. And there, we're seeing a range of things across the world that I wanted to talk about. And I'll start by talking about the U.S. So as we said in the half, we saw some strong momentum in Q2 and good growth in November and December. That growth continued through into about the middle of February. And then from the middle of February, sales fell off. There were some weather events in February, which sort of possibly explains some February. But then from March, we saw a dip compared to -- a decline compared to March last year, which is obviously very unusual for us, and we'll get a bit under what do we think is going on there.

Then in Europe, hospital systems in Europe are under pressure. And we're seeing that manifest itself in a few different ways. In the U.K. with the NHS is the most obvious example there. We've had significant success in lifting referrals, but we're not seeing that translate into more surgeries in the NHS. And the NHS has really struggled as have many healthcare systems since COVID. But what we're seeing is growing waiting list, not only at surgery, but also at audiology. And we're also seeing quite frequent cancellations of CI surgeries. So that is within the NHS, cochlear implant surgeries are getting deprioritized relative to other surgeries.

Also, similarly in Germany, hospital systems under pressure. We're seeing growing waiting lists and a lower priority in some hospitals there with that economic pressure. And then also in strikes in Italy and strikes in Spain in the hospital systems cutting surgical capacity. What we see there is that's a different manifestation of a hospital system under pressure. And we do run into surgical slots access from time to time. So that's not necessarily new, but what we've seen over the last few months is, where in the past, it perhaps been a bit patchy, it's happened across all of the major European markets over the last few months, and that's put real pressure on just the total number of CI surgeries and consequently onto our sales.

If I then go back to just want to look back a little bit further at this adults and seniors segment and what we've seen since COVID and what we saw before COVID. And I'm going to link all these bits together and what the implications are for our strategy in just a minute, but I want to give you a bit more background first.

If we look back before COVID, we saw adults and seniors growing at 10% to 11% per year, year-on-year very consistently. What we've seen since COVID is the adults and seniors growth rate has gone from probably lower than 5% this year, which will be the lowest to over 20%. And obviously, it bounced back strongly out of COVID, which was a catch-up. But then even in '23, we saw 19% growth in adults and seniors. So we've seen much more variability in the adults and seniors growth since COVID.

As we've looked back at that and tried to understand it, we've also seen that, that adults and seniors growth rate has some correlation with what's happening in the hearing aid sales in developed markets. It had a similar burst of growth, high growth coming out of COVID. But if we look across the hearing aid companies and what they're reporting, we have seen that sales growth slowing year-on-year for the last few years. So it looks like there is a correlation between our sales to adults and seniors and hearing aids.

And that -- as that segment becomes a bigger part of our business, we are seeing that correlation or that variability is having more of an impact on our overall revenue. We then take that back to the U.S. As we said at the half year, we have seen year-on-year growth in our referrals from hearing aid channel. We have seen that decline in the first half, and that's continued into this quarter. And we've also just seen then that U.S. consumer sentiment is the lowest on record. And we've got records going back just over 50 years, and U.S. sentiment now is lower than it's been at any time over that period.

And so what we see -- what we're concluding from that, and we're still exploring is that our adults and seniors sales is more correlated with sentiment and macroeconomic conditions than we've seen in the past. And that's only being tested with the extremes of consumer sentiment that we have at the moment. So I want to do this, obviously in the U.S. -- in Europe, we're seeing significant financial pressure on hospitals, leading to ways of surgery schedules getting cut or disrupted in the U.S. We see some of that pressure on hospitals, but very much more pressure on the individual, and we're seeing individuals pull back from getting their hearing treated.

We think there's a core theme that sits under both of those, and this is what gets to the importance of our strategy. That core theme is that hearing loss isn't being seen as a high priority intervention when either people become under pressure financially or when hospital systems come under pressure, they are deprioritizing hearing loss.

Why that's important for our strategy, which I'll come back to a little bit later, is the core of our strategy is actually to medicalize hearing loss and to use the evidence out there to get up lifted both from a hospital priority perspective, but also from a consumer perspective. And again, what we're seeing in the U.S. is people know they've got to pay out of pocket for hearing aids when they see this in our consumer research, when they think about a cochlear implant, I think that's got to cost more. So if I'm concerned on cost, people are more likely to pull back. We need to change that.

So let me come back to that, but we think there's a core theme that sits under what's going on across both those markets with quite different healthcare systems, which to do with how people and how society more broadly views hearing loss and the importance of treating it.

Let me go then just to the other segments. So in cochlear implants or across emerging markets, there, setting up through February, our sales were on track and in line with our expectations, and we were seeing good growth. The war in the Middle East is having a significant impact on us there. Our sales in the Middle East are always weighted to the last 3 or 4 months of the year. That's just a quirk of timing in that part of the world where we're typically selling into distributors or to government hospital systems in sort of bulk rather than sort of a run rate with surgeries.

So with the war in the Middle East, we are seeing some order cancellations. We are seeing reduced surgeries in a range of countries, and there are access issues, just getting logistics in terms of actually getting products into some countries is constrained. That's having an impact already. We're not sure of how big that impact will be through the rest of the year, and that's one of the reasons for a pretty broad guidance range is that there remains a fair bit of uncertainty over what we will sell into the Middle East through the next 3 months.

And then on to China. We've talked about the impact of VBP, and that was in our forecast. What's happened in the last quarter is that we -- there are special zones in China where we're able to sell premium product where we've been selling Nexa. There was a level of reimbursement into those special zones that was withdrawn in Q2, and that will have an impact on our premium tier sales into China as well.

Go back to Services and Acoustics. Both of those performing in line with expectations. We said we see growth in the second half, and we've given the 13% and 11% constant currency growth rates that we saw in Q3. So they seem to have been largely unaffected by what's going on so far. So that's sort of the -- if I run through the segments, what's happening.

If I then just go quickly to what's the implications of that on the P&L. So just to quickly summarize in that. In adults and seniors, we've got weaker demand. In emerging markets in the Middle East, we've got the war, which is deferring our -- canceling and possibly deferring some sales. And further to that, given what's going on, there are some questions over the collection of some of our receivables in the Middle East. We just don't know at this stage. I don't think anyone can know at this stage as the state that some of those governments will be in because all government payers will be into the future.

And so we have been cautious to signal that we may need to provide for some of our receivables into the Middle East. And of course, we had the rising Australian dollar, which we already took -- already factored in, but does have an impact on our profitability. So that's led to lower sales. It's led to that guidance range. That guidance range is wide. We acknowledge that, and that is because there is a range of uncertainty that we still see even over the next 10 or 11 weeks. We're in quite an unusual situation across the world in terms of what we're seeing.

The final component of the impact on the P&L is reduced manufacturing output. So we have lowered our manufacturing output. We have lowered it by more than the fall in sales, and that's a consequence of the inventory levels that we are carrying. When we do that, there is manufacturing overhead that doesn't get recovered and it goes straight through the P&L. Obviously, we had a choice there. We could have kept production running at the rates that we had planned, which would have pushed those costs into inventory and then through the P&L in subsequent years. And obviously, we made a sensible decision to slow our production down, and that means that there is a P&L impact in this year from that. So that's the short term.

Before I turn over to questions, let me then just go to what does this mean for our strategy, which I think is actually the most important question of all of this. Just touching on market leadership first and then on to growth, which are the core elements of our strategy and then how we -- and then on to costs in terms of how we -- and Nexa continues to be well received. Now it is out there. We've got lots of interest in the potential of Nexa and to explore potential Nexa to improve hearing outcomes over time.

But we also have a very broad product pipeline. And we talked about TICI, drug eluting electrodes. We have great confidence in the specifications of the products that we're building there. The progress of the trials and the experience we're seeing is very positive. They will come to market over the next few years and the products we have are built on long experience and give us confidence of those products as they come to market.

In terms of our growth opportunity and our growth strategy, first of all, that medium to long-term opportunity is unchanged. The clinical need is significant. We have very effective products. The products are very cost effective from both the society and the healthcare system. The clinical evidence supporting why treating hearing loss is really important for healthy aging, particularly around cognition and lowering the risk of dementia is significant and it's growing. And we need to continue to prosecute to build that evidence and to use that evidence to prosecute the case for standard of care for cochlear implants and to medicalize hearing loss.

I think all the data that we can see says that's certainly what, that would be beneficial for society, for healthcare systems for that to be the case. But as always, with a therapy, it does take time for that to happen. And perhaps just a quick example of the time it takes. Back in 2018, 2019, we set out -- we helped facilitate a group of professionals around the world to develop a consensus statement on cochlear implants, which is a standard thing for a therapy to do. It's what does all the evidence say about what should be the treatment process, treatment path and treatment criteria for an intervention.

As a result of having a consensus statement, you can then start to build guidelines and have those guidelines adopted country by country. Just in the last few months, the U.S. has adopted a set of clinical guidelines based on this consensus statement and available evidence for the treatment of hearing loss and particularly cochlear implants. How this helps is that as we talked about at the half go into the medical channel to build a referral base. We're not just there saying, do you know about cochlear implants and how can we educate them on you. We can go in and say, are you aware of the latest guidelines for -- adopted by the U.S. professional bodies for the treatment of hearing loss.

And let's talk about -- you can talk about those guidelines because it also starts to put some professional obligation to follow guidelines when they are approved by the leading professional bodies. So just one example, but it was 7 or 8 years from starting that consensus statement to getting the guidelines actually adopted in the U.S. And now we've got to build -- the guidelines approved. Now we've got to build out adoption and awareness of those guidelines. So it does take time to build towards that standard of care in medicalizing hearing loss.

And I think then what does this mean? So we're confident our strategy is on the right track, and we've got to learn as we implement. What we've also seen is we've got to invest more in this strategy, and that's why we are reshaping our cost base. We flagged at the half year that we've been working on the organization through the last few years to get more flexibility to redirect more resources to growth. What we're doing with the program that we are undertaking now is to accelerate that process given the lower sales growth, that's what we need to do to make sure that we can provide the funds and still manage our margin to invest in growth.

We're also nearing the end of replacing our core systems with cloud-based systems and consistent data structure and standardized processes across the world, which sets us up to build scale and efficiency and particularly to be able to more easily leverage AI and generating that scale and efficiency. So it's the right time for us to accelerate. And because we are accelerating that program, we have called out that we'll see somewhere between $25 million and $35 million in costs that are going to come through in this half in terms of accelerating the restructuring that we will be undertaking to accelerate that program.

That will all go above the line. It is really pulling forward expenses that we would have taken up in '27 and '28 as we worked to the plan we originally had, but we are accelerating that plan.

And I say let me finish before going to questions to say, there are a range of issues hitting us right now, which have had a significant impact on this year's performance. We remain confident in the long-term growth outlook and the core of our strategy. What we see we do need to do is to free up more money within the organization, which we -- and we see we can do that to invest more in that growth to accelerate the execution of the growth programs.

And with that, I will hand over to questions.

[Operator Instructions] Your first question today comes from David Low from UBS.

Could I just start with a sort of high-level question? I mean is it -- it seems clear from what you said that this adjustment is not about the war or that effect or the Middle East lost sales. This is about the developed markets and you're seeing a slowing down in adult and senior sales versus what you expected.

Yes, David, it's actually both those things. There's absolutely an impact from the Middle East on our sales. So the last 4 months, our emerging market sales in the last 4 months of the year are disproportionately skewed to the Middle East. That's just the nature of the timing there. So there is an impact of that. But there absolutely is a piece of this that comes from much slower adults and seniors growth in developed markets than we had expected and that we have seen over the last few years.

Okay. And when we look at the situation in Europe, it strikes me as that's going to be more of a challenge because it's a system issue rather than a demand issue. So you've talked about the strategy in broad brush sense and need to ensure adequate prioritization of surgery. How quickly can you have an impact on those sort of systems?

Yes, good question. It is going to take some time. And because we are not going to solve the problems in those healthcare systems. What we want to do is get a higher priority. So when the scheduling happens, ENT and particularly cochlear implants isn't seen as way down the list.

Yes, we can't solve the problem, but what we can do is work on the priority. We think the evidence is there to strongly support that, and particularly things like the data that came out of South Korea last year showing that for people with severe to profound hearing loss, cochlear implants -- those people who got cochlear implants had a 70% lower rate of dementia than people had hearing aids with the same level of hearing loss and 120% lower than people with no hearing treatment.

That sort of data that I think we can get in front of the right people in terms of healthcare systems, should lead to say, yes, this actually is a more -- this is not a discretionary. It's nice for all the people to hear, it's actually saving the healthcare system money. That's a skill we are building and we need to get better at is that payer government and policy influence. And as we look to reshape our cost base, that's one of the areas that we will be strengthening is that our government affairs and that ability to work at the policy level.

All right. And just last one for me. Cochlear had this long-term policy of 18% after-tax profit margin. What's the plan going forward on the -- post this year?

Yes. Look, our intention is still to get back there. As we said at the half, it's going to take us a few years to do that. The currency makes that harder. The lower sales growth makes that harder. So we're still holding that but it will take us a few years to get there. And we've got some impact on the gross margin that we've talked about, and we'll talk more about them in August.

So for the next couple of years, we should certainly assume that it's going to fall short of that. Can you -- I mean like this year's number is going to be dramatically short of the 18% margin. Can you give us a sense to get back to 18%, what's the pathway?

Not more at this stage than it will take a few years. When we come out in August, we'll have our outlook for '27, and that will give some insight into '27, but I don't want to get more specific on that now. We need to go through the right process to have a solid outlook.

Your next question comes from Andrew Goodsall from MST Marquee.

Just on those restructuring charges, I'm not sure I picked up what would flow into FY '27 or are they all going to get done in the second half?

So the amount we called out in the release is to hit in '26. There will be some costs in '27 likely too, but there were in '24 and '25, and we just absorbed them in the OpEx. We're just calling this out because this is a bigger one, and it is an acceleration.

Okay. So no distinct -- nothing distinct in '27?

Not at this stage. Look, when we're going to give our outlook for '27, if there is another bigger piece, we will certainly call that out. But at this stage, we're not sure -- we know what we're going to do now. There will be some more in '27, and we're just -- whether that's big enough to call out or whether we absorb it as normal, we will tell you then.

And just in China and the special access zones, what percentage of contribution to the total cost would reimbursement have been presumed for it to impact the market is quite materially?

Yes. It actually it was -- I won't go into the full detail because that sort of end up showing what our price was too, but it was a pretty significant contribution to the total. So we've certainly already seen a drop-off in demand.

And just...

And that's entirely out-of-pocket.

Okay. Okay. That makes sense. No. No, that's probably where I was going. So it's total cash, so okay. And then just with -- just more just trying to get a sense of proportion, but there's been some quite good articles talking about global hospital slowdown. On top of that, you've got the consumer. Do you have a sort of sense of sort of where that split is? Are the hospitals picking up any capacity? Or just any color you can add on that would be great.

Yes. Look, I've been reading those articles on as many as I can see on hospital, we all have. Yes, look, I think healthcare systems around the world are under significant pressure. And we are a tiny part of any hospital system. Our goal, as I said, is to change the priority, not change the system. I'm not sure if that answers your question. Ask more if I haven't quite.

I think consumer gets excited through -- not excited. Consumer takes -- you get a call to action, particularly around dementia and so on, just where the capacity of this nature.

Yes. Yes. So again, part of us -- yes, part of us using the data that's there is to make consumers aware of the importance of treating hearing loss. I mean the best way to get a waiting list deal with it is for the patients themselves to be saying and their family saying, look, this is essential treatment, look what you're not providing me or look at the implications of not them getting treated and particularly in socialized healthcare system, that is what gets action on waiting list.

So patient advocacy is an important part of raising the priority. And that's something we've been working with advocacy groups around the world for a few years now, and we do want to again strengthen that along with the work we do on policy and payers.

Your next question comes from David Stanton from Jefferies.

Look, it's more a longer-term question, my first one. Given what you called out as sort of public and private insurer pressure plus discretionary spend pressure that we're seeing particularly in the developed market, how long is this sort of low growth in developed market environment likely to continue? Should we be thinking that this is a story for at least 2 to 3 years, and then we might see volume growth as things hopefully improve across the systems? Or can we see a faster bounce back than that or a slower bounce back than that?

Yes. David, good question. I don't think we can say at the moment. We've got -- I mean what we're seeing from a consumer sentiment perspective is extreme based on history, particularly in the U.S. How that changes? I think we can't say how quickly that's going to -- I don't know if anyone knows certainly not us on how quickly that's going to change. The advocacy work that we need to do on policy, we are on to them. We are going to -- with this reshaping data we spend more to accelerate that. So again, we're confident in the medium to long term of the opportunity and our strategy. It's hard to know over the next couple of years, just given the range of factors and how that's going to turn out.

Okay. So just a follow-up then, we shouldn't necessarily -- it sounds like you're not really saying there's an immediate bounce back here.

I don't have to do that, I'd be able to predict consumer sentiment...

Yes. Yes. And my second and last question. Can you give us some more color about this cost base reshaping? I'm just frankly, a little bit perplexed as to why in this kind of soft environment, you feel you have to spend more? Can you help sort of explain exactly as much as you're willing to do so, the increased costs you're putting into the business, firstly? And then second, how that's going to pay off over the medium to long term?

Yes. So we're not spending more. We are reallocating the costs that we've got. So we are -- we're taking cost out, and there's a cost of taking cost out because our biggest cost is people. So to reduce costs, we've got to have fewer people in the business, and we've called out the cost of doing that. With that cost that comes out, some of that will go to building the margin and some of that will go to further investments in growth.

Understood. So a follow-up from me. So building the margin happens over the medium to longer term, though?

Yes, it will be part of that next year. But yes, we will build it over -- we're aiming to build back over the next few years.

Your next question comes from Saul Hadassin from Barrenjoey.

Just the first one, Dig, I wonder if you're willing to give us what you think cochlear implant unit sales will look like for second half '26? And in particularly, do you think you can actually increase the number of units sold in the second half versus first half '26?

So I don't want to try and go into that now. We've given -- we've said we can get, we think, between 2% and 6% revenue growth in the second half. There's a range of variables that go into that, but I don't want to try and give a more specific data than we've given in the release on that now. Obviously, you'll see in August. And when we've seen the full year, we'll be able to make more in-depth comments.

Okay. Second question, Dig. Just in terms of the impact on consumer that you're talking to, particularly in the U.S. consumer sentiment. I think you flagged that historically is actually impacting on processor upgrades as well. You're noting now that upgrades actually seem to be doing -- tracking quite well. So I guess, is the -- is what you're seeing on processor upgrades due to the obsolescence of the N7?

And I guess my question is, as that obsolescence impact washes through, for example, into FY '27, is there a risk that, that sentiment starts to impact on processor upgrades again? Or is that -- I'm trying to reconcile the impact on the consumer -- of upgrades versus units.

Yes. No, I was waiting for this question because, yes, it's the -- why isn't upgrades affected by the sentiment. And we haven't seen it so far. And yes, we think it's because once now it's retired, it takes this upgrade from discretionary to essential. And insurers will pay for it. If someone's processor breaks, they got to pay their co-pay, the insurer will pay the difference. We are watching through the fourth quarter. It's one of the potential variables just to see do we see a higher rate of cancellations.

And certainly, to your point, that the impact of the retirement will take some time to flow through because we have quite a lot of people out there in the U.S. still on Nucleus 7 and they don't all come in on the day we retire. So it will take some time to get them through. But as they've moved through, then yes, I'd expect to see consumer sentiment have some impact on upgrades. Now who knows where consumer sentiment will be then. And obviously, at some point in the future, we will have the next generation of upgrade, which starts that cycle again.

And speaking just lastly, you say you may need to take that provision for Middle East receivables. So is that incorporated into the range of guidance? And if you do have to take that provision, do we assume then the range would be skewed to the lower end?

It is in the range of guidance. I don't want to comment now on whether that would take us to the low end or not. There's several moving parts at the moment that goes into that outlook of which the receivables is one, but it is included in the guidance range.

Your next question comes from Chris Cooper from JPMorgan.

Dig, so beyond the 18% net margin guidance, which has been in place for some time and remains in place by the sounds of it, I think the other long-term guidance you've had is 10% revenue growth on a long-term go forward. So today, you've called out quite a number of headwinds on implants, some of which hopefully are sort of short term in nature, many of which sound a little bit more structural. Is 10% revenue growth over the long term still the right number to be anchored to?

Yes. We see that it is. And you're right, there are a bunch of headwinds right now. Some of those I think will come off over time. We said we're working on the policy level and the evidence level to get hearing loss is a high priority. But the opportunity is there. The effectiveness of the products is there. The cost -- both -- cost effectiveness in terms of the patient outcome and the cost effectiveness for society and healthcare systems is there. As we communicate that more clearly to the right people, we do see that, that opportunity to grow at 10% is there. When we look to our future, product pipeline there, too, we see further opportunities to drive growth.

Just a follow-up. If the revenue opportunity is sort of over the longer term as attractive as it has been in the past, why is now the right time to be thinking about changes to the cost base and becoming a lower cost to serve business as you described today?

Yes. Yes. Why is the right time now? So two things. One is what we are seeing and I took out, we're seeing more variability in our sales than we saw pre-COVID. And just that on its own says we need to get more variability into our cost so that we can better deal with that variability. And part of that is you've got to full fixed costs out to get to that point.

Second one is that we do believe we have the right strategy. We do have that opportunity I just talked about, and we talked about this before. In terms of building out standard of care, it's effectively -- you can think about it like trying to build an asset. And the faster you invest in that asset, the faster it gets built. So if we can create more capacity to invest, we build that asset, which is standard of care faster and we get to that more consistent growth faster. And we see in the organization with the work we've been doing over the last few years that the time is right that we can do this.

We think the opportunity is there in changing how we work and leveraging AI and leveraging the new platforms we've put in. So we've been building towards this. We're now just accelerating what we're doing because the opportunity is there. And there's nothing like the imperative of lower growth to reinforce all across the business. We had a call with -- a global call this morning with the business on this is a situation we're in, and here's how we need to respond. These are -- we don't like being here, but this is an opportunity to galvanize people even more strongly around our outlook and our strategy and our mission.

Okay. And just one quick specific one on the Middle East. Forget '26 for a second, but just over the last couple of years, how much revenue contribution from that region through '24, '25, just rough numbers?

Yes. We -- look, we haven't called that out. Emerging markets overall is now a bit over 20% of our revenue, of which China is the biggest component. The Middle East would follow China as being a significant part of that. So we don't call it out explicitly, but it is a reasonable part of the business. It's quite a profitable part, and it's particularly overweighted in the last 4 months of any year, again, just due to timing of how orders work in that part of the world.

Your next question comes from Steve Wheen from Jarden.

Just my question is around the Nexa launch. Just trying to understand, particularly in developed markets, whether you've been able to achieve the price premium as you've been recontracting some of these hospitals and if that's part of the issue here with regards to the earnings impact or the surprise relative to your previous guidance?

No. So there's nothing in the change in guidance that's related to price. So we have achieved the price outcomes that we set out across the world. We did a bit better in some places and a bit behind. But overall, we've got where we wanted to get to. But there's no change there that's had an impact on the change in outlook for the year.

I mean I might just push a little bit harder on that because some of the channel checks that were done, it would suggest that hospitals, particularly in the U.S., have not seen a price increase. They've been able to negotiate no price increase relative to the 600 series. So just trying to understand, I mean, is that just -- we've just chosen the ones that you were able to -- that were able to achieve that? Or is that a bit more commonplace in the U.S. and you're getting price improvements elsewhere in the world?

So the pricing -- average price increase we achieved in the U.S. was above our expectation. It looks like you've spoken to a few small subset. And I'm not -- I'm intrigued on which ones because there's very few. There are some that have contracts that aren't up for renewal yet, possibly spoken to them, but anyway.

Yes. I mean the issue that hospitals are saying in the U.S. is that with an absence of features in the Nexa platform and no change to the reimbursement for the implants, then it's difficult for them to accept a price increase. And I'm just...

So first of all, there was an increase in the CMS reimbursement. So that part of what they told you wasn't accurate. And there are features in the Nexa. So that wasn't accurate either. But it is the argument we hear, right, yes.

So what are the Nexa features that we expect -- I mean this is the big question that we're trying to understand is when will we see these differentiated sort of software that you can add on to the [ set ].

Yes. So we've got -- so the one that is there right now, which has a direct impact on clinic profitability is Smart Sync. So people don't need to come into the clinic if they lose or break their process so we can ship them a blank one. And so that takes unbillable time out of the clinic. So that one has a direct impact on hospital profitability now. We have -- that said, we've got premarket research that we -- that has been done on Nexa. We will soon -- very soon start to show the results of that.

We are also working on regulatory approval for some research tools, which will enable a range of clinics to be able to start exploring the features of Nexa. So certainly getting plenty of interest, and we're getting closer -- we are getting both closer -- much closer to showing some results and getting closer to enable a range of clinics to actually get in and experiment with the potential.

In terms of timing that we can expect to see some sort of benefit in terms of take-up rate?

I think as we start to show -- we're already seeing some benefit of that. As we start to show some of these results, I think that will -- does reinforce the opportunity for Nexa and the take-up that we'll see. As people start to do research, it should help even further, but I'm not going to put times publicly on when those things, part of it is subject to regulatory approval, but both of those things are getting closer.

Okay. I might just talk to guidance overall. I mean we've had a number of disappointments relative to guidance over the last few halves. Just trying to understand, is this guidance now, is it -- is there any ambition in there? Or have you approached this with a lot more conservativeness so that we can sort of at least establish a new base?

I think, we all try to learn as we go and make sure that we're getting better in all of the things that we do. So the guidance we've put out there is based on our collective view and our experience. It is a broad range because there is a fair bit of uncertainty. There's a number of dimensions to it, which we're calling out, and there's a bit of a range on each of those.

Yes. Okay. And sorry, one final just point of clarification. At the first half result, you guided the gross margin down to 73%. Is this the commentary about another -- the 100 basis points? Is that now suggesting 72%? Just wanted to clarify that.

Yes, that's right.

Your next question comes from David Bailey from Morgan Stanley.

Just on the U.S. hearing aid channel, wondering if you could help us just size that in terms of how material that is in terms of referral base. And I suppose the extension then is, if you're seeing more discretionary behavior, does that mean that fewer people going in for the initial consult? Is that a thematic? And/or do you think that maybe the audiologists are referring a little bit less if they're under pressure financially, they make a bit more money on hearing aids, maybe they're referring less for cochlear implants? So just some of the observations around the hearing aid channel in particular, if you can.

Yes. No worries. I think it's all of those things. And obviously conscious talking about the hearing aid channel. We have some insights through the cycle data. And then we have sort of anecdotes and what we read in the hearing aid manufacturers public reporting. So certainly, there has been slower organic growth across the hearing aid companies year-on-year for the last few years. We see in the cycle data that there is a bit less traffic in hearing aid clinics, and that's obviously a segment. It's not all.

We're also seeing a bit that people are sort of trading down a model. So people who are replacing their hearing aids are not necessarily buying the same tier. And these are I'm speaking cautiously because this is a sort of macro look at a lot of data and obviously, hearing aid companies know this way better than we do. But I think all of that suggests that people are being more cautious on what they're spending on hearing aids. That means less hearing aid retailers are probably seeing less revenue than they were and our lower referral suggests that they are holding on to people more so than in the past.

Yes. No, that's helpful. And just how significant is that channel? If you did a pie chart, how would hearing...

So in the U.S., sort of 30%, 35% of our business -- about 35% of our business comes from our DTC and our hearing aid referrals. We actually don't break out which of those two -- what's the split in those two, but it's in that segment where we're seeing the reduction in referrals. But we also know in the other sort of 65%, about half of those referrals come from the hearing aid channel, other half come from the medical channel.

So we have visibility of a proportion of the referrals from the hearing aid, but not all. The proportion we got visibility of, we can see has declined. But we suspect that decline has gone into the proportion we can't see. There's no reason to believe why it wouldn't be different in the part we can't see.

And just a quick follow-up -- sorry, an extra question. First half, you sort of said there was some -- a bit of discounting from competitors. Just want to understand the competitive dynamics subsequently. It sounds like you're winning share, but can you just talk through what you sort of -- you think -- if you think the trends are more macro driven as opposed to share dynamics at the moment?

Yes. So certainly, what we're seeing in terms of sales is a macro -- an overall market issue, not a share loss. We've seen -- we've been gaining share. We did lose some share, as we said, we've regained that share. Note that one of the competitors recently publicly reported increased competitive intensity and hinted at a poor outlook than expected on their CI sales.

Your next question comes from Craig Wong-Pan from RBC Capital Markets.

Could you talk about what growth you've been seeing in the pediatric markets in the U.S. or Europe during the third quarter?

Yes. It's -- for pediatrics, I don't want to give -- try to give a quarterly number because there is a delay in registration. So the best we could do is only give you about half a quarter. What we did say at the half is we had seen, particularly in the U.S., a decline in the pediatrics. But remembering this is a smaller and smaller part of our developed market business. It's now less than 30% of our developed market sales are in this pediatric segment. But given that the U.S., we said at the half had been -- we had seen a decline.

Okay. And within Europe, have you been seeing similar activity there?

In Europe, I can sort of look back to the first half, and it looked pretty flat. But yes, I don't want to -- again, given the lag on registration, I don't want to go into what's happened in Q3, so we wouldn't be able to do it accurately.

Okay. No problem. Second question, just the hospital capacity issues that you mentioned in Europe, has that transpired in the U.S. as well? Or is it more just the adults and seniors, the consumer activity and cost of living pressures having any impact there?

Yes. So it's more stark in Europe. I think socialized healthcare systems, I suspect -- I have no data, but I suspect they have less able to get a sort of efficiency in their hospitals, whereas the U.S. with the commercial hospital system are pretty clear --- clearer rather on their overall financial state. There's no doubt the U.S. healthcare system is under pressure as well.

Some of the changes being made by the administration to Medicare, Medicaid has the potential to impact some hospital funding. Where -- what I called out is we just -- we see in the U.S. more of an impact from consumer than we do broadly across the hospital, but there's no doubt that there are hospitals that are under pressure and there are hospitals where it's been tough for doctors doing CI to get surgery slots in the U.S. It's just less of a theme than we see in Europe, where it's pretty consistent.

Okay. And then just the production volumes being lowered to reflect what you're seeing with demand. I mean volumes do seem to have been fairly volatile. I guess, just wondering how quickly you can ramp up production if needed?

Yes. So we do -- we can ramp production. We carry an efficient -- we have an efficient way of carrying some headroom in production, so that we can lift output by at least 10% quite easily.

Okay. And then just my last question on the TICI. You've mentioned that as some studies underway. Just wondering if you could give any rough timing for when how that might come through?

Yes. So cautious to give timing because -- largely because of the regulatory process. So we do have pivotal studies, so studies for regulatory approval running in Europe and in the U.S. Those studies are recruiting. The surgeries are going, and then there is a follow-up period and then the regulatory submission. So it's still a few years away, and the regulatory cycle for a new product like that is certainly less predictable than an iteration of a conventional implant.

So we're cautious on giving timing for that reason. We're also cautious that just from a -- we don't want to signaling to people to hold back getting a cochlear implant now in the anticipation of a TICI.

Your next question comes from Paul Grace from Evans & Partners.

It's actually, Sacha Krien here. Look, a couple of questions on the guidance, first of all. Just wondering if we should still be expecting the $50 million STI provision rebuild or whether that has now been reversed?

Yes. So in our outlook, there is an allowance for the STI made, an appropriate allowance for STI. Obviously, STI is subject to a Board's decision at the end of the year, but there is an allowance in there in that guidance.

In that guidance. Okay. I think you previously spoke to $50 million there. Is that the allowance that we should be thinking about?

No, that's slightly different. So that was what we took out of our STI potential last year. So we have an STI pool. That pool was reduced by $50 million because of performance last year. And when you look at the OpEx this year, assuming 100% STI, $50 million of the OpEx or whatever it will be this year would have to be STI for 100%. I hope that makes sense. But it's fully covered in the guidance. And when we get to the end of the year, the Board will look at our performance and make a decision on what size pool that should be.

Okay. So just to be clear, I'm not 100% following this. So you've got all of it, all 100% covered within the current guidance and some of that may not be paid out, and therefore, the guidance may change a little bit. Is that the message?

No. We have sufficient in that guidance to cover the range of outcomes that we can see for this year. So whatever -- yes, the STI will not take us outside of guidance...

Yes. Okay. You've given guidance for second half constant currency sales growth, 2% to 6%. I'm just wondering if you can share third quarter -- the third quarter constant currency sales growth. You've given some of the component parts, but can you just...

Yes. No, I don't want to share more detail. We think we've shared enough details as much as we're comfortable with, we think makes sense.

Okay. And just on the U.S. market, just wondering, I mean, you mentioned a couple of times that you've regained share with the Nexa. Are you actually meeting your expectations for share gains? Or is it a bit hard to say in the current environment?

I think it is hard to say in the current environment. We remain, based on feedback we get, optimistic on the outlook for Nexa and the potential of the product and therefore, the potential for further share gains, but it is hard to -- as always, it's hard to be too specific on share over a short period of time.

Yes. Okay. And then just last one for me. I just wanted to dig a little bit more into your comments about deprioritizing hearing. I'm just wondering, are you saying that U.S. hospitals are deprioritizing cochlear implant surgeries to a degree given the economics of those surgeries?

We're certainly seeing it in Europe, more from a -- but they prioritized more on the basis of what's perceived as the most important therapies or conditions to treat. There certainly are cases in the U.S. As they look at profitability, they'll schedule something that they see as more profitable than a cochlear implant in. But it's not -- it's certainly not a dominant driver of the -- it's not a driver of our sales being below forecast.

Yes. And you're not seeing any change in sort of reimbursement knockbacks for cochlear implant surgery?

We're watching insurance approvals carefully. We are hearing of some anecdotes of some insurance rejections, which almost always get overturned on appeal, but the data is anecdotal rather than comprehensive at this stage.

Your next question comes from Stuart Thomas Welch from Alphinity.

Dig, can you hear me?

Yes, I can.

Excellent. Just I just want to focus in on that cost-out initiative that you got underway. I guess my understanding is you guys have been adding sales reps to help deal with some of the customer or the patient interactions to take the weight and load off some of the audiology clinics to give them a bit more space and time. Given that's where a large part of the investment has been, like where can you take cost out to reinvest?

Honestly, the short answer is across the board. But we're very -- we will be surgical as we do this. We will make sure that we are protecting revenue growth. We'll protect things like -- obviously, things like product quality, but there still is a range of things that we've got across the business.

There's certainly an opportunity -- there's an opportunity to improve efficiency everywhere through the better use of information and through the use of our systems and through the redesign of some of our work. So now worries off limits, but we're also being very careful not to damage or put at risk core parts of our growth or core parts of our competitive advantage as we do this.

Yes. And how -- what's been the competitive sort of landscape, if you like, on the ground vis-a-vis MED-EL and AB with that strategy? Have you sort of seen -- like how have they evolved as you've been adding more salespeople in the field?

Yes. I mean they're strong competitors. They certainly compete very hard. MED-EL are a good company. They're clear on their messages and on how they -- the rationale for why they think their product is best and they prosecute that well. Advanced Bionics have a couple of features around bimodal and around remote programming that they get from Sonova. And again, that's -- they're their differentiator. So they do a good job of selling those.

Now coming back to, we have the most complete system, the most comprehensive system with the broadest set of features and benefits. And that's why we hold the share we do, and we make sure we sell that well and our competitors are good.

Your next question is from Davin from -- Thillainathan.

It's Davin from Goldman Sachs. Just thinking about the U.S. market, Dig, and I guess the question really is relative to your previous expectations and previous guidance range. You had sort of flagged a slowing referral base from the hearing aid channel. So I don't think that's necessarily, in my view, anyway, the real reason why the U.S. market has probably underperformed to your previous guidance range. So what else is happening? Do you sort of feel like people have gone through the pipeline, gone and had a referral then ultimately just not gone ahead and converted to get an implant?

Yes. So a couple of comments. One is -- that decline in referrals is definitely part of this. But as I said, it's more than that. It is -- we are seeing -- yes, people who are getting referrals not going ahead. That's part of it, too. What we are hearing from clinics is they are just -- they are seeing fewer people coming in more recently, and that I think links back to -- again, we're sort of triangulating this, but that links back to the fewer referrals, but also a sentiment issue of this is a discretionary treatment, and it might cost me something. So I'm just going to hold off at least for now.

Yes. I'll leave you with a point because clearly, there's a question here about whether it's cyclical, i.e., discretionary impacts on the consumer versus more structural questions on your referral base. My understanding in this space has been it takes more than 2 months for someone to be referred and ultimately get put on an implant. So your guidance 2 months ago, which was based on some visibility you had in your pipeline to what you're putting out today, what's been the key change really?

Yes. Good question. So you're right, it does take more than 2 months for people to come through the system. I think a couple of things to that. People can withdraw from the process at any time, and so that does happen. Secondly, we don't have full visibility of that pipeline.

As we talked about before, we got visibility in the U.S. of about 35% of the surgeries. The 65%, we don't have visibility. So we actually -- we don't know. We get feedback from clinics, but we don't have numbers on how many people were turning up 6 months ago for assessments. So you're right, 2 months isn't enough time, but equally, we didn't have -- we never have perfect information.

Yes. Okay. And just sort of a follow-on question on this. You've talked about making some changes to your cost base. And I assume part of it will be to sort of pivot referral sources. Could you sort of help us understand some more tangible changes you can make on that point and if that can start contributing to some better outcomes in FY '27?

Yes. So certainly, the work that we are doing in the medical channel, which is now well underway. We have -- we're working in 4 cities in the U.S. to build a referral base. That's progressing very well. We do see it, as we said at the half year, is a significant opportunity that about half our referrals come from medical channel already, and that's without us doing a lot of work to stimulate referrals.

I think it has -- is potentially a bit of a buffer to sort of economic conditions impacting hearing aid referrals because it is a medical channel. It's more used to what's your condition. I know where to send you rather than I have a treatment for you, the hearing aid where there's a financial incentive not to refer in some -- in many instances. So that's an example where it both can insulate from the macroeconomic and it is definitely a growth opportunity.

The other part which we talked about, which is more for Western Europe, but has a role in the U.S. as well is working at the policy and the payer level on the evidence of the effectiveness of treating hearing loss and the -- particularly around cognition, what happens if you don't treat it, and therefore, what costs are avoided if you provide the right level of treatment and therefore, why it should be a higher priority in terms of the prioritization process that goes on in hospitals of what procedures to undertake.

Yes. And just one last one...

And just building on that, too, that work we're doing in the U.S. for the sort of the direct-to-professional referrals is something that we are working out. We are expanding that one into Germany and into Australia and then some of the other Western European markets to build out that medical channel referral.

Yes. Okay. And just one last one on your cost base and the restructure initiatives that you've highlighted today. Just if you didn't think about adding more costs or just investing in further headcount. So if I just think about it being the headcount you've reduced from your restructuring initiatives, just how much of reduction in SG&A and R&D costs from a year-on-year would that yield in FY '27 versus FY '26, please?

Yes. We don't want to give that out at this stage. As we get into '27, we'll work out what we want to say about where we are. We are, as I said, taking costs out broadly across the business and a significant part of that, we will reinvest. We'll keep you informed as we go through the process, but I don't want to put numbers up now, if this is what's coming out and this is what's going back in. We'll get further down the track before we do that.

[Operator Instructions] Your next question comes from Shane Ponraj from Morningstar.

Just one from me, please. I just want to clarify the guidance for the cost base reshaping, you've called out up to $25 million today. But it sounds like some of that is accelerating the cloud investment you're already planning. Am I correct in that thinking?

No, no. So this is separate. So no, that $25 million is related to the taking costs out of the business. We do what -- in terms of the reference to accelerating the cloud, it's not accelerating the cloud program. That's nearing completion. It's accelerating the realization of benefits from that program.

Great. So just as a follow-up, if I remember correctly, at the half, I think you called out $80 million this year for cloud expenses as a significant item. That guidance hasn't changed at all. It remains roughly about $20 million remaining for '27?

Yes. Sorry about it. Yes, that's the envelope that we had given.

Your next question comes from Trent Crawley from Copia Investment Partners.

[Technical Difficulty]

Your next question will be from David Grace from Evidentia Group.

We're finished with the questions, I think.

Yes, unfortunately, there seem to be some technical difficulties with their lines. As there are no further questions, I'll now hand back over to Mr. Howitt for any closing remarks.

Just to say thanks all for joining this call at short notice, and thanks for your questions.

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

Thank you for standing by, and welcome to the Cochlear Limited HY '26 Results Analyst and Media Briefing. [Operator Instructions]. I would now like to turn the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.

Hi, everyone. Thanks for joining us today for our first half results announcement. So let me get started and the presentation upfront and then open for questions. And we do like to start with our mission. And particularly this half where we've been very focused on the launch of Nexa, which is the core of our mission of getting people here and be heard and some highlights of being able to talk to professionals about their excitement around the technology and Nexa and what that brings for the future and to be able to meet a bunch of recipients who have excited by the technology and be able to benefit from features like Smart Sync.

Let's get into the results. So as I said, that this year -- this half is really all about Nexa. And certainly a big undertaking sort of launch Nexa, and I'll explain a bit more about what's involved in just a few minutes. And overall, we see -- saw a very successful launch that really does set us up for sets us up for the future. And in doing that, and I'll go into some of the detail, we saw price increases, and we did see some delays in those price increases and delays in sales, and that's really what's brought us short of where we expected to be in the first half. And that's led to the sales revenue being down 2% in constant currency and the underlying net profit of $195 million.

So what that means for the outlook, and I'll talk more about the outlook a little bit later, but at a high level, we now think we'll come in at the lower end of our original guidance range before we adjust for the recent rise in the Australian dollar. And the reason for that being at the lower end rather than just in the range more broadly is the shortfall in the first half. We don't see that we will catch up in the second half.

And then on to FX, obviously, Australian dollar has been on quite a run just over the last few weeks. If it stays about where it is today, that's about a $30 million net profit hit through the half. And you'll see later on, we provided a bit more detail because it has been moving around so that if it does continue to move around, you can have a chance of estimating what that impact will be.

But let's go on to talk through the segments. And I want to spend a bit of time on Cochlear implants, obviously, with the Nexa launch. Because the key with a launch like this is a significant exercise right across the company. It's a change to our manufacturing process, obviously changed to the distribution. It also involves new software in all of the clinics around the world that are using Nexa. So we think about just the logistics of that launch, it's a significant effort across the organization. And it does take time. And so we said at the start of the year that our performance, our revenue and our profit will be weighted to the second half, and it still is.

And so if you think a bit more about Nexa, so first of all, as we know, we had approvals in Western Europe and parts of Asia Pacific at the start of the half. So we're able to start shipping into a number of countries in Western Europe and Australia from early in the half. We did then have to install software. Some of that went quickly, but for instance, in the NHS, our new software got stuck in a queue in the NHS. So it was actually some months before we were shipping Nexa into the U.K. In the U.S., we got FDA approval in early July, we started shipping in September to hospitals that had recontracted with us for Nexa. So again, we've really in the U.S. we've got 4 months of Nexa sales in that first half. For the hospitals that contracted upfront and some of them took longer, which meant even less impact of Nexa in that half.

We did, as we went into this, we said at the start of the year, we would seek price increases in countries where the reimbursement system enables a price increase for new technology. In most of the countries where that's the case, that does mean contracting hospital by hospital. So that's the case in Germany, it's the case in the U.S. And in going through that, we have been able to achieve the price increases that we set out to do, albeit took a bit longer in some instances. And obviously, when we're negotiating price, it's an opportunity for our competitors to compete with us quite aggressively. And we expected that to happen. We saw that happen.

We saw a number of instances where -- when we were pushing for price our competitors. We're offering discounts for bulk purchases in those hospitals, and that enables them to get a bit of stock on the shelf. So certainly a few cases where we lost a little bit of market share going through the contracting process. That's a bit of a description of what happened. Where do we end up and the way we end up is important for the confidence that gives us looking forward.

So the result of all that is by December, over 80% of our developed market sales were in Nexa. So that's obviously a very significant shift. We did see in November and December across key markets, a 10% lift those key developed markets, a 10% lift in our Cochlear Implant units compared to the prior year. And so that's sort of a good indicator of the impact that Nexa had once it was installed. And we did get a low single-digit price increase. So we got the price increases we sought in the markets that we went for it ended up with a low single-digit impact. And obviously, not much of an impact for that in the first half given the timing. But as a result, we ended up with just a low growth in overall CI units.

Now we do know while we've been very focused on Nexa, the key to our success is driving growth in the Cochlear Implant market. So we have continued to execute our growth strategies, and we continue to push -- launch new growth strategy.

I'll talk a little bit more about that and push more resource into driving growth, particularly in the adults and seniors. And 1 example of that is we're launching right now some new messaging on cognition using the latest results from independent studies showing the legs between commission and hearing loss of benefits to commission from using Cochlear implants, and starting to use that again to raise awareness of the need to treat.

So I move on then to look at emerging markets. Emerging markets, we said going into the year that we expect to see volume growth but at lower -- in the lower tiers. And that was particularly because of the China volume-based pricing, which came in, in March last year. So we had the full 6 months. And we also had that against a comparable half where we had noted higher than normal premium tier sales in emerging markets. So we saw very good volume growth in the emerging markets but did lead to lower overall revenue, and that's directly as a result of the planting based pricing in China.

That's said, we did execute very well in China. We're holding a strong market share. We're seeing strong growth and the team there have managed that transition very well. So overall, in cotter implants for the half, so the sales down 2% in constant currency, a little bit up in developed down in emerging from my perspective, very pleased with how we executed on the Nexa launch pleased with the execution through emerging markets. And both of those things set us up well for a strong second half in cochlear implant units.

Let's move on to services. Our services was in line with our expectations post work with copper implants. So we're a little bit behind where we expected these services was in line -- we did see growth in developed markets of 4% in constant currency. And this follows on what we've been talking about is and executing on is we've strengthened our digital marketing and new platform better able to segment and target people eligible for upgrade, stronger messaging around Nucleus based on direct feedback from people who have gone, particularly from Nucleus 7 to Nucleus at and the benefits of that emphasizing the waterproofing nuclear sand the launch of Canada of that led to that 4% growth in developed markets.

And what we see looking forward is stronger -- even much stronger growth in the second half, particularly with the retirement of Nucleus 7 in the U.S. We've seen a significant uplift in people inquiring about upgrades just over the last few weeks, which is in line with our expectation, but gives us confidence of our outlook for services into the second half.

And then on to Acoustics. So Acoustics down 3% in constant currency. And if we look at that by market, we actually continue to see good, very good growth in the underlying markets for acoustics and particularly Asia, and we saw it particularly through Western Europe and Australia. One of our competitors launched a new product just over 12 months ago into the Acoustics segment. And we know that sort of the second 6 months after launch, where you start to see the impact of that launch. We saw that. We lost a bit of share actually in the U.S. and the U.K. And that's better with the new product, people are going to try it.

We remain very confident of our product features and product benefits, particularly in terms of hearing outcomes with us here over the competition, and we have significantly better MRI indications. And so while we've lost a little bit of share, we still hold a very significant share in the acoustic implant market, and we expect to regain some of that share plus see market growth as we look into the future, but did see an impact from a competitive launch a bit over 12 months ago, and it is that sort of Six months later, we start to see that impact.

Okay. Before I hand over to Sarah, do you want to make a few points on our strategy. As we talked in the release about some restructuring that we have been doing across the company, which is really something we've been working on over the -- over the last few years, it's all about making sure that we are making the company fit to drive growth and fit to get scale as we grow.

So there's 3 things that I wanted to call out in areas where we've been doing quite a bit of work to drive the drive growth or set ourselves up for the future. The first of those is the transition to the cloud, which been the program that has been very visible for the last 4 or 5 years. And this is just about switching our platforms over to the cloud. It's also about actually getting consistent and aligned processes across the company and reengineering our data to get consistent data architecture and data structures. Those 2 things combined with the systems enable us to get scale as we grow. And I also become platforms for the use of AI, which is going to be part of us getting efficiency part of us getting scale but also getting insights into how we drive growth. So those programs continue to progress well.

The second area that we've worked hard on over the last 6 months and certainly since the Nexa launch is to restructure our R&D, and it's the right time to do it after a big launch, but as our products are now much more complex, than they used to be. Our R&D organization is larger than it used to be. quite naturally. And in doing that, what we're doing is restructuring to make our R&D more modular, which improves accountability but also enables us to target the capabilities we need and make sure we get concentrations of the right capabilities we need for future technology development. So important piece of work there that's well underway and appropriate to do after the Nexa launch to make sure that our R&D organization stays future-fit and able to continue to develop an outstanding range of products.

And then the third area is around driving growth. And we know that's the key to our longer-term success. We continue to work hard to lift the growth rate, particularly in the adults and seniors segment. We've got a number of programs we've talked about over time, but we continue to add some new programs and new experiments, particularly focused on referrals and referrals out of the medical channel rather than perhaps the hearing aid channel, and we're diverting more of our sales and marketing resource towards growth, and towards building these referrals. And that's both requires some organizational change to do that and some reskilling of some of our commercial teams to have that because of different conversations that they have in the referral channel than they might have either a hearing aid or in the cochlear implant clinics. So it's done some restructuring across our commercial organizations to set ourselves up there too.

But just 3 important areas of strategy that we were making changes that don't have any benefit now, but are setting ourselves up to have a benefit into the future.

Okay, with that, I will hand over to Sarah.

All right. Thanks, Dig. So I will take us starting with the profit remarks. And you see the sales revenue has declined by 2% in constant currency, but Dig's taken us through those details. So I won't go into it further right now.

We go to gross margin. You see a 2-point decline to 73%. Now this was largely expected, and there's 3 things that I'd call out in here. First is the mix shift to lower-margin emerging markets in the first half, including the impact of the China volume-based pricing coming through. Second is Nexa. At launch, Nexa has higher COGS, we expect that. But we also expect that as we come up the experience curve as the commercial volumes grow, we do expect that to decrease over time.

Finally, Chengdu is a facility that is continuing to ramp up. We're really happy with the production we're getting there, but there's still room to go in that facility. So we'll continue to see Chengdu be a small headwind to gross margin for another year or so. Our operating expenses declined 2%. That's a net effect.

As Dig talked about, we've continued to invest to drive long-term sustainable growth and to invest in R&D. So that's strengthening our sales capabilities, getting more scalable and how we support our go-to-market, investing to strengthen the referral pathways in the way that Dig talked about. And then also putting investment into R&D so that we support that project and services pipeline that we have coming. However, at the same time, we've been very deliberate in this half about phasing our costs into the second half as to balance out the second half weighting of the revenue profile that we expected to have.

Finally, we're cycling a few one-off projects that finished up in the first half of last year and are finished at this point. That brings us to the underlying net profit margin of 17%. The -- what you see below that are some items I'd call out, in particular, the $24 million of cloud computing related expenses, which we expected to invest there and will be reported as a significant item below the line. You'll see the fair value losses on investments of $9.6 million. That's related to Saluda which is a small long-term financial investment that we've had that was revalued on their listing back in December.

Let's go on to the balance sheet on the next page. The main feature of the balance sheet is the $48 million increase in working capital. Now that's a factor mainly driven by having fairly conservative safety stock coming into this half and holding that as we launched Nexa, Kanso, progressively rolling out around the world.

We continue also to build that stock ahead of what we expect will be a big second half. We also continue to expect that, that inventory will moderate over the second half.

The other thing I'd note on here is you do see that $36 million change in trade receivables, the variability is pretty normal and largely due to our emerging markets. If you remember back to the end of FY '25, we had seen receivables increase due to the larger emerging market orders. And this is just the unwinding of that as the receipts come through. I note that other net liabilities increase of $33 million. That's an increase in net tax assets, and it's very much a timing effect that will unwind by June.

Let's talk about cash on the next page, if we can, please. All right. The main feature in the cash flow you see is the $103 million decrease in net cash. There's a few factors behind that. We have a number of quite lumpy payments in that first half. The $48 million increase in working capital that we just spoke to, there's a $34 million cloud investment that we mentioned. There is those taxes paid, noting that, that's $30 million higher than what's expensed in the P&L due to the timing effects. And there's also the discretionary bonus that gets paid in the first half. Now this was $16 million, which is much smaller than our STI normally is. That reflects that in FY '25, there was no STI paid to senior levels of management.

Final call out on here is our capital expenditure of $40 million. That is continued expansion in our Lab Cove and Malaysia facilities.

All right. Dig, back to you for the outlook.

Okay. Thanks, Sarah. So to under the outlook, and I've touched on this upfront, but just a little bit more detail here. is we're aiming to help 60,000 people here this year. And obviously, as we said at the start of the year and I set upfront weighted to the second half, but we were a bit behind where we had expected beef or cochlear implants, which means now the lower end of that $4.35 to $4.60 range. We don't expect to catch that back in the second half.

I've talked to each of cochlear implants and services where we had some good confidence on the signs we're seeing of an uplift in the upgrades in the second half, and that's something as we talked about, we've been working towards is getting that upgrades and services number back up. I expect some lift in acoustics as well as we both see the market growth -- we'll get some share and with the Baha all there from an upgrade perspective.

Now in terms of the foreign exchange, we've gone into more detail here. That guidance range was set at 66% and 56% for the Australian dollar to the U.S. and the euro. If it stays where the spot rates are now, that's about a $30 million hit across the second half. We have just provided there that for a little bit more detail. So for each cent change against the U.S. dollar -- it's about a $3 million impact for that in the half and for 1% in euro, it's about $4 million. And that's around our exposure for this half and also takes into account our hedging coverage for the half as well.

Okay. So let's finish the presentation and then move into questions.

[Operator Instructions] Your first question today comes from David Lowe with UBS.

If we could just start with the restructuring, just to be clear on that, when you talk restructuring -- are we talking charges that we should be thinking about coming through the P&L? And I guess the more important question, you talked about the seniors pathway. Can you talk a little bit about how things are playing out there? And maybe touch on where you think market growth is, particularly in some of those key markets where seniors have been a strong driver, please?

Yes, David. So on the first one, the cost of the restructuring, we take -- we just took up through OpEx through the P&L, and we've done that for the last couple of years. It's a reasonable amount of money, but not huge amounts, but it quite an active -- it is an active program of making sure that we keep the organization ready for the future as we're changing and as the markets now technology changes. Tenorace, yes, it is the most critical issue for us. What we've seen is good progress on front. So Nexa been an opportunity to reengage with people who we've engaged in the past while they haven't been ready or haven't been indications, and we've seen some good progress there.

On the flip side, the referrals from hearing aids have been a little bit softer through the last half. Possibly, that's in line with what the hearing aid companies are saying about slower growth in hearing aid units. But the big opportunity for us is to has always been is to generate more referrals. We've been working hard in hearing aids on that. We are now doing more on the medical channel.

We've done quite a lot of analysis of the people who turn up at clinics that we don't have connection with before they get to a clinic and where have they come from? And what we're seeing is quite a number of them have had referrals from other ENTs, sometimes from GPs. So we're now running some programs to experiment with how do we engage those people who are already referring to get them to refer more and who are physicians like them who would also be able to -- we see people who are in indications, but also able to refer. So further programs there.

And as I said, we're also rolling out messaging on commission, the leg between commission and hearing loss and that we've talked about many times, is a really important long-term part of our strategy. the reason -- 1 of the big reasons people don't get referred is people don't see hearing loss for seniors, particularly as a very important medical issue. And as the evidence grows, that not treating hearing loss increases the incidence of dementia and an evidence showing treating hearing loss and treating hearing loss properly with cochlear implants to be with Spiderman loss significantly reduces the incident dementia. That evidence is there as it keeps growing. It's important that we communicate that in the right ways to professionals and also to consumers. So that's a lot.

Can I just ask a quick financial questions. Profit margin, actually. I know you're saying '27, but it's frankly 16.5% versus the 18% we used to what should we expect second half full year? And I did think the hedging program over the years have been led to believe that it was pretty effective at protecting the next 6 months at least. So I'm surprised at the level of exposure maybe it's changed. Maybe I'm have a date. Could I get you to touch on those 2 topics?

I can talk about some of those. So certainly, first of all, the margin in the outlook will be -- excluding currency, we expect to be a bit under 18. The currency is going to bring that down further if it stays where it is. Our hedging program is only a partial hedge, really hedging the cash flow that comes back to Australia.

We're not trying to hedge our net profit. It's more about hedging the cash flow, which gives us time to adjust -- and in this outlook, we're not going to try and do is trying to adjust our cost base, particularly given how quickly the Australian dollar has risen to change the -- to have an impact F '26. We are looking at F '27 and looking at the cost base and trying to get our -- take the action we need to get the P&L back in line with our the long-term structure of the P&L.

And if you go back and look, I think in 25 years, if you go back and look at our 25-year charts in the annual report, the Australian dollars moved between $0.60 and $1.10 over that time, and that there's pretty good consistency in the COGS and the OpEx in the net profit margin. You can see it moves around a bit when the currency moved extremes, but hedging gives us time to react and normalize it and seeing the Australian dollar stays up, that's the action we will take again as we've done in the past is to get our P&L back in line with our long-term targets.

Your next question comes from Andrew Goodsall with MST Mark.

Just with Nexa, if I remember correctly, you wanted to be in about 90% of your jurisdictions by now. Could I just check where that? And then the 10% growth that you highlighted in developed markets, just where you think that is relative to underlying market growth?

Yes. So Andrew, we've got to just over 80% in December. That will continue to lift. So countries like France have a well like have a CE mark, they have a registration process. that sort of takes 6 months or more. So we're expecting to get that registration in the second half in France. Japan and Korea are always a bit slow. They're expecting to come on. So we expect that mix percentage to continue to lift, but quite reasonably happy with being at 80%, and there's still a few contracts that we haven't locked down and we expect to lock down over this quarter that will give us a bit further lift in the U.S. and in Germany, particularly.

In terms of the outlook for market growth, we think our CI developed market number developed market growth will be a bit under 10% as we look into the second half. And I think that's pretty much in line with market growth. We did -- we have lost a little bit of share, as I said, in some of these -- particularly some hospitals around the contract in the first half, which will get back as a short-term impact that we're having through the Nexa launch back focused very much on how do we drive growth and how do we drive that out some senior growth. And we've seen some good progress over the last 4 years, but we know we've got more to do to get that growth rate at the level we want and sustained the level we won.

And just a quick second question on buyback that you haven't made any mention looks like it was not really utilized in the first half and maybe that reflects where your cash flow was, but just any comment on that going forward?

Yes. So yes, that's a good observation. But that remains in place. But we -- we've got a target for our cash level. Yes. And we're a bit under that at the moment. So we want to get our cash back up to there, which we will do. The inventory is high. I'm very comfortable with that going through a launch but through the launch and with stability, we'll get the inventory back down, and we'll see the cash generation pick up on the back of that.

The buyback will sort of work around that timing?

Yes, yes. So certainly, it's going to -- it remains on foot, but we want to see the cash flow improve a bit.

Your next question comes from Davinthra Thillainathan with Goldman Sachs.

Just picking up on that bit about market share loss, I guess, in the first half. Curious, do you feel like that was more in the U.S. versus Europe, I guess, in the developed markets? And then somewhat related to that, we've sort of picked up commentary in places like Germany, as an example, to sort of get the price uplift that you're putting through for Nexa, you kind of need the hospitals themselves to get an uplift in their funding through DRG reimbursement as an example, and that can take some time to come through. Could you please just highlight if that's correct? And how long it could take to come through, please?

Yes. Okay. So first of all, just on the -- where we've lost a bit of share, it's more actually on a sort of a hospital by hospital basis rather than sort of market specific. So certainly some cases in the U.S., some in Germany. And it is where our competitors saw our launch coming and sensibly responded with some pretty strong messaging and marketing. That's what we'd expect.

But also from a price perspective, I said we've seen instances of discounts for buying bulk and then they get their implants on the shelves and they'll get used over time. So those sorts of things have an impact in the short run.

It's very sensible strategy on their part through a launch. -- but not -- it's a short-term issue 1 year not a longer-term piece. In terms of DRG and price increase, so a price increase for a device isn't directly linked to -- but if hospitals aren't getting an increase in the DRG and the DRG is basically the amount of money that they are reimbursed for the procedure that covers the device cost plus the hospital costs, plus the surgeon costs.

If the DRG doesn't be and the product price does then the out of money in the hospital to carry out the procedure is reduced. So hospitals do push back on that. So yes, that creates sort of tension in the negotiations and we knew that going in. And therefore, we get some pushback.

But equally, when you have an opportunity to get a price increase, we should go and it's right for us to go and see what we can do and I said we got the price increases we were after. So the negotiations were quite difficult in places. We did better in some places than others.

In terms of the DRG, rising, yes, it is that over time, the device price does have an impact. It's often an assessment process that looks at the cost of procedures and looks at the DRG. And so the procedure cost goes up because the device then there can be an increase. We certainly know the reverse is true. If you pull the device price down and then often the payers will look at that and see the procedure cost is less and pull the DRG down. But it's not necessarily a linear relationship and neither is it specifically time-based if this happens on a point in time in 18 months' time, you then see a proportionate impact.

Great. Maybe 1 for Sarah then on your gross margin. I noticed the reduction relative to your previous guidance by about 100 bps on -- could you help us understand the moving bits there. I believe the next delay is likely a contributor, but I would have thought the other sort of bids that play into it sort of manufacturing perhaps in terms of your inventory build as well that has secured. So is that a drag in the second half? Could you sort of help us work out what's driving that 100 bps, please?

Sure. Look, it is a combination of factors and it's the things that you said. So part of that is that we were holding a reasonably conservative level of safety stock because when we go into this product launch and over this first half, remembering we have Nexa, also KENZO 3, also BAHA 7, all coming out to the market. What you don't want to be doing is get caught short if it suddenly goes faster than you expected, right? So as big as talk through, we did go through this. You have to go through this contracting process. You have to get the software installed and all of that.

And as he said, it took a little bit longer. But we've been holding some inventory at safety stock levels so that if it went the other way, we were prepared for that. So that's a contributor. Certainly, the contributing factor around the needing to build and make sure we have the right stock ahead of the second half, which as we've talked about, we do expect to be significant. We've got that inventory as well. It will start to moderate over the second half.

Your next question comes from David Stanton with Jefferies.

Perhaps I could talk to more longer term at least initially, call it, F27 plus, should we be thinking about greater than and that 10% volume growth into F '27 given the ongoing rollout of the Nexa, and what are the implications, again, longer term, 27%-plus for that previous NPAT margin guidance, please?

Yes. Okay. So first, thanks for your questions. So yes, look, we continue to aim to get at sort of 10% revenue growth year-on-year and do that over the long term. I think we're working through what F 27 will look like now, but certainly expect us to continue growing. I'm not going to give you a rate of -- I'm not going to give you our guidance for right now, that will be premature.

But over time, the opportunity to grow is there. Growth programs are having an impact. We're expanding and putting more into those growth programs and the evidence for people to be treated continues to continues to grow. And we see that in our consumer surveys is right there is definitely growing awareness of the links between hearing loss and cognition in candidates. So, David, I think there was a second part beyond just the...

And what the implication for margin -- implications from item, please.

Yes. Look, I think, as I said earlier, in the shorter run, the Australian dollar does put pressure on our margin, mitigating to some degree by the hedging, but not completely. But as you've seen over time, as the dollar moves, we'll adjust where our costs are, what we spend and how we spend it to try to get that margin back in line. That's why those lines are pretty consistent over 25 years in terms of net profit and R&D investment gross margin.

Understood. So 18% underlying is still the target over the medium term at least?

Yes, still taken over the medium term. I think certainly with the currency where it's not going to happen this year. We'll see where the currency goes over into '27 and the outlook there, but again, not going to give guidance on margin for '27 at this stage.

Understood. And perhaps to ask in a different way, question has already been asked. This reorganization what does that do to -- in the short term at least to G&A as a percentage of revenue? Will there be any changes in the second half from that, please?

No, we'll manage it within the envelope that we set. We had a regional restructuring cost in the first half, and we have 1% OpEx rate. So we are -- we know what we've got coming, and we budgeted around it. We manage around it.

Your next question comes from Saul Hadassin with Barrenjoey.

First question, Dig. At the full year '25 results, you spoke to 10% plus growth for units in developed markets. You haven't given a specific rate this half. But in terms of what you just said around what you're seeing in the marketplace now as it relates to market growth and your share, can you give us an update as to what you think unit sales growth will do this fiscal year based on the revised guidance.

Yes. Yes, we think in developed markets will be under 10% this year as part pretty much sort of flat in the first half, 20% in the second half is beyond what we think we can do. Yes, even with Nexans over the year, it is going to be a bit under 10%.

And I guess on that point, because it sounds like from what you've been saying on the call that the opportunity in the senior market is there, but you're having some degree of difficulty at least accessing that or tapping into that. Is that what we should be reading through? I mean in terms of a sustainable rate of growth for developed markets, when you factor in pediatrics being flat, and the growth coming from adults and seniors. I mean I'm not sure you gave an actual percentage growth rate for the market. But should we be thinking that developed market growth at an industry level is more like upper single digit rather than 10% or 10% plus.

No, we certainly still think 10% is well achievable. We -- potential is there. We're working hard at getting. And if you look back after the last few years, we certainly saw stronger growth back in '23 and '24 that slowed into '25. We expect that we should be able to lift that up with the activity that we're undertaking.

Great. And last one, just on services and the idea that you should get some uplift based on expressions coming in from recipients noting to obsolescence -- the feedback from clinics in the last few months out of the U.S. is that insurance companies continue to be problematic in allowance for process upgrades, including wanting to see clinical notes to see whether there is, in fact, any issue with the processor. You've mentioned strong recovery or strong growth of processes in second half. How confident are you that you'll be able to deliver on that revenue line?

Yes. What we are seeing is that the insurance companies are pushing harder requiring more information. We've set up so that we're able to provide that information because clinical notes is only there, it's just a matter of getting the access to them. And we have seen an uplift in interest and inquiries because of the N7 retirement and that uplift is certainly in line with our expectations. So that gives us confidence in the outlook that we have set. And that's in the U.S. And then in Western Europe, too, we've seen stronger upgrade performance in that in the last half as well, and expect that to continue into the second half.

And just on the glass point, in the context of the revised guidance, can you give us a sense of what strong growth means in a percentage terms in terms of that services revenue line in second half?

No, we haven't broken going to break down. of the by line what we expect in the second half. But we are anticipating a strong -- a significant uplift in services.

Your next question comes from Steve Wayne with Jarden.

I just wanted to ask about the, I guess, the delay in the contracting process that you saw during first half. With that contracting, I mean, was the issue that was causing some of that frustration price? Or is there other factors to the contracting process? And now that you've got 80% of your target contracted. Can you just give us an indication of have they all made the software upgrades as well?

Yes. Okay. So on the software -- yes, yes. So the software installation issue early on, particularly in the U.K., a few places, but that's -- there's just a logistics in time to do it, but that is done. And then in terms of the sort of the Contracted more broadly, when it says price, yes. And it's just people push -- it's a range of things from the obvious if people push back on price and say and justify and in hospitals is particularly more rigor around prices. So yes, we put a price cost, yes, okay, we've got a value committee and that value committee meet you in 3 months' time, and we take all our price increases there. So there's nothing we can do. Apart from wait for the 3 months to all as and for those meetings to be held.

In terms of taking longer than an estimate, look, we haven't done a price increase like this around a new implant in a very long time. So we put our best estimate of what it would take us and with some ambition in it as we should, and we've fallen a bit short of that. But we overall got the results that we were looking for.

And so as part of the contracting process, do they -- are you asking those customers to commit to a certain volume? Or is they just agreeing on price only and then it remains to be seen what they order. Just to ask that from the perspective of your confidence in the second half.

Yes. Yes, there's a whole range. So certainly, in some places, there is price and volume lengthening others, it's just a price.

Yes. Got it. Just 1 quick question on the accounting for Sarah. Last year, at the end of FY '25, you released the STI provision into the P&L because they weren't going to be triggered and indicated that you will be rebuilding that provision during FY '26. Just wondered where you got to with the rebuild and whether or not you would be rebuilding it to that sort of level given sort of the performance of first half?

Yes. Look, we are continuing to rebuild that. So you see that coming through in the employee benefits provision. The rebuild happens like it normally does, which is over the year. So we've accrued for about half of that. But the rebuild will continue. It's -- I think is that going to answer your question.

Yes. So you're saying $25 million of provision has been put into the P&L this half. Where does that sit? Is that in the SG&A line?

So the employee benefits provision has increased. It's offset by what's paid in that discretionary where that came out this year.

So from a P&L perspective yes, through the SG Well, it's actually through every line item, right? So there's people in COGS who you get the STI. So some or goes through there, some through SG&A, some through R&D. Wherever we got people there's a provision base.

Your next question comes from David Bailey with Morgan Stanley.

You've given some commentary around the expectations for developed markets for the full year unit sales. I'm talking here, so a bit less than 10%, good growth in the second half. Just on the emerging market side, I do note that there was some very strong growth coming through in the second half of '25, particularly in China, I'm guessing. Maybe just help us understand what you're expecting for unit sales growth in emerging markets in the second half and maybe an overall number for unit sales for the second half or full year considering both developed and emerging markets would be helpful.

Okay. So we do expect strong growth in emerging markets across the board, so both CI and in Acoustics into the second half. We've got a lot of the emerging market business works off sort of either tenders or orders and those orders we get reasonable visibility in advance. So we can see quite a strong forward order book. It's particularly into Q4. And so that sits that sits in our outlook.

And similarly, as we saw a strong second half, a number of those orders are sort of annual orders into some countries. So they come back at the same time a year be easy for us if they didn't occur in Q4, but that's -- they don't care about our financial year.

In terms of where do we expect overall CI growth for the year. We haven't given a guide on the number, but we do expect pretty strong unit growth overall. Part of that is driven by China, but we see, obviously, a pickup in the developed markets in the second half and pick up more broadly in emerging markets as well. So we haven't given a guidance on to the CI unit number.

Maybe just a more of a medium-term question. I've asked this before, but I'll ask it again, just on the totally implantable -- it looks like there's been a new pivotal study coming through on clinical trials for Cochlear. Can you maybe just talk a little bit about the potential timing for Cochlear? And maybe it looks like there is a competitor could launch toward the end of calendar year '27. Just what are you sort of seeing in terms of that space and potential launches for others versus what might be able to achieve?

Yes. Look, exciting area. We have got pivotal studies up on clinicaltrials.gov and recruiting for totally implantable. The pivotal study is a step to regulatory approval, with a new technology like that do need to complete a pivotal study, meet certain endpoints around safety and around hearing performance that the regulators then take into account in review. So those studies are going to run probably 18 months or so. It sort of depends on recruiting speed. There's a 6 month on a 12-month follow-up and then there's a regulatory process on top of that. And being a new product is not -- we don't necessarily on the standard regulatory time lines. So still a few years away.

Yes, we got the other competitors on the journey. I think I'd say I think is that the time lines are unpredictable, both around the study around the results and then around the regulatory process. We are certainly confident or very confident of the performance of our TC. We first did a ticky 20 years ago. We've done a couple of feasibility studies with over the last 6 or 7 years with the technology to give us confidence in the technology. So in us going to a pivotal study, it's an indication we're confident of the performance of the product and the ability to meet the regulatory hurdles. But that doesn't give you a great guide as to exactly how long it's going to be, but it's still at least a few years away.

Your next question comes from Craig Wong-Pan with RBC.

Just with services, you saw good improvement in developed markets, but a decline in emerging. Do you have any ideas of why there was that decline in the emerging markets?

Yes, we do. Certainly, part of that is just is timing. I said emerging markets, those orders can happen in a lumpy way. And part of it is that the part of upgrades in China is caught up in the VBP process. So that had some impact.

Okay. And then just a question on gross margins for Sarah. The drivers there, you talked about that compression, so mix Nexsan and Chengdu. Could you provide any color as to the splits between those? Like what we -- was there any kind of particular 1 that was bigger than others?

Look, we don't provide a detailed breakdown of that. I mean the mix shift to lower margin in emerging markets and the Nexa higher COGS for right now, which will come down over time. our reasonable share of that. Chengdu, as we've said previously, is kind of just under 0.5 point and we'll continue to be that working out for the next year or so.

Okay. And then just a question on the restructuring that was done. -- still guiding to 13% of sales for R&D. Is there any benefits kind of beyond the FY '26 where that comes down because of this restructuring or through the sort of SG&A lines as well?

So the 13% in R&D wasn't from the restructuring. It was just with our lower sales last year, we chose to continue to invest at a rate -- at a sort of dollar rate in R&D and have the sales catch up, so that will get back to 12%. Now this restructuring is don't expect sort of changes in the margin or the lines. It's about making sure that we've got the right resources in the right places with the right skills. So it's -- and some of it will give us efficiency for sure, but then we will use that to reinvest either in growth or in a new technology area. It's very much making sure that we've got the right capabilities for the future and the right structure and accountability for the future that enables us to get scale, but it's not done with the goal of it will just deliver efficiency in itself.

Okay. And then just last question on the drug-eluting electrode. There's 2 studies out there, I mean, that you're conducting. When could we expect some readouts from that?

So those studies -- certainly 1 of them has closed. So we've seen the data, but we are well use that data is for the regulators. So that's our priority there. We go through over time, we'll probably disclose some of that data as much to our customers on what we see, but we haven't made decisions on when we do that at this stage. And as I said, the core purpose of that data is for the regulators. I think perhaps we're at that. We're pleased with the results that we are seeing without showing the data continue so we are seeing what we had expected to see.

Your next question comes from Sacha Krien with Evans & Partners.

Look, first of all, on services, I'm just on your second half expectation just wondering if you can give us a sense to the extent to which payers are approving upgrades on service discontinuation since -- I mean you talked about inquiries. I just want to get a sense of how much you're seeing approvals on that basis.

Thanks, Sacha. So the once we retire a product, so we're no longer repairing it, then it does an able -- it does open up for the insurers to be able to cover it. And obviously, that they do that because they want to see that the processor is a proper life or it isn't repairable. So it does sort of open that path up. And obviously, we have to retire products because there's actually an ability for us to support the components are these using electronic components, which have pretty short life cycles.

There is a limited time that we can support the external products, and that's the reason for retirement. I think insurers recognize that. But something the external can't run forever and can't be repaired for it because it just -- it's not technologically possible.

Yes. That makes sense. I just -- we've had some feedback that some payers are saying it actually needs to be broken rather than not repairable. So I'm just -- I guess I'm just wondering, are you saying that the majority of payers will basically approve on the basis of service discontinuation?

If the -- so they're actually not really a difference between not repairable and broker because if it needs repair, there's something broken and if they can't be fixed in the process of broken -- there's not perhaps semantics rather than a real difference -- the person keep using the process or the insurance might expect them to do that if they can't, and we're unable to repair it, then they will replace it.

Then FX, I know you're not giving guidance for 2017, but I'm just wondering, roughly, if we're talking about a $30 million headwind in the second half, does that equate to about $60 million next year on the same currency levels is today?

It depends. The amount that we put in that number has changed every day this week as the Australian dollars rise the same -- yes, that number sort of...

It got worse there, right?

Yes, as who knows. But I said, look, there's hedging there and then we will work to adjust our cost base to track back to the margins that we're aiming for. Obviously, doing that at a sensible rate while we can keep investing in the business. And that's what we've done over time, and we'll continue to do that.

Okay. And then last question. Just wondering if you can give us a sense of pediatric developed market growth during the period, and it's been a bit soft. Has that come back at all?

Yes, we did see it was flat through pretty much to the , but we did see some declines in a few places, which has been unexpected, certainly the U.S. was one. And I think there's probably some local conditions around sort of some of the support and infrastructure there, but broadly flat.

Yes. I mean the repositioning or restructuring that you're talking about towards the medical channel, does that mean that there's a little bit less confidence in being able to achieve that sort of market growth without these changes that you're making, the growth slowed with the focus that you had?

Put it more as we have -- as we grow, we're able to expand the growth programs that we take on. And as we implement our growth programs, what we always said is we experiment and we learn. And from that, we then adapt the programs. So this is a natural extension of the work we're doing and what we've learned along the way and the application of more resource to driving growth, which is part of us growing and part of us reprioritizing our internal activity to make clearer choices on resource allocation and putting more into growth, which, again, is just part of the strategy process. And as we develop as a company as an organization and get -- we get better visibility over what we're doing better data on what we're doing and are better able to redirect resources to higher-value activities.

Your next question comes from Elizabeth Davis with Bank of America.

This is Lyanne Harrison. So just coming back to the next pricing, I understand you took a low single-digit pricing this time. But given that you hadn't taken price for a long time, also the efforts that went into the contracting. Why didn't you ask for higher prices, whether it's mid or high single-digit increases -- changed, sorry.

So low single digit is the outcome we achieved across the board. Some more we can get increases of some count. So where we went for increases, we went for more than that. The sort of weighted average of that gives us low single digits. So yes, you're quite right. If we're going to take the effort and the delay, we want to push for more or higher single digit, but we know we couldn't get that. It's not all the places that we had that opportunity.

Okay. And so then with that pricing strategy, where you were -- where you had taken smaller increases, are you likely to go back to those hospitals or customers a bit more frequently to try and get increases later down the track?

Yes. Look, it varies by market. We certainly have, again, depending on the circumstances in market. So in the U.S., we have been working for a while to get more regular price increases through. In other markets, we don't have that opportunity. And 1 of the things we have with Nexa and with the upgradability, which we've talked about in the past is in markets where you can't get an increase until you've got clinical evidence of a benefit with Nexa upgradability as we explore that as we demonstrate some of the benefit that we think is there, there is potential to go back to those markets to make the case for a price increase based on the evidence of improvement in outcomes or quality of life.

So yes, we've got quite a comprehensive pricing strategy around Nexa of which we've implemented some of it so far, and some of it will extend in and it extends over several years into the future as we think about and bring about the potential.

Okay. And then the next question for Sarah on gross margin. So understanding Nexa has higher cost or higher COGS currently, but you expect that to decrease over time. At what point do you expect, obviously, Nexa with increased prices, et cetera. When would that become sort of gross margin neutral or a gross margin tailwind?

Look, on that one, I mean, I look back to prior products where we know that it takes a year or so for those COGS to kind of come as we come up the experience curve, it does take time. But that's what helps us bring those COGS down over time.

Okay. And then just 1 last question following up on what Sacha was asking about that medical channel. What proportion of your referrals come from that medical channel at the moment?

Yes, it does vary by market. But in some of our markets, we're seeing half of -- there's a component of our referrals that we get through [indiscernible] can be sort of 30% to 40%. But depending on the 20% to 40% depending on the market. Then we have between 60% and 80% that is self-preferred gets there in another way, up to half of that can be medical channel referrals. That's quite a significant part of the business and certainly -- we have current referrals that we don't get involved in and we can see the opportunity to expand that further when we look at the base of potential referrals against those.

Your next question comes from Laura Sutcliffe with Citi.

I think you mentioned back in August that you were seeing some surgeries delayed by choice waiting for the Nexa. I was just wondering if considering your exit rates in November and December, whether you were starting to see some of those come through? And if perhaps they've provided a boost at that point during the year or whether they're coming steadily or whether you're still waiting for them?

Yes. I think to the extent surgeries were delayed and they're certainly worse. We think they were caught up through the half. Now what's hard to know, though, is because surgical slots can be tight, those got caught up in the half, but did it push someone who was scheduled and maybe was scheduled in December is now scheduled into the middle of February, because somebody was made it sort of pushes the pipeline down a bit. But I think fortunately, we did see some deferrals, but not a huge number through that early period.

So the gains from -- the gains we get from here are going to be more around just market growth and picking up share. And rather than sort of backlog of deferred -- certainly backlogs for surgery are more than normal than they are just deferred next.

Next question comes from Christine Trinh with Macquarie Capital.

Just a quick 1 for me. It sounds like quite a lot of work is going on to kind of tap into that seniors market, medical than direct-to-consumer. I just want to know how we should be thinking about sales and marketing going forward over the next year or so?

Yes. No. Thanks, Christine. Now we will manage that within the bounds of our normal G&A. So we're talking about reallocating resources internally, not expanding G&A to do it.

Your next question comes from Siobhan Drury with EY. We'll move on to the next question from Elizabeth Davis with Bank of America.

It's Lyanne Harrison here again. I had 1 follow-up. Previous reporting calls, you talked about the cost of living challenges that was weighing on services revenue. Are you still seeing that as a headwind through this first half? Or has it alleviated somewhat.

Look, I think it still sits there in the U.S. where there's a co-pay and sort of macroeconomic conditions, it still sits there. But yes, look, we haven't called it out explicitly. I think we did that on the way down because it was definitely part of the services falling. It is still an underlying issue as is the insurance pressure that's been talked about. But with those things, we remain confident of the ability to grow services into the second half.

There are no further questions at this time. I'll now hand back to Mr. Howard for closing.

Okay. Thanks, everyone, for joining the call. I appreciate your time. Thank you.

Thank you for standing by, and welcome to the Cochlear Limited FY '25 Results Analyst and Media Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.

Good morning, everyone, and thank you for joining our results presentation. Let's get underway. And as always, we are starting with our mission. And our mission serves as a guide across the company. That it has 2 important points. One is is that the purpose that sits in our mission enables us to attract outstanding people. And the other thing it reminds us of is the long-term nature of our business and the long-term nature of our strategy to help more people hear and be heard.

And so I wanted to start the presentation today with a look at our '25 year financial history. And doing that to put in context the F '25. So as you've already seen, our sales were below our expectations for '25. And then it's really a question of how do we respond. And I want to put how do we respond to lower sales in the context of history.

So if you look at these charts and starting on the left with our R&D. That investment in R&D, that's the most consistent chart on this page. So R&D has increased year-on-year. When sales have gone down, that R&D investment has continued to lift. So our first response when our sales are not where we expect them to be is to make sure that we protect R&D. And we do that because it's the core of the business. It enables us to retain our market leadership position, but it's also the performance of our products that sets us up to get the evidence to drive growth, and I'll come back to that.

I mean think about Nexa, which I will also talk about being a 20-year development. It's that consistent investment in R&D over 20 years that enables us to produce a product like Nexa.

Now OpEx after R&D is then the next least variable chart on this page. Again, pretty consistent growth. But you can see we do pull OpEx back further than we do R&D. And we lift OpEx more than we do R&D, too, when sales are going well. And I think you'd expect that. So when we do moderate our spending, but we do try to protect in the OpEx is the investment in growth.

I say protecting that investment in R&D, protecting the investment in growth leads to the 2 charts in the middle, which is the long-run history of growth in cochlear implants and the long-run history of growth in revenue.

Now the consequence of protecting the growth spending and the R&D spending are the charts on the right, where there is more variability in profit, which is what you'd expect, than there is in our spending and than there is in our sales. And so that response to lower sales, which we saw this year than our expectation, is to protect the investment in the core parts of our strategy that drive our long-term growth.

And we do that because we've got a market that's less than 5% penetrated, but we do that because we have confidence in our future. And I want to talk to 2 key aspects of our confidence in our future before we get into the detail of '25.

So the first of those is the Nexa system. So launching now around the world. It is -- we started the development of Nexa from concepts in 2005. That was early in Chris Roberts tenure. Janssen had just taken over R&D at that time and Jan who shepherded this product over the last 20 years. And it's absolutely a breakthrough product.

The world's first and only smart cochlear implant. In our view, one of the most sophisticated neural stimulators in any therapy.

What's it bring to our patients and our professional partners. We want to make sure we have benefits upfront as well as potential into the future. I'll get to the potential of the future in a minute. But right upfront, because we've been able to, with new electronics, make the power transmission more efficient, we can have a smaller battery on Nucleus 8, and that gives a full day battery life. So Nucleus 8 was already the smallest processor on the market by quite a margin. It's even smaller again. We know that consumers are very interested in cosmetics and the size of the processor, and we have extended our advantage in terms of having the smallest processor with a full day of battery life.

Then the map on the implant, which we call SmartSync, the ability to get back on air quickly, is important both for recipients and for clinics. So what happens up to now is if someone's processor breaks, they either need to schedule an appointment with the clinic, go into the clinic, they get a new processor. The clinician loads their map, and the map is the unique settings that encodes sound for their auditory nerve, and it's different for each person. They load that onto the processor, and the person goes away hearing again. Or in some parts of the world, we've got the map in the cloud. So they call us. We load the map in our warehouse onto a processor and ship it back out to them. But there is a process that takes recipient time, takes valuable clinic time. It is often not reimbursed.

And if you think about this from when people go on holidays, for example, particularly with children, they're worried they processor could break. They could lose the processor. So they go into the clinic and they get a spare, they get a loaner just in case. So you think about all this clinic time that is taken up even when processes are reliable, but not billable and adds no value.

Now with the map on the implant, all someone needs is a blank processor. So we can ship a blank processor, a clinic can ship a blank processor to them, no clinic time appointment time needed. People going on holidays can take a new spare with them. They've got an emergency, if they don't need it, they send it back afterwards. So savings in clinic time and savings for recipients.

And one of the things being able to do with the amount of data that we now collect on clinical practices, we can see that over half the appointments that were made in clinic are for people after the first year of having their implant. And those appointments are really about just routine checking and maintenance. The more we can reduce them, the more clinic capacity we create for future growth.

The other point I want to make on Nexa in the future, too, is -- we often talk about how full our R&D product pipeline is. Nexa is an example of this, a 20-year development that we didn't say anything about, I think, for obvious reasons until 2023, until we were getting very near the end of the development, we started to talk about new stimulation modes. And new stimulation modes to improve hearing outcomes is one of the potential future possibilities of Nexa. And the last one on the list on the right here. It's really one of the core reasons for developing Nexa with this upgradable firmware is to be able to now experiment with different ways of stimulating the auditory nerve, getting potentially more precise stimulation and therefore, better hearing outcomes.

Over the last -- over the last year, we have been running 4 small studies to experiment with new techniques. Those studies will wrap up over the next year, which will give us real insights into the possibility with this implant and then enable us to undertake further development.

But some of the other future possibilities shown here, even more power efficiency, which could lead to smaller externals.

Earlier activation. So with the map on the implant, we can actually load a map in surgery, and we're going to start running some experiments on this, which means that someone when they go home from surgery, once the bandages come off, they can put a processor on and they will be able to start hearing. Now it'd be some number of weeks later, they've got to come back to the clinic for another appointment or a set of appointments to get that map set up. So again, that's saving clinic time, easier for recipients.

There's a whole bunch of potential for diagnostics. already some of those are active. There is more to come. Again, we think about half of clinic appointments being routine maintenance and follow-up. The more we can do for -- on a diagnostic front saves clinical capacity into the future, but also gives both clinicians and recipients confidence in the performance of the system.

And then the last one here is Neural Health. One of the biggest drivers of variability in outcomes for people with copper implants is neural health, the quality or health of their auditory nerve. At the moment, that quality can only be inferred at some time after implant. We're very confident that what we can do with the implant is be able to measure that neural health, which will mean much more targeted -- much more targeted expectations, setting a much more targeted rehabilitation or habilitation to enable people to reach their potential.

So a very quick view of just some of the potential for Nexa.

The second reason of my confidence. Nexa has a really strong competitive position. It's a significant step above our competitors and based -- and those benefits come from the Slim Modiolar or electrode, which is also unique to us.

Second reason for being confident in the future is the work that is going on across the world to explore the link between cognition and hearing loss. This is all about medicalizing hearing loss. We talked about this a lot. Hearing loss is one of the most prevalent medical conditions in the world, and it's one of the least treated. And it's one of the least treated because people don't see it as a medical condition. They don't see that there is other health consequences from not treating it. And so they don't see the need to treatment. And through -- we have awareness campaigns because people actually don't know what the potential solutions and their effectiveness.

So what we've seen and we've talked about over the last 5 or 6 years is a whole range of studies, starting with frankly, naturally in 2011, showing the correlation between hearing loss and cognitive decline. The Lancet publishing that hearing loss was the single biggest modifiable cause of mid-life modifiable cause of cognitive decline. And study in Melbourne, showing people with cochlear implants cognition improved after getting a cochlear implant. And then on the right here, there are several more studies coming over the next few years, looking at hearing loss and cognitive decline, looking at the different treatments between CI and hearing loss and effectiveness, both in terms of hearing and to some degree, effectiveness in terms of cognition. And it's this emerging data that gives us growing pool of data on this link that gives us confidence of medicalizing hearing loss and the increasing motivation for professionals to refer the people who want to treat their hearing.

I wanted to just call out one study in particular. This comes from Korea. It's just published a couple of months ago. And this study -- and in Korea they've got population-wide data from people's health records. So this study tracked over 50,000 people with severe and profound hearing loss for 14 years. It was an observational study. So it didn't track them. It looked back at their medical records. And then what it looked at was the incidence of dementia across these 50,000 people over 14 years and then looked at that incidence by type of treatment.

So if we go to the chart here, the black line there is the incidence of dementia from people with normal hearing. And there was over 1 million people that they tracked over those time. The blue line is the incidence of the metric for people with severe to profound hearing loss who got a cochlear implant. It's about 640 people. So a reasonably significant number for us.

There is no statistical significance. The study concluded in the incidence of the metric for people with cochlear implant versus people with normal hearing.

I then go to the green line and the red line. The green line is people with hearing aids. The red line is people who had no treatment for their severe to profound loss. What that shows is that for people with -- used hearing aids, the incidence of dementia was significantly higher than those with the cochlear implant and those with normal hearing, but it was better than people with severe to profound hearing loss, who didn't have any treatment. This is an observational study. There are some limitations on it, but it is evidence like this that gives us confidence of our future growth because of this growing link between hearing loss and cognitive decline. And that being the motivation for people to refer -- for professionals to refer, but in time for people to get their hearing loss treated as well.

Okay. So let's move -- now let's move into the detail of the results. You will have seen the headlines already that 4% revenue growth, 1% net profit and the dividend. So let's get into the detail.

So first into cochlear implants. And so cochlear implant, the result overall is a pretty good result, 9% growth in cochlear implant; revenue, 12% growth in systems. We saw stronger growth in the systems in the second half, which is one of the things we said would happen at the half.

We look into developed markets first. Their units were up 6%. And also senior is growing around 10%, again, pretty slight we've seen in the last 2 years, but still pretty strong growth. And the key bit there is we continue to see ways for us to activate people on their hearing loss journey. We've collected a lot more data over the last year on referrals, on what happens to the referrals. For instance, we know now that about -- people actually get referred for cochlear implant, only about 1/3 are actually getting to get an implant. And there's a whole bunch of reasons that they drop out along the way. But by us understanding those reasons, it's the opportunity for us to go into help those people back into their funnel because only a small number of dropping out because they are not in indications. Most it's about not enough information or conflicting information or just not sufficient follow-up. So we've learned a lot more about that path. I talked about the medicalization of hearing loss and cognition. That all helps us build confidence into the future. And our DTC programs continue to be a very important part of our growth around the world.

We did lose a little bit of share. We think through that half in a couple of countries and coming into the product launch. Our competitors know that's coming. They have responded as you'd expect. They are very good companies. We expect to more than regain any share that we have lost with the launch of Nexa.

And a slight decline in children. Again, we said at the half was surprised children was continuing to -- we wouldn't be surprised by a decline in children just because we have seen such strong growth, which we knew was out of line with the rate of incidence that there should be a reversion to the more normal rate. And I think that's what we're seeing.

Very strong growth in emerging markets, up over [ 20%. ] And remember, we had sort of 2 different halves on emerging markets. In the first half, we had a smaller volume but a very strong mix towards the premium tier, which lifted our overall ASP on lower volumes. In the second half, we had far more volume going through, but it was low tier volume. And that was across a range of countries. Obviously, the volume-based pricing in China, which started in March has been a factor in this. And it's been -- we are seeing strong growth there, but that growth is in the lower priced, lower tier. And that -- given the comparison between '26 and '25, the VBP in China will be a headwind for us, both on revenue and on profit.

Okay. Let's move on to services. Services for us is -- the down 10% is obviously the most disappointing part of the result. We talked about this at the half. We've seen some stabilization of our services sales, and we do expect to see growth going into '26. But then there does remain some uncertainty because there's a few factors in '25 which are unique to '25, and then there's some ongoing factors.

So one thing unique to '25 is we are cycling, particularly second half of '25, the impact of COVID. And we know the biggest driver of services over time is a growth in the recipient basin, particularly the eligible recipient base. I mean, 5 years ago in COVID, we saw a reduction in sales and a reduction in upgrades, and we are starting to cycle that, and we can see that in the eligible base. Now that eligible base grows again as we go into '26 and particularly in into the second half of '26.

The other thing that we talked about at the half that we have not seen for -- over time is the impact of cost of living, and particularly in the U.S. where there's just significant economic and consumer uncertainty. We look at some of what the hearing aid companies are saying. I think they're seeing something similar to this. But that's where we do have an out-of-cost payment. The U.S. was the largest fall in upgrades over the last year. We talked about putting payment plans in place which we have done. And even that, we are seeing is not, at this stage, sufficient to get people to take upgrades. And we do know upgrades are discretionary. So if someone's process that was broken out of warranty in the past 5 years, they'll get an upgrade. If it's discretionary, then we do see people delaying. So again, at some point, those people will upgrade. But right now, we are seeing more hesitancy, particularly in the U.S.

Part of that is Nucleus 7 is a fantastic product. And people saying, my Nucleus 7 is pretty good. Why would I switch? We've got really good clinical evidence that shows that Nucleas 8 is better. The other thing that we have done through the half is survey people who have gone from Nucleus 8 to Nucleus 7. 9 out of 10 of them are saying that they would recommend switching. And 7 out of 10 are saying they're hearing better. We will use that evidence to promote, along with upgraded marketing capabilities to promote upgrades in the half -- sorry, through '26. And we have Kanso 3 as well, which will help us get modest growth in upgrades into '26.

And then finally, acoustics, 6% revenue growth, so slower than we expect the long-run trend for acoustics. Osia growing 30%, very happy with the Osia growth. It was really Baha 7 coming and Baha 7 being visible later in the half. We saw a pullback on Baha 6. We expect to pick that back up this year with both Osia continuing to grow in countries and with more geographic expansion and Baha lifting Baha plus upgrades through the year.

I'll do our strategy. Now our strategy is unchanged. I'm going to move pretty quickly through and over the other strategy because I did talk about our strategy upfront. As we go into a lifetime hearing solutions, our product portfolio, our investment in R&D continues, like I said, the Kanso -- sorry, Nexa, it's a whole system, new software as well as Kanso 3 and the drug-eluting electrode trials. Two pivotal studies are well underway, recruiting well, this important product for our future portfolio.

Moving on to thriving people. Again, people got 2 parts to this. Our people and our leadership development is one of the key enablers of our growth. We continue to work hard to leadership development, particularly in the lifting capabilities of our leaders, so they are capable to lead in a growing and larger organization and the investments in replacing our core systems. We are in the final stages with the replacement of our core ERP. And what we will get here with both new data, new systems that will automate many processes, giving us some efficiencies. But more importantly than that, data and clean data and consistent data, which will enable us to be making better decisions and enable us to be able to use AI as we look forward.

And then a picture of Stephen, one of our first Nexa recipients meeting people in manufacturing. I just want to -- one of the things Stephen said we talked about our mission and hearing solutions. One of the things he said is this is not a hearing solution, it's a living solution, and a good reminder of the impact of what we do and again, reinforcing our confidence for growth.

And then on environmental responsibility. We continue to meet our targets. We're a very small emitter, and we continue to reduce our emissions.

And with that, I am going to hand over to Sarah to take us through the P&L and balance sheet in more detail.

All right. Thanks, Dig, and good morning, everyone. Let's go through the numbers. So we'll start with P&L. You can see on there, sales revenue was up 3% in constant currency. Now Dig's taking you through that, so I won't go through those details. You see the gross margin declined by 1 percentage point to 74%.

There are 2 parts to this. First, there's a shift to lower margin emerging markets in the second half. And second, we started to scale up production at the Chengdu manufacturing facility. Until December last year, we'd only been manufacturing sound processors. Now we have regulatory approval for implants, and we have started to increase production rates. That site will continue to be a gross margin headwind for another year or so.

Operating expenses increased 5% for the year, just a little ahead of revenue growth. We continue to invest in activities to support long-term sustainable growth and in R&D. We moderated the rate of growth in the second half. With softer sales, we prioritized our growth investment on the highest value activities.

Total operating expenses also includes an approximately $50 million reduction in the employee short-term incentive provision. This was a result of below-target revenue and profitability outcomes.

Our cloud computing-related investment was around the same levels as last year at $33 million. We continue to expect our overall transformation investment to be about $250 million total. The final phase of that program focuses on our core ERP, our underlying data and our manufacturing systems. The balance of approximately $130 million will be incurred in FY '26 and FY '27. Given the materiality of this investment, we'll report it as a significant item from FY '26.

Now the increase in other income is primarily collaboration income from our innovation fund investments and revenue from various government grants. And then the final thing to note on here is the net margin pre-cloud was 18%, in line with last year.

All right. Let's move on to the balance sheet on the next page. Key change to the balance sheet that you'll see is the increase in working capital. That was up around $200 million on last year. A big part of that was inventory levels, which [ increased $108 million ] ahead of major new product launches and to build higher safety stock levels for critical components. We expect inventory to sales levels to start to moderate by December.

The $90 million increase in trade receivables are relatively stronger fourth quarter sales that we had, including in emerging markets. You can see property, plant and equipment increased $28 million, and this is mainly investment in capacity expansion at our Lane Cove and Kuala Lumpur manufacturing facilities.

You see the $50 million increase in intangible assets. That reflects increased IT system development, acquired technology and software development and some impact of foreign exchange. An increase in the other net liabilities includes the approximately $50 million reduction in the employee short-term incentive provision that I mentioned before.

All right. On to the cash flow on the next page. You'll see operating cash flows declined $150 million on last year. That's driven down by the working capital which we just went through and a bit on higher income taxes paid. And that's due to timing of tax installment payments. Finally, the CapEx of $103 million includes the capacity expansion that I mentioned, that investment in Lane Cove and Kuala Lumpur and our stay-in business CapEx.

Right. Now back to Dig for the outlook.

Thanks, Sarah. So on to the outlook, you can see that the numbers here, a guidance range of $435 million to $460 million. That's 11% to 17% reported. But when we take out cloud out of '25, that's between 5% and 11%.

Going into the detail on that, which we really talked through on the way. We expect a strong performance in developed markets through this year on the back of the launch of the Nexa systems. We're expecting over 10% unit growth will be weighted second half because we are rolling out Nexa with FDA approval at the start of July. In the U.S., for example, we then got to work through contracting because we are seeking price increases in our whole range of markets for Nexa and software installation. So the launch is still coming in the U.S. so weighted to the second half.

In emerging markets, we do expect strong unit growth, but it will be in high mix in this -- in the low-end tier. That means modest growth. And as I said, China is a headwind for us in terms of both revenue and profit into '26 compared to '25, particularly because we had a strong first half, very strong first half in emerging markets in '25.

Services, as I've talked about, we're expecting to see growth there. It's modest growth, but it's really that eligible base growing; will help us. And there does remain some uncertainty there, particularly over just the sentiment that we see, particularly in the U.S.

Acoustics, I've talked about the gross margin at around 74%, around 74%. Now R&D is slightly higher this year, and that's a factor that I talked about upfront. We haven't slowed down our R&D pipeline with the lower sales this year. So as the sales catch back up, we're preserving that R&D spending, which means it lifts as a proportion of sales.

So our net profit margin heading towards 18%, but will be a bit below. That's reflecting the R&D and just reflecting to make sure that we continue to invest in both our R&D and our growth as our sales grow, and Sarah has talked to cloud.

Okay. So let's move on, and we'll talk to questions. I kind of stopped sharing the screen so that I think you can see Sarah and I.

Thank you. [Operator Instructions] Your first question comes from David Low from JPM.

Dig, if I could start with guidance. Can I get you to talk a little bit more to how second half weighted it will be?

And then just also on the same topic, they're a little bit below 18%. How much is a little bit? And why the decision to do that? I mean it seems such a long-standing strategy. I mean I heard the explanation on R&D, but if I could get you to elaborate on that as well, please.

Yes. Okay. So our sales will be pretty significantly weighted to the second half. For -- as I said, Nexa is rolling out. So we won't -- we don't get a full 6 months in all of our countries of Nexa in the first half. And equally, with people knowing Nexa coming, we expect to see now it's imminent surgery holds, and we are seeing some of that in the U.S. Now they'll come back pretty quickly, but some of that will flow to the second half.

And similarly, on upgrades, had said that eligible base rises in the second half. And also in the U.S., we have the retirement of Nucleus 7, which comes into effect in the second half. So pretty strong weighting. And if you saw this year, obviously, we had more profit in the first half than the second half. So that -- obviously, this year is going to be the other way around. And so that contrast will also play when you look at it on a comparable basis. And then the second half of your question, David, was...

How much below.

Yes, yes. So okay, so it is -- so we're going to be above 17.5, which is why we say 18, but we want a bit of flexibility there. And we are rebuilding that the SGI division. As I say, that was a significant piece of our costs that didn't happen because of performance in this year. We expect to perform and get that back next year. So rebuilding that and making sure that we are still investing in R&D and investing in growth. And given a long run out, look, we think it makes much more sense to smooth that path back to 18% and to jump straight back up there at the risk of compromising the future.

Your next question comes from Andrew Goodsall from MST Macquarie -- MST Marquee.

And maybe just continuing on from your comment around the Nexa launch. Could you just give us a sense of what sort of response you are getting in the market you have launched? And I mean is that what's supporting your sort of 10%-plus growth outlook? Is that giving you that sort of confidence?

Yes, Andrew, yes. So we're seeing a very, very positive response. Surgeons was quite a conservative. Surgeon saying this is a game changer in terms of the industry and in terms of patient selection and implant selection. We have consistently heard those sorts of messages as we roll the product out and being through launch event. It is genuinely new technology and different technology with more potential. And just given the -- what people are recognizing is that people have the -- whatever age, the implant for the rest of their life, the potential for that -- for the implant to be a benefit from technology over that time as they do from sound processes now is really important. So that gives us confidence with new technology. We are pushing for price increases across a range of markets. So part of that lift is both -- we will get share gains, we'll get some ASP gains, and we've got an underlying market growth and all those things give us confidence in that developed market CI outlook.

And just a second part of my question, just for Sarah. Can I just get you to clarify what you expect the post-tax cloud spend will be? And then just for the basic guidance where you've given the 5% to 11%, is that just -- can you just also clarify the base that we should be using to understand that 5% to 11% growth?

So the post-tax cloud is expected to be around $80 million. And then the second part of your question was around the base for the 5% to 11%. Is that right? Yes, that's off of our numbers from this year as usual.

So it's a pre-cloud to -- it's exclusive in cloud to -- the 5% to 11% -- sorry, excluding cloud to excluding cloud.

Now...

Yes. So if I use of your -- you've given us sort of an 18% margin in the P&L for this year or ex cloud. So if I use that to get the NPAT come up with about 4 2 4 , then the 5 to 11 on that number. Is that right?

Yes, it's all the underlying basis. .

Yes.

Excluding cloud?

So if you take guidance range and back out 5%, 11%, you'll get to that number.

Yes.

Okay. Got it. Got it. Okay. And the 80 is the first tax number. Just to clarify?

Yes.

Your next question comes from Saul Hadassin from Barrenjoey.

Dig, I guess a question on the services and particularly upgrades and the commentary gained about that U.S. consumer, which I think hasn't really been a feature in upgrades in the past. I know you're expecting improvement because of the increase in the size of the installed base from 5 years ago. You seem to be a bit cautious about the commentary just then about the outlook for '25. So I guess just your -- yes, some comments around why you think services should see solid growth? And maybe also could you give us a sense of what does solid actually mean? Is that a mid-single-digit revenue growth number? Is it high single digits? Any color around the word solid, please?

Definitely single digit growth in services, our expectation. I don't want to go too much further than that. Yes, look, we are a little bit cautious on the outlook. And so you're quite right. It -- this is not something that we have seen before is as caution around the co-pay in the U.S. Now we're trying to sort of triangulate that. It is -- I've just been to the U.S. pretty recently, and we hear from our team there a lot. There is a bunch of uncertainty in the U.S. at a sort of a consumer level. And we look back over our history, we haven't seen that level of uncertainty at the same time, apart from COVID, at the same time as actually our services business has been quite significant. We're probably going back to the GFC, where services have got much, much smaller, we would sort of see those impacts. So we are trying to understand unravel. We are a little bit cautious on the outlook, certainly in the short run. But over the long term, remain confident because this is -- and this tracks well over time. It's driven by the growing recipient base. And while upgrading is discretionary, it's discretionary within a point -- within a time window. Our processes do wear out. You just can't make a piece of consumer electronics that sits in that sort of environment where the processor sits and have it last forever.

Understood.

Is it uncertainty -- uncertainty versus a long-term remain confident that the underlying conditions for services are intact.

That's very, very comprehensive. And just one more, Dig. This commentary around slower market growth in some of the developed markets that I think was referenced during this fiscal year as well and maybe some expectation that, that growth might improve. Can you talk what it is that is going on potentially in some of these markets? And are you able to call out which of the developed markets that you've seen this? I assume it's not necessarily the U.S.A., but maybe some of the Western European markets. And any idea? I guess the question is, what do you think market growth -- what is a sustainable rate of market growth considering the slowdown in some of those markets that you compete in?

Yes, yes. So it has been a bit slower partially in Western Europe. And it is also coming off some really strong years of growth, particularly in the adults and seniors. And then getting to around 10% this year is not -- it's clearly not a bad outcome. It's just not at the level we've been.

What gives us confidence is that of this growth, the growth picking back up, is that we are seeing our growth programs getting traction. As I said, we've done a good job this year of getting more insight into the referral path and the points at which people will drop out. So we've got better metrics, we got better measures, and that will help us target our -- where we invest in our growth programs.

And Nexa, to a degree, is also just help for in the shorter run from growth because there's -- we have contact with a lot of people who are in indications of whatever reason I've decided just not to go ahead now. A new product is the opportunity to reengage into -- and for all these people, they're hearing will -- certainly will have deteriorate over time as well. So long run, again, what I talked about this links to cognition, and you see the growing evidence there. That gives us a lot of confidence that -- both for referring and a candidate perspective, we'll see more motivation to have a nice trend again in some of our surveys now of people who further got implants, and we asked them what motivated them. Cognition is one of the things that is rising in terms of people's reasons to act.

Your next question comes from Steve Wheen from Jarden.

I just wanted to touch on the cloud costs. At the interim, you increased your guidance is to how much you're going to spend to $40 million, and I think you've done $32.7 million. Just what happened in the last few months that made you not spend what you thought you're going to spend?

Yes, I can take that one. So when we indicated at the half we were spending more, we had not yet fully done the planning for exactly what we would be doing when during this half and then going into next year -- to the year we're in now. We did that planning during Q3 of the year. It became very clear exactly what we want to do when and why. And so it's a timing effect. We will still spend the money. It's just -- we didn't end up actually doing exactly the things we were kind of thinking we would once we firmed up those plans more. So it's a timing effect on that.

And just a bit of a follow-on from that, just the staff STI provision release of this year of $50 million, I heard your comments that you're going to be rebuilding that provision in the FY '26 year. Can you give us an indication as to, are you going to get -- reverse the $50 million back into the FY '26 year? Or is it a figure less than that?

And then as part of this, I'm just trying to understand the guidance. Your other income included some -- certainly larger than I was expecting, but where -- what was the composition of that? And will any of that continue into FY '26 as well?

I'll answer the first part. Sarah can do that other income. So yes, on that -- the $50 million, it will go -- we do expect to land on our -- the targeted outlook. And if we land on our total outlook and we delivered well on our programs, we'd expect to have the STI going broadly across the company next year. And therefore, we've got to rebuild that provision. And that goes through into our OpEx for the year. Sarah, you can just talk on the other income.

Other income. Yes, sure. Look, in the other income, about half of that is grant income from government grants. We know those come and go in different years. If we could predict the grants the government were giving us, so I would love to do that. So I can't guarantee you that, that all sustains at exactly that level into the next year. There is also some income from collaborations that we have and a little bit of that, that is related to the Oticon acquisition, just as that got wrapped up.

Okay. Sarah, so you aren't putting any of that continuation into FY '26 guidance?

It will be lower in FY '26. I wouldn't expect it would stay quite at that level.

Your next question comes from David Stanton from Jefferies.

Look, just to maybe beat a dead horse a little bit. Can you give us an idea of what you think market volume growth is for cochlear implants at present?

Well, I think, David, on this one, it always depends on which segment are we talking about. So we've seen very strong volume growth in emerging [indiscernible] to seniors. So look, we think it's -- we saw around -- we saw around 10%, and we probably lost a little bit of share. So we think that segment, therefore, the market growth is a bit higher, probably low single digits in the year. We didn't leave much share, so probably just over 10%. That's about -- and that's a bit lower than we saw in '24. But we're expecting that segment to get -- to grow again this year, that growth lift as we go into '26.

Understood. So that's that 10% number, just to make it absolutely clear for the dummies on the call like me. That is the overall number -- global number? Or is that just to developed markets or I think...

So developed market adults and seniors. Yes. No, important to clarify.

Okay. And then overall number, would you hazard a guess at that?

Not really because it is this mix of pretty different things. Obviously, developed markets have got children, which is about 1/4 of the implants. In developed markets, we should come back to around 2% normal run rate. And then emerging markets, we've seen over time, putting a number on it in a single year is just guaranteed to be wrong. It's always going up, but it moves around quite a lot.

Understood. And I'm interested to hear with the Nexa you've had initial feedback. Well, I'd like to hear your initial feedback on the potential from surgeons or the feedback from surgeons around more precise manipulation post surgery, whether that's a feature that the surgeons are very interested in.

Yes, that we're getting a lot of surgeons reaching to be interested in doing research, and this is on this -- the focus multipolar stimulation. I said we've got a couple of small studies going on that we've had going on for a year now. We're seeing some interesting results there. For example, just a small study, we are seeing with the new stimulations, people preferring music with the new stimulation modes over the over the existing ones, small numbers of people, but at this stage, but very encouraging results.

And sort of the logic here is pretty strong, but we need to see that clinically. The logic here is if with the electronics, we can focus the charge more and therefore, be more precise in the stimulation of the auditory nerve. The logic says that should get better hearing outcomes. But only when you do this clinically do you -- do we see if that's the case. And some early indications, but it is early and more research to be done.

Okay. Sorry, second and last follow-up. And it sounds then like the surgeons are interest -- may be interested because it may correct for any issues that they have during surgery that can potentially fix it later.

Not so much the correct for issues in surgeries. One of the things -- separate that -- as well as being able to measure neural health, one of the other things that we think we'll be able to measure is electrode placement. And at the moment, when a surgeon puts the electrode into the cochlear, they're blind on exactly where in the cochlear is it and how close to the modiolus, the auditory nerve. Again, we are -- and we've done some studies on this at a small scale, but we're confident that we'll be able to actually measure that, which will enable the surgeon during surgery to ensure that the electrode is optimally placed and that will certainly help outcomes. The focused stimulation more -- is more about with the electrode optimally placed, how to maximize a person's potential by targeting the stimulation to their auditory nerve in a way that gives them the best perception of sound.

your next question comes from David Bailey from Morgan Stanley.

I just want to be clear on this one. The update you gave in June, you called out slower-than-expected market growth in developed markets. Can you just sort of talk through, following on from Saul's question, where that's occurring and the mix between adults and seniors, please? Sorry, adults and kids.

Kids. Yes, yes. So it was more in -- Western Europe was certainly slower than we had expected. And then that children -- the decline in children, we sort of anticipated it, I suppose, or we foreshadowed it might happen. But when it happens, it's different foreshadowing it's going to happen at some point. So on the adult and seniors get 10 is a pretty good number. We want it to be higher and it has been higher and we're confident we can get it get it back higher, but there's not -- I'd put it in that -- it's a modest decline in growth rather than a worrying decline in growth, and we're confident of the plans that we've got that we can lift it back up.

And is there any reimbursement pressure or just volume coming through. So the question is price versus volume in the...

In developed markets, we are not seeing any increased or unusual reimbursement pressure. I mean, health care systems, there's always reimbursement pressure, but certainly wouldn't call that out as being a factor in '25.

Yes. Understood. And then you've talked to the VBP in China, a bit of a revenue hit and gross margin impact as well. Is there anything you can sort of quantify in relation to that?

And maybe just more broadly, the dynamics there. I think there's pretty good private pay growth in those special zones. But the question is maybe quantifying '26 to the extent you can and then the dynamics in the Chinese market more broadly.

Yes, because -- can make a few comments there. So yes, you're quite right, the special zones are still there. And we are selling Nexa through one of those special zones now. We've seen a very strong uptake. So that good premium segment remains.

In terms of the volume-based pricing, we're 5 months in. And there's definitely been a lift in overall volume. Still some uncertainty of the extent to which that will be maintained. We know the market potential is there, but we're also pretty confident that this was visible board happened. So there was a backlog of people to come through. So we want to just see that run a bit more.

Overall volume is definitely up, and we think it will stay up, but it is through that low tier. And one of the things that's happening is that used to have a pretty good middle tier pricing in China, and that volume that was in the middle tier, most of that's moved into the low tier, and that's what brings this revenue headwind and that profit headwind as we go into '26.

Are you able to quantify either a gross margin impact or revenue impact?

No, I'm going to stay away from the specifics of this. There's still -- it is still moving around. So we just want to really be cautious about going beyond the dynamics to get to numbers.

Your next question comes from Davin Thillainathan from Goldman Sachs.

I appreciate the opportunity. Can I just get you to talk to the ability for the next implant to expand the market? Clearly understand the longer-term dynamics there with the process and mapping side of the equation where you can actually, I guess, expand the capacity in the channel. But if we think about nearer-term trends, could you give us a sense if you're seeing any leading indicators where the products is actually expanding the market?

Yes, good question. Too early to call on whether Nexa would expand the market. And we're certainly seeing some share already now, early days on that, but definitely seeing that happen. And you're right, one of the features in Nexa, some of those will take away -- take out clinical time, therefore, increasing clinical capacity to enable more people to get evaluated. So it's an enabler of growth.

Looking forward, from a product perspective, we do think that drug-eluting electrode has the potential to expand the market, particularly -- and to do that, we want to be able to demonstrate that there's better hearing preservation because that is one of the barriers for people getting an implant now is that while there is hearing preservation, our labeling at the moment says you may lose your hearing. And we've seen some early indications that a drug-eluting electrode could help preserve residual hearing. And if people -- surgeons rather give people more confidence on the amount of hearing they've retained that would take away one of the barriers. I said we've done this analysis of where people drop out when they're referred, and that is certainly one of the points at which people who are in indications and we do better to pull out of the process.

And my next question is on the services part of the business. And in your FY '26 guidance, is there any expectation within services for a new process for the Oticon Medical recipients. Just thinking about that opportunity there?

Not in '26, but it's something we're certainly working on. That recipient-based Oticon medical is relatively small. So when it does come in, you won't see a huge pickup in services. We are continuing to sell existing processes there. So it is -- it's a small number, but it's a small part of our services revenue.

Your next question comes from Marcus Curley from UBS.

Just a couple of questions on the Nexa platform. Could you talk a little bit about how you think the multiple stimulation differs from what's offered by Medel and Advanced Bionics.

Yes. Yes, Marcus, good question. So Medel don't have anything that is in any form of multipolar stimulation. Advanced Bionics have some capability, and they've had that for over 20 years. Being electronics over 20 years ago, it is far more rudimentary than we have. The other thing that's important and that we realized is partway through this development is you need to be really close to the hearing nerve, which is one of our motivations for launching the Slim Modiolar electrode in our 2016 is to -- be an effort from -- with the benefit from focus stimulation, you've got to be really close. Otherwise, that benefit of that focusing too far away still got a lot of channel interaction. So -- products don't have a sophisticated electronics, and they certainly don't have the electrode that would enable the benefits that were not certain.

And then secondly, you mentioned the future potential reduction in the size of the sound processor with this platform. Could you give us a better perspective in terms of how small future releases could get? We've had feedback to suggest that there could be quite large reductions in the size of the sound processor in the future with this type of platform.

Yes. So we've already seen a reduction upfront, and we do think there is more we can do on reducing power consumption with the electronics, and also it has potential with the drug-eluting electrode with lower impedance to reduce the power consumption again. So there is more room to go there. So the obvious, the ultimate on size reduction of the external is [indiscernible].

Okay. And maybe I can throw more in on products. Can you just talk a little bit to the response you're seeing on the Kanso 3 and sort of how big a contribution you think it makes to our services revenues in '26?

Yes, early days, but good response so far. It brings all of the Nucleus functionality into the Kanso form factor. Kanso is an important part of the market. On average, across the world, it's sort of around 20%. So there's a population people out there on Kanso 1 and Kanso 2 who will be eligible to upgrade for Kanso 3. So I think that's part -- certainly part of the services mix this year.

Your next question comes from Lyanne Harrison from Bank of America.

I'm going to come back to services for a little bit. You mentioned there were a number of reasons for softer services revenues this year. Can you put that in context for us? Which of those factors was the biggest drag and which had less of an impact?

Yes. Lyanne, good question. And it's actually really hard for us to disaggregate. There -- '25 is a difficult year because there's quite a for us to really understand every piece of what's going on because there are multiple factors, and it's just hard to just segregate those factors. I think the -- as I said, the U.S. was where we had to just fall, and that's the place where cost of living is -- there is the co-pay and that cost of living impact is there. So that certainly helps us conclude. And what we hear from directly from people as we're talking about the orders, is that was a piece of it -- the recipient base bit not growing. That's a contributor but actually disaggregating those into exactly of the reduction. This bit was due to this and this to that. We're not able to do at that level of granularity. But what that doesn't stop us doing though is still is not sure knowing that would change too much the actions we've already taken, which is about to promote what we have got better, we've got -- in the U.S., the retirement of Nucleus 7. And obviously, then we just have the eligible base increasing. And we got Kanso 3 launching as well. All of those things will contribute to a better outlook and result in '26.

Okay. Great. And just another question. You mentioned taking some price, particularly with the Nexa launches. How much price increase would you be thinking about there?

Varies by market, but that's certainly in single -- there's a range, but all in single digits.

Okay. And with those launch of new products and also you're expanding some of the processor launches across different markets as well. Why would we not expect gross margin expansion? Obviously, you're guiding it to being flat in '26, but -- and understanding some of the some of the headwinds there. But if you're taking some margin -- taking some price in launching a new market, surely, we should expect a little bit of gross margin expansion?

Yes. So in the developed markets, yes, we will. In the emerging markets, we're going to have a full year of the volume-based pricing in China, and that will put downward pressure on the gross margin.

Your next question comes from Andrew Paine from CLSA.

Just coming back to our services, obviously, calling out a small eligible base impacting that area. But just looking at the strong services growth that followed that initial code disruption. Do you think that's an indication of type of growth you'd expect as those headwinds easing maybe also including some of the product launches coming up?

So we're certainly -- and are not forecasting that sort of level of growth that we saw coming out of COVID. But I think that what that growth did show is that upgrading is discretionary in a time window. So if people are holding off upgrading now, they will upgrade at some point because at some point, they will realize the gap between the existing technology and potential technology or the process of just where we're at.

Yes. Okay. So if you're talking about, especially in the U.S., cost of living pressure, so there's holdouts there, plus you didn't have the kind of 5-year cycle through, let's say, this calendar year -- in -- for calendar year '26, it should -- there should be some reasonable demand for upgrades coming through? Is that correct?

Yes. So I think -- your point of -- some -- I think saying yes, look, some of those upgrades that would have happened in second half of 2020 were delayed into '21. So those 5 years for those people has moved out. But for some of them, they -- and that will happen in '26. And that's one of the reasons the eligible base grows in '26 compared to '25. It's reflecting that deferral that happened in COVID.

Okay. That's great. And then just also, just in relation to hold-outs waiting for the Nexa system. Is there any concerns around bottlenecks to surgeries or getting those patients through the channel? And in implanting devices, let's say, once the U.S. launches and into calendar year '26? Or do you think that's going to be a pretty smooth process?

I think, look, to the extent there's holds, we will get those surgery back through in '26. And surgeons are -- particularly the U.S. issue, where we've got the launch with the contractor, we haven't put the product out just yet. It's soon. And seniors are very conscious of their access to their surgical slots and don't want to give them up if they're not sure they can get them back. So that's moderating. While we're seeing some holds is moderating, the level.

Your next question comes from Sacha Krien from Evanson Partners.

Look, just another clarification question on developed markets. When you previously mentioned some market weakness, can you sort of clarify how much of that you think is attributable to patients waiting for Nexa versus other factors? Or are you seeing any potential cost of leading issues on the implant side as well?

Yes, Sacha. We don't see that cost of living has had an impact on the market growth. In terms of people holding for Nexa, we don't think it was significant. We're sure there was some because we announced a product in February. And we've got -- we certainly know through our consumer tracking of -- and a small number of holds, but it wasn't -- I certainly wouldn't hold that up as a significant factor impacting '25.

Okay. Got it. And services growth. I mean, you touched on a few different factors there, but you didn't mention payers. I'm just wondering how much the change in mix of your eligible base, so more seniors and more adults is pushing out that replacement cycle do pay as -- apply stricter criteria to adults and seniors upgrading their processor?

No. We don't see stricter criteria based on age. We certainly do see in places and payers as they always do, pushing back on upgrades and on procedures -- upgrades, but that's not unusual.

Okay. And then Medicaid changes, is that part of your uncertainty driven by potential changes for Medicaid?

So Medicaid changes. Look, like the -- there is still uncertainty there. I think the saying is that impact shouldn't have -- won't happen just yet. Now Medicaid is a small part of our sales in the U.S. But there is -- certainly is a level of uncertainty of just what impact that will have, probably not so much directly on us, but on hospitals. There are hospitals that have a level of Medicaid funding, which helps them with their profitability. And if that falls, what's the hospital response to that and what impact is there on us. So there is some uncertainty, but not -- we think that's more likely a bit later than '26 at the moment and still playing out.

Yes. Okay. Final quick question. Just emerging market prices. You talked a bit about the trends in China. I'm just wondering if you're seeing any more pricing pressure in other markets?

In terms of other markets, it can be pretty normal. Across emerging markets, there was always a range of prices. With Nexa that gives us a great opportunity to hold and even gain share in that premium segment across the world. And then at the lower end, yes, there is always a range, and the volume there is where it's more variable because there is -- more dependence on government funding and the timing of government funding, but not -- we're not seeing a trend that's different.

Your next question comes from Steve Wheen from Jarden.

Sorry, just given you'd mentioned this historically that you were expecting Indian tender from the Indian government. Wondering if that appeared at all in '25? Or is that -- is there part of that, that you'd expect in FY '26?

We certainly -- we've got a bit of volume in '25. We expect to have, as always, some Indian tenders in '26. But in terms of the overall impact on the business, it's not a huge -- either way, not a huge impact. With these trends, we can see a lift in our volume, but not a huge revenue impact.

So the government one tender that went missing in '24, you're not expecting that to come back?

No, no.

Your next question comes from Craig Wong-Pan from RBC.

Just wanted to clarify, is the margin headwind from Chengdu manufacturing becoming larger in FY '26, given you're expecting to manufacture more implants there? And then is the amount of the overall margin headwind still thought to be around 50 basis points that should roll off somewhere throughout FY '27 and FY '28?

Yes. Look, we're not expecting that to get larger. Ramping up is helping us there. It will probably be a little bit less than that number you quoted, but it's still a headwind this year and next.

And the other thing I should have just mentioned earlier on Lyanne's question just on the gross margin is the Nexa being new, the new product, the cost to start and then they come down. So there's a partial impact there as well.

Okay. And then just on acoustics, you mentioned that with the launch of the Baha 7, that might have meant some upgrades were delayed. Given that it was only announced in June, I was just curious to when doctors or patients might have been aware of that. And is that a significant impact there around why that those revenues are declined in the second half?

So we actually, Craig, did see that was in the U.S. We did start launching in February with Baha 7 in Europe. So that's where we saw some delay, and we're seeing a good response on Baha 7 now.

Your next question comes from Christine Trinh from Macquarie Bank.

Just 2 quick ones from me. Just in terms of longer-term targets, are you still looking to target sales revenue growth of about 10% over the coming years? Or are you kind of expecting a significant uplift from that Nucleus Nexa system?

No, as a long-term target, that's one that we would maintain.

Yes. And just quickly on the cloud investment again, just confirming that $130 million over the next 2 years is post tax?

No, that $130 million over the next 2 years is a pretax number. That's our whole investment in that.

Your next question is from Lyanne Harrison from Bank of America.

I just had a follow-up question on the retirement of the Nucleus 7. Can you give us an indication of what proportion of your installed base are on the Nucleus 7? And when you say retirement, what does that mean in terms of patients who are currently on it? Do they have to switch? Or is it just that any support gets turned off?

Yes. Lyanne, good question. So retirement is part of managing the life cycle of each of our products. And the -- with these consumer electronics, there is a limited life that we can support them for. We also have different regulatory requirements in each country as to how long we need to continue to support. So we're going to manage -- so the retirement dates are different by country, be conscious of our regulatory obligations. And we're also very conscious of just our ability to continue to support a product with components. So the retirement that we're talking about is in the U.S. I won't go into what proportion of our recipient base because, again, it does vary by country. What it means for retirement is that we stopped providing repairs. So if someone's processor breaks, it's unable to be repaired. If we're going to repair that without replacing components by that, but it's not all repaired, then they need to get an upgrade.

Thank you. There are no further questions at this time. I'll now hand the conference back to Mr. Howitt for closing remarks.

Okay. Thanks, everyone, for joining. Appreciate it. And no doubt see you again in 6 months, if not before.