Cochlear Stock

Thank you for standing by, and welcome to the Cochlear FY '26 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. Thank you for joining us. Let's get underway. So in FY '26, as always, our mission is central to what we do. And we enabled over 55,000 people to hear for the first time or to regain their hearing and more than 50,000 of our over 800,000 recipients received a new speech processor last year, giving them access to better hearing.

I'll give an overview of the year and then focus on actions to drive growth in the developed adults market. In FY '26, sales revenue grew 2% in constant currency to $2.3 billion and underlying net profit was $322 million. These results were below the expectations we set last August, but they were at the upper end of the guidance we revised in April and revenue in the second half was up 6%. During the year, we advanced our strategic priorities, including successfully launching the Nucleus Nexa System, which I'll cover in more detail later.

And when market growth slowed, we acted quickly to optimize our cost base, lowering fixed cost to fund investment in growth programs, and Sarah will talk to this later. We accelerated work to medicalize hearing loss and we are working to make adult cochlear implantation, the standard of care for people with severe to profound hearing loss by building clearer treatment pathways and expanding medical referral channels. Despite lower sales growth, we increased R&D investment to support our innovation agenda, and we're strengthening our implant portfolio by building on the Nexa platform.

Now I'll spend some time on cochlear implants. I'll talk through last year's performance by region and then share the insights we gained into market growth and how our growth strategy addresses these insights to drive growth into the future. The long-term opportunity has not changed. The clinical need is significant. The outcomes from our product are very good and adult penetration remains low.

In FY '26, overall cochlear implant systems were up 5% and revenue was flat in constant currency. This was due to a high mix of lower-priced sales in emerging markets, especially in China. We'll talk a bit more to that. The first to developed markets, where cochlear implant revenue was up 1%. The launch of the Nucleus Nexa System, the world's first smart cochlear implant system with upgradable firmware was very well received. Adoption has been strong with the Nexa System accounting for more than 95% of our implant sales across developed markets by June. Feedback has been positive and an average 3% price increase was achieved.

In the U.S., revenue increased 4%. Market share was maintained across the year and growth remained strong in DTC and for clinics with established referral networks but there were clear headwinds that slowed growth overall. These included a higher rate of insurance delays and broader economic pressures, which made people more hesitant to proceed with surgery. In Western Europe, revenue declined 8%. Financial and demand pressures on health care systems constrained capacity in major countries last year. While these pressures have existed for some time, it's very unusual for them to apply across all major markets at one time.

So there's a number of examples I could give, but I'm only going to give a few. This includes the U.K. where referrals were up, but surgery rates did not increase due to NHS waiting lists and temporary clinic closures. Industrial action in Spain, significantly lowered access to operating theaters, and we lost some market share in Germany, largely the result of implementing a price increase with Nexa shortly before reimbursement rates were lowered.

Asia Pacific grew 7%, strong performance across the region, particularly in Australia and Korea. In Australia, where we've built out referral pathways, surgeries grew 15% in private hospitals, where we helped candidates navigate around public system waiting list. We also generated significant referrals to the public system. Those referrals led to an increase in waiting lists rather than more surgeries as the public system was capacity constrained. We're working hard, obviously, to reduce those waiting lists. In Australia, Singapore, Korea and Japan, we increased market share with the launch of Nexa. And in Korea, we also expanded our professional customer base, which added to growth.

Now into emerging markets, where revenue declined 2%. Strong performance in Latin America and Eastern Europe was offset by declines in the Middle East as a result of the conflict that started in March, and also in China from a full year of volume-based pricing. In China, there was also an unexpected reduction in reimbursement in the special zones in the second half, which reduced our sales in the premium segment.

So now I want to move on to looking at detail about adult growth with a focus on the U.S. to illustrate the sources of price and how our strategy addresses these. There are broadly 2 ways in which candidates get to surgery. There's growth driven by actions we take to lead people to surgery, primarily through our direct-to-consumer activity. And there's an underlying level of market growth driven by aging population and increasing awareness of the importance of treating severe to profound hearing loss.

Over more than a decade, our direct-to-consumer campaigns and concierge services have driven strong double-digit growth, expanding to roughly 1/3 of surgeries in the U.S. These cochlear supported surgeries grew 10% in FY '26, below our historical average but still strong growth in a more challenging environment. And what we might call the self-navigated pathway. The referral path is inconsistent and the majority of people who get surgery find their way -- their own way to cochlear implant clinic. A small number get a direct referral to a CI clinic. Self-navigated pathway has historically provided mid- to high single-digit growth, and it actually declined in FY '26.

So experience in the U.S. tells us 3 things. First, there were genuine referral and capacity headwinds last year that slowed down both pathways. Second, our DTC programs work even when market conditions are challenging. And third, the self-navigated pathway was significantly more affected because it's not driven by consistent medical referrals. Our growth strategy addresses both pathways to surgery. Our DTC programs work, and we continue to grow them.

And we have evidence that targeted interventions in the self-navigated pathway can drive growth at a lower cost than DTC alone. The growth in private surgeries in Australia was largely a result of building referrals in this self-navigated pathway. In the U.K., educating, referring audiologists to direct -- through direct engagement has doubled high-quality referrals to cochlear implant clinics over the last 4 years.

Now these referrals haven't yet converted to a proportional surgery growth due to NHS bottlenecks but the referral increase demonstrates this education works. And in the U.S., clinics with established referral networks continued their strong growth in FY '26, while those without them didn't. So to improve referrals in the self-navigated pathway, we now have pilot programs in 4 U.S. cities, working directly with ENT doctors who don't perform cochlear implant surgery, educating them on clinical practice guidelines and appropriate candidacy criteria.

So we know the path forward. We'll keep expanding Cochlear supported DTC programs which are effective at driving growth. At the same time, we're scaling interventions in the self-navigated pathway, building sustainable referral networks. We have evidence these interventions work from Australia, the U.K. and the U.S., and we're now implementing them systematically across major developed markets.

So turning to self-navigated pathway into a professionally supported pathway is a critical outcome of medicalizing hearing loss. So let's go on to look briefly at the process of medicalizing hearing loss. Our objective is to build a professionally supported referral program. We've seen medicalization fundamentally transform treatment patterns in other conditions. As an example, obesity shifted from being viewed as a lifestyle issue to a recognized medical condition with clear treatment pathways and therapeutic interventions.

Closer to home, pediatric cochlear implants became medicalized nearly 20 years ago. In the 1990s, parents of children born with hearing loss only had a self-navigated pathway to get access to cochlear implants. Today, they are the standard of care. Over 80% of children in most developed countries will get 1 or 2 cochlear implants by the time they're 12 months old. We're now doing the same for adult hearing loss following a clear roadmap based on actions that have worked in other therapy areas. And we've made substantial progress over the past decade, building the foundations to do this. Global consensus statements and clinical practice guidelines have been established, and these are being adopted country by country to guide clinicians on appropriate candidacy criteria and referral pathways.

The clinical evidence connecting untreated hearing loss to dementia and falls continues to strengthen. It provides the medical rationale for treatment rather than treating hearing loss as being considered only quality of life enhancement. And we continue to progress on elements of medicalization that you can see on this slide. We're working with partners to have hearing loss defined as a medical condition and establishing a vital sign for hearing loss, a simple standardized measure that helps both clinicians and patients understand severity and appropriate treatment pathways.

This creates a common language between primary care physicians, audiologists and specialists. We're building integrated care pathways that connect audiologists, ENT specialists and implant programs into seamless referral systems. These pathways reduce friction in the patient journey and ensure candidates who meet criteria are directed to treatment. And we're working with policymakers and payers to ensure appropriate reimbursement as hearing loss becomes recognized as a treatable medical condition rather than an inevitable part of aging.

So this medicalization works directly -- work directly supports the referral pathway development I described earlier. When referring clinicians understand candidacy criteria and benefits, the patient pathway becomes more consistent. Instead of patients navigating complex decisions alone, they're guided by medical professionals through established protocols, and this creates sustainable, scalable growth.

Now let's move on to Nexa. A major achievement for FY '26 was the successful launch of the Nexa system, our next-generation implant platform. Nexa offers benefits today to improve power efficiency means that the Nucleus 8 Sound processor is even smaller, extending our advantage in cosmetics. And a smaller processor is more comfortable. We actually are seeing an increase in the time per day people wear their processor with Nexa compared to previous implants, and we know this leads to better hearing outcomes.

Smart Sync provides both recipients and audiologists with a better experience and [ SmartNav 3 ] reduces surgery time and provides more information to surgeons. So there are benefits for all of the stakeholders from the Nexa system upfront. And Nexa builds on our long-standing advantage in electrode design. Our Slim Modiolar Electrode sit closer to the auditory nerve with more electrode contact points than competitors' devices. Clinical evidence demonstrates this gives better hearing outcomes faster than other electrode designs.

And Nexa has the potential to take this further in 2 ways. First, it can measure the health of an individual's auditory nerve. And second, it can use that measurement to customize stimulation patterns to each patient. In clinical studies, recipients using new coding strategies showed significant preference for music quality compared to traditional cochlear implants. And this combination of neural health measurement and flexible stimulation has the potential to enable personalized outcomes for every recipient, extending our competitive advantage.

And next is the platform for 2 very important implant developments that will drive growth. Drug-eluting electrodes aim to preserve residual hearing, removing a barrier to surgery and totally implantable devices address cosmetic concerns and more importantly, enable 24-hour hearing, benefits that are clearly resonating with patients based on recruitment rates that we see in our clinical studies. And both of these programs made significant progress over the last year.

So now let's move on to services and then acoustics. Services grew 6% in constant currency with very strong performance in developed markets, which were up 13%. This was a result of the retirement of the Nucleus 7 Sound Processor in the U.S. And across the world, we improved marketing of the benefits of Nucleus 8 over Nucleus 7 based on direct feedback from customers who had made that transition.

In emerging markets, revenue declined due to disruption in the Middle East and lower pricing in China. Continuing growth in the recipient base, as always, provides the foundation for services revenue growth. And in the year, Acoustics revenue grew 1% in constant currency. We had a better second half than first half. We did lose some market share in the year due to increased competitive activity. However, the launch of the next-generation Osia processor in FY '27 will enable us to regain that share and drive market growth.

The new processor has FDA approval and CE mark and it has market-leading features, including a rechargeable battery, improved connectivity and most importantly, improved power output, enabling a wider fitting range and improved sound quality. The new processor also opens up the opportunity for Osia recipients to buy replacement processors. It's the first upgrade opportunity for Osia recipients, building our services revenue for Acoustics.

And now I'll hand over to Sarah to go through the financial results.

All right. Thanks, Dig. Good afternoon, everyone. Let's go through the financial statements, starting with the P&L. Sales revenue was up 2% in constant currency. Now Dig's taken you through that, so I won't go through the details. The gross margin declined 3 percentage points to 71%.

Let me talk through why it changed from original guidance and what we're looking at for FY '27. At the start of FY '26, our gross margin assumptions incorporated 3 known headwinds. First, the introduction of VBP in China. That's a structural headwind we're working to address over time. Second, being early in the Nexa manufacturing experience curve, which typically takes 18 to 24 months to reach full efficiency at commercial volumes. And third, the continued ramp-up of the Chengdu facility to full utilization in FY '27. These 3 factors were all built into our original budget and guidance assumptions of 74% gross margin. But a couple of changes happened in the year that we hadn't anticipated, and these reduced sales of top-tier products, specifically weaker developed market sales growth and the second half removal of China special zone reimbursement.

These changes affected our gross margin in 2 ways: through product mix and through manufacturing overhead absorption. First, on product mix. The weaker top-tier demand meant a greater proportion of our sales came from lower-margin products than budgeted. This mix reduced gross margin by 1.5 percentage points versus expectations. Second, lower sales volumes meant we reduced production rather than building excess inventory. This was the right operational decision, but it meant lower absorption of our fixed manufacturing overhead costs. That created a 1.2 percentage point manufacturing variance.

We've now reduced our fixed overheads to align with the FY '27 plan. In addition, the stronger Australian dollar reduced gross margin by 0.6 percentage points. Based on FX rates at the start of FY '26, we budgeted for a tailwind, and we got a headwind because most of our revenue is in foreign currencies, while a large share of our manufacturing cost base is Australian dollar denominated. Looking ahead, FY '27 guidance has gross margin staying flat.

Now there's 2 reasons for that. First, we assume the FY '26 sales mix persists without a net shift toward higher-margin top-tier products in this year. While stronger developed market growth would help, we've assumed the current mix for this year. Second, while we're cycling the FY '26 manufacturing variance and we're moving further up the Nexa manufacturing learning curve, this is offset by annualizing that China special zone reimbursement change plus the FX headwinds we see. Over the medium term, as developed market growth lifts and as we benefit from COGS improvement programs underway, we expect gross margin to improve.

Now operating expenses. Comparable operating expenses were down 1%, reflecting cost management across the organization while continuing to invest in R&D and growth initiatives. Reported operating expenses increased 5% as this includes $32 million in restructuring costs from fourth quarter organizational changes and $37 million in STI provisioning following the low payout in FY '25 and a partial payout in FY '26. R&D expenses increased 15% to $323 million, which is 14% of sales revenue, up from 12% in FY '25. This reflects our commitment to key R&D projects and to development of our products and services pipeline, which underpins our competitive position and growth opportunities. This investment this year supported the progress that Dig mentioned on the development of the drug-eluting electrode and the totally implantable cochlear implant.

Our cloud computing investment to modernize core systems and improve scalability was $66 million post tax, taken below the line in FY '26. This is an increase from the prior year, reflecting the delivery stage of the current program, which introduces new ERP and manufacturing execution systems. We've completed the first go-lives. All manufacturing lines at both Sydney sites and in Malaysia now use the new system. So that's the majority of our manufacturing volume. In-year expenses were $15 million post-tax lower than expected for this due to final phasing of milestone payments. There'll be approximately $60 million after-tax spend in FY '27 to complete the program, which remains on track for FY '27 completion.

Total cost for completing the 6-year cloud program is just over $200 million post-tax. That's higher than originally expected due to scope expansion. We remain on track to deliver scalability, data capability and operating efficiency benefits, and that's built into our guidance. Fair value losses on investment and share of losses on equity accounted investments was $109 million, mainly driven by the noncash write-down of our investment in Epiminder. Underlying net profit of $322 million reflects a net profit margin of 14%, below our medium-term 18% target.

About half this outcome was driven by reduced developed market sales impacting across revenue, COGS and tax lines and half by the $69 million in transitional costs, that's the restructuring and STI provision replenishment, which will largely not repeat. We've managed costs carefully to deliver free cash flow.

On the P&L side, we've reduced recurring costs by updating our operating models and using the cloud technology platforms we've invested in plus AI capability. These changes are permanent, not once-off.

As a result, we've cut fixed costs 2 percentage points as a share of revenue, increasing our flexibility to respond when market conditions vary. Changes to date deliver around $40 million in run rate impact from FY '27. We have work ongoing in FY '27 and FY '28 with overall cost improvements expected to deliver about 50-50 margin improvement and reinvestment in growth. We've also reallocated $25 million into growth initiatives, including direct-to-professional referral programs, such as Dig talked about, digital and AI tools that support candidates through their journey and evidence generation to develop the standard of care for adults. While making these changes, we still invested over $40 million more in R&D than in FY '25, and we're committed to keeping R&D at least 12% of revenue, the engine of our growth and market leadership.

On the balance sheet, you'll see tight working capital management, cut inventory $75 million, 13% in the second half as planned following the Nexa rollout. Inventory unwind will continue over this year, although we expect to see an increase at the half before decreasing over half 2. That's so we support readiness for the remaining go-lives of our manufacturing and ERP systems. We also made sure receivables normalized following the Nexa launch that was at the end of FY '25. And as a result, we've more than doubled free cash flow compared to last year.

Specifically on the balance sheet, you can see working capital reduced to $789 million, reflecting lower trade receivables and inventory following Nexa launch and first half rollout. You also see the change to investments in other financial assets, which reflects changes in the value of our innovation fund investments with the write-down in Epiminder being the largest contributor.

On cash flow, operating cash flow improved $130 million on last year, driven by better working capital, which we just covered, and lower income taxes paid due to reduced profitability. You can also see we invested CapEx of $91 million, covering both stay-in-business CapEx and productivity improving CapEx. That's mainly at our Lane Cove and Macquarie manufacturing plants.

Now let's talk about FX a little bit and the impact on net profit. In FY '26, foreign exchange contract gains gave an after-tax benefit of $9 million versus a $12 million after-tax loss in FY '25. Taken together, that makes a $21 million year-on-year movement that you see here, which helped offset spot exchange rate movements. Overall, the constant currency outcome was pretty flat compared to FY '25.

On hedging, our approach reduces but does not eliminate the impact of short-term currency fluctuations on earnings. It mainly protects cash flow. Our hedging policy has been largely unchanged for years, and we review it regularly. We take out forward exchange contracts on currencies we have key exposures to in 6-month tranches over 2 years weighted toward the first 12 months. We disclosed the contracts held for the next 12 months in our annual report each year. These are summarized in the table at the bottom of this slide.

At current rates, this would provide about $25 million to $30 million in gains to help offset the FX impact of a currently stronger Aussie dollar versus the FY '26 average rates. The FY '27 guidance that Dig will take you through next is based on the U.S. dollar at $0.70 and the euro at $0.61 versus the Aussie dollar, a stronger Australian dollar than the FY '26 average.

Net of the foreign exchange contract gains just discussed, this is expected to reduce FY '27 underlying net profit by about 10%, and it's factored into our guidance. We have a net profit sensitivity of around 2% for every $0.01 change in the U.S. dollar or the euro. All right. Back to Dig for the outlook.

Thanks, Sarah. Okay. Before I get into the outlook, we obviously remain confident of our long-term opportunity to grow the cochlear implant market, and we look at F '27 in that context. So in FY '27, we expect to see low single-digit constant currency revenue growth and an underlying net profit of between $330 million and $350 million. We expect modest revenue growth in developed markets supported by DTC programs and referral pathway activity. We have assumed that underlying market growth does not rebound in FY '27. And in emerging markets, we expect low growth with a decline in the Middle East as a result of ongoing instability, and we expect China sales to be in line with FY '26.

Services growth will be slightly lower than FY '26, reflecting that we are later in the cycle with Nucleus 8. And Acoustics, we expect growth to be driven by market expansion and the launch of the new Osia 3 Sound Processor that I mentioned earlier. As Sarah said, gross margin will be between 70% and 71% with improvements in manufacturing costs and overhead recovery offset by FX and the annualization of lower China pricing. There will be a small decline in operating expenses, and this includes a lower level of restructuring costs in FY '27, the benefit of cost reduction activities and enables investment in growth and margin expansion and increasing the STI pool to 100%.

Sarah mentioned the impact of FX on profit in FY '27. And over the next few years, we expect to see developed market growth rates lift, tight management of OpEx, along with continued investment in R&D and in growth programs. All of this is expected to result in profits growing faster than revenue and should see us return to our 18% net profit margin target over the medium term.

Thanks for listening. And now let's open up to Q&A.

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

Dig, The medicalization of hearing loss, can I get you talk to over what time period do you think these programs can address this issue? Because it feels like it's come on quite quickly. We haven't spoken or I didn't speak about the hearing aid channel at all, whereas what you've set out is something that's going to take quite some time to deliver a benefit that shareholders would see.

Yes, David, good questions. So medicalization of hearing loss does take some time. That's for sure. We've been working on it for nearly 10 years now, and we expect it to continue to take longer. But it's not -- it's also -- it's a gradual improvement. It's not something that we just work on and all of a sudden, it's done and then you see a sort of a rapid increase in the growth rate. So the work that we do year-on-year will improve referrals, but also conscious that given our market penetration for adults and seniors is under 5%, we've got a long way to go before we get there. So it is a long-run program, but it has year-on-year benefits.

We haven't mentioned the hearing aid channel. Hearing aid channel referrals remain important for us. Our referrals from the hearing aid channel in the U.S., for example, were flat year-on-year when we look at '26 versus '25. And I think that reflects some of the headwinds we've seen. But very importantly, what we're doing with the work in what we're calling that self-navigatEBITDA channel is to expand beyond just hearing aids and actually get into the medical channel, where we're already seeing referrals come through.

And -- but that's without us directly intervening. And the examples I gave show that when we do intervene in that medical channel, and we do educate, we do see an increase in referrals. And it's the right time in terms of our development and the execution of our strategy to be expanding that presence in the medical channel and getting those more medicalized referrals, which again is a step on the path to medicalization.

Right. I mean the other question for me just at the trading update, we heard a lot about the market not growing, particularly the U.S. market. I think Western Europe had some explanation with U.K., Spain, et cetera. But if I could get you to focus a little on the U.S. and what you think the dynamics are that are causing market growth to be so slow? And what should we as investors and outside the company looking -- be looking for as signals that things are starting to improve?

Yes. So as I said, we -- in the U.S., where we are working through our direct-to-consumer activities or the work we're doing at cycle, we're seeing growth in referrals. We're seeing growth in surgeries. Clinics that have established referral networks continue to grow. Where the growth didn't come was in the other parts of the -- in that self-navigated channel where there's always been an underlying level of market growth. That didn't occur this year, actually declined slightly, as I said. What we see going on there is a couple of things. One is that the insurance pre-authorization denials, which are leading to delays in surgery.

And we continue to hear, as I talked about in the trading update, we continue to hear from clinics that sort of sentiment broadly macroeconomic conditions is having some people more hesitant to go through to surgery. Clearly, not all because there's lots of surgery still happening, but it's been enough to take the edge off that growth.

And perhaps, David, just the last point on that is what we see is when -- it's one of the reasons that our -- where we intervene grows faster is because we're able to provide people with information on will this be covered by insurance, what will the level of out-of-pockets be? And I think what we see in that self-navigated pathway is people used to -- particularly in the U.S., used to paying $5,000 for a pair of high-powered hearing aids, assume this is going to cost more.

And without getting a strong referral and getting that information, they're more likely to pull out along the way. Again, got to medicalization, getting clarity on the treatment, the treatment pathway and the cost will help people move through that pathway in a more seamless manner.

Are these pathways really clearly distinguished in your mind? Because it seems like quite a change from what we've heard in the past. And like I hear it the DTC channel has been talked up for quite some time and seems to be going well. And now we seem to be talking about other channels that are not growing and probably a little bit less observable from the outside.

Yes. And we've obviously been aware of this for quite a while. We have spoken about DTC. What we have been talking about the last 2 years now is research we did into these surgeries that happen where we don't have any impact -- any contact with the people before. And we've talked about that in these calls before to say that there are about 70% of surgery depending on the market where the first thing we know about this person is when we get the implant registry. 2 years ago, that led us to go and do research into where are these people coming from? How are they finding their way.

And out of that, we learned a lot about the ad hoc nature of many of those people's journeys, and we hear that directly when we talk to recipients. And we also learned there was a significant number of medical channel referrals occurring despite us actually never going into that channel to stimulate those referrals. So that led us to build this program in the U.S. where we've now got 4 cities up and running, and we're going to take that to 12 cities over the next 6 months, where we've got people on the ground working in that medical channel. So we haven't talked about it for a while, but we've certainly been aware of it, and we've been working on both the research and in the programs to drive growth for a while.

And I'll come back to the Australian example. And Australia being our home market, it's an easier one for us -- an easy one for us to experiment in. We've been working for a while in Australia on expanding the referral network and working out what is it that drives referrals and what's the education that helps make a difference.

Your next question comes from Andrew Goodsall from MST Marquee.

Just you've talked a lot about the volumes and so on. But I wondered where you sort of see the opportunity to get price. I think you sort of talked about China, you've taken price and then just you had some plans there. And, I guess, finally, if it's -- if you're not getting it back through Nexa, can you get it back -- can you get price up with TICI?

Yes, Andrew, thanks for your question. So we did get -- first of all, we did get average price increase of about 3% with Nexa, which was good to see. As we said before, one of the things we were doing with Nexa is testing our ability to get a price increase. We hadn't gone to put a price increase through at this level for quite a long time and cognizant of TICI coming. We wanted to understand how the market worked when we put a price increase through and improve our ability.

So as we -- all of that said, as we look forward with TICI, we are thinking very carefully about the commercial strategy, about the pricing that we'd like to achieve, about how we realize growth with TICI. We're certainly seeing from our market research and the clinical studies, there's a lot of interest in TICI. And interestingly, from our market research, we're seeing it's potentially a different patient cohort to we're getting now. It's an extra patient cohort. So we've got -- we're building a commercial strategy. I'm not going to go into the detail of that today that looks at how do we drive growth, how do we work within the reimbursement parameters that they have around the world, what's the right level of pricing and lifetime value that we can get.

And maybe just to talk to that a little bit more just on price. Obviously, just -- obviously, there's some markets where it's a lot lower, and we know that with China and so on. But even the sort of markets, developed markets your constant currency implant revenue is still quite a way below your total units. So just trying to understand, I mean, I think there are some markets where you lost a bit of share and maybe that was price driven. But overall, you're saying that you are holding price. But maybe if I can just ask for a bit more color.

Yes. No, we are holding price. And in developed markets, we are holding price. The difference between that 5% volume growth and flat constant currency is emerging markets, and it's largely China and the shift to volume-based pricing. As we've talked before about the volume-based pricing, the goal in China for -- in dealing with all -- pretty much all medical therapies is to lower the price and significantly expand access. So that's what we've seen in China. We've seen a significant lift in volume, but that has happened at a lower price. And that's the single biggest driver of that 5% volume growth and flat revenue in constant currency. It's not a decline in average prices in developed markets.

Your next question comes from Davin Thillainathan from Goldman Sachs.

Dig, maybe just the comments that you've made on the U.S. market about insurers pushing back, initiating sort of more prior authorizations. I guess, what's within your control to sort of help with that dynamic and some changes that you've put through to address?

Yes. So we're certainly seeing that pushback. As we've talked about before, so when -- where someone is getting an upgrade, we're often managing the insurance processing part for them. Where they're getting an implant, the vast majority of those authorization -- pre-authorizations are sought by the hospital. So it's actually then up to the hospital to -- if they get a denial to appeal because most times when there's an appeal, that denial gets overturned.

So we don't have a direct role in that. If we -- if it's a candidate we're working with, like through our DTC and we see that, then we can help -- we can talk to the clinic about getting the clinic to appeal. If it's from the other side, then we don't get that visibility. But I think what we've seen is these denials are not just cochlear implants, obviously, it's across a whole range of surgery areas. The primary impact of these denials actually on hospitals and on hospital revenue. And that's where we think the hospitals are actually going to take the lead here and lift their work in terms of challenging, appealing the denial and seeing that overturn.

So I think we will see that change over time, the work that the hospitals do to get those denials through. It's exactly the response we had when 2 years ago, we saw insurers pushing back harder on replacement processors. We lifted our game on the documentation we provided to insurers. We appealed when there were denials in place, and you saw the result with stronger growth in services that while there's still plenty of tension there, we've improved our ability to get insurance. We think hospitals will do the same with respect to surgeries overall.

Yes. Great. And my next and final one is just thinking about the NPAT guidance into '27 and also your, I guess, longer-term guidance in terms of lifting the NPAT margin back to 18%. In a situation where your revenue does lift above the low single-digit guide, do you sort of expect that to sort of all flow through to the bottom line? Or do you step up the rate of reinvestment into the business as well?

Well, Sarah provided a good guide on as pull -- as we reduce our cost, we'll put some in the margin and some in growth. If we see extra growth, we have that same consideration of do we have a priority growth program that we want to invest more in would we restore the margin. But definitely, a good part of that will go into the margin. We've got that 18% target, and we want to lift back to that.

Your next question comes from Saul Hadassin from Barrenjoey.

I'll stick to 2. The first one, there's [ constant ] talks to the developed market implant growth and says revenue is expected to grow modestly. From the release, it looks like you've got a price increase on average of 3% from Nexa, most implants, if not all, being implanted to Nexa. And you've also talking to share gains on the back of the Nexa. So my question is, is this set, therefore, just a function of market growth effectively being soft in those developing -- developed regions, sorry?

And I guess in that same comment, it says current trading conditions remain mixed and the measures being taken now or the actions being taken now will take time to translate to more consistent growth. So regarding the outlook for '27, how much line of sight do you have as to unit sales growth through those developed markets considering when we had the downgrade in April or May, it seemed to come very suddenly. I guess, how much confidence do you have that the trends that you saw, say, in June can be extrapolated into the current fiscal year?

Yes. So I'll answer the first part of that, and Sarah can talk to what we're doing on that from a visibility perspective. So yes, look, our outlook is a combination of price increase, some share gains on improvements with Nexa in some markets, not all, in some markets, we've already got those -- the share gains and some market growth. It is a combination of those and a combination of how we think those factors will play out across the different markets that leads to our outlook. I'll let Sarah talk to when -- what we're doing on visibility.

Sure. I mean, look, when we think about that outlook, we consider not only the historical trends that we've seen, but more importantly, what we're seeing in the market. And so working closely with the sales teams because that's actually one of our best sources of intel, seeing where those outlooks look like from a customer perspective, understanding quite deeply where there are capacity constraints at kind of the micro level or where there are bigger trends that we're hearing from our customers. We also look at the data that we have available to us is proprietary data.

So what's going on with our DTC, our direct-to-consumer data, where that's available to us and also the broader market trends, whether that's information about the hearing aid channel that we can get through our cycle data or broader, more publicly available data sets. So we look across all of those things when we combine together what we think those forecasts are. Of course, we've got a range for different subsegments, but then overall, combine that into the outlook we've given for our developed markets.

And can I just follow up with one other question. Historically, Cochlear has said that on the services revenue, it was the intention to smooth that revenue and the rate of growth. It still seems to be quite volatile as you go through the various years of the life cycle of an upgrade. Do you think it is going to be possible to smooth that revenues? Or do we just have to live with the fact that the first couple of years, you get significant growth in that revenue line and then ultimately, it declines as you get to the outer years of that upgrade cycle?

Yes. I think it will certainly still remain lumpy to a degree. As we've said before, adding the off-the-year process and that typically being sort of a mid-cycle launch does help smooth that out. I think the other factor that will help is we do have to retire older processes because we just are unable to supply the electronics to keep them running. And us staging that retirement across countries to sort of help manage the demand and the run in the run out, all of that will help provide some smoothing. But we're always going to see a lift on a new processor launch that there are people who are tuned in to waiting for these. We've got a track record of delivering significant benefits from these launches, and there will be people who are always going to jump at that chance.

Your next question comes from David Stanton from Jefferies.

Just to ask Saul's question in a different way. The pipeline in the U.S., how many months ahead can you see volume and scheduled surgeries? Just a follow-up from when we heard from you last period, like Saul said, it seemed that it was shorter than I previously thought. So if you could give us some color on that, that would be greatly appreciated.

Yes. So first of all, on scheduled surgeries, that sort of typically looks out a couple of months. It does vary by clinic, but it is only a few months into the future. When we look at our pipeline of candidates through the areas where we have visibility, that gives us -- can give us a 12-month view, but it is a mix of candidates who move with quite different velocities.

So we can run some averages over that, and that gives us an indicator. And as I said, that's about 1/3 of our sales. But again, that pipeline is typically more concentrated in the next 6 months and less concentrated sort of in the 6 to 12 months. So it helps give visibility, but it's certainly not perfect visibility.

Understood. Very clear. And could I trouble you for an estimate for CapEx for F '27, please? Or have I missed that?

Yes. No, that will still be around about $100 million pretty consistently.

Okay. And then my final question. Any updates for trial results from your TICI, please? Any kind of time line or further color will be greatly appreciated.

Yes. So in -- we've got 2 studies there, one in Europe, which has finished recruiting and recruited ahead of schedule. And then the one in the U.S. is still recruiting, but it's running a few months ahead of schedule largely because it's very easy to find candidates. So obviously, after the study, there's -- after the study has finished recruiting, there's then sort of 6- to 12-month follow-up and a regulatory approval path that comes under that -- after that.

Your next question comes from Steve Wheen from Jarden.

Dig, I wonder if we could touch on the Nexa and if you could provide any sort of guidance as to when we could expect some of these new features to be announced or launched with that Nexa. I mean the overwhelming sentiment from surgeons and audiologists is they're looking forward to it, but nobody needs -- nobody seems to know where -- when that is coming. And you don't need to say what it is, but just some timing so we can sort of get some feel for it because that will be when your price increases might resonate a little bit more?

And then the second part of the question is there's been -- associated with the launch, there were some problems around the map transfer. Just wondering what time frame you've been able to get that reduced to and the SmartNav changes, when would they be sort of able to be relaunched to bring those surgeons back to the tools that they were used to when implanting an implant?

Yes, that's a good question. So on the -- I'll do the software first. In the next few months, we'll have a software release that will improve the range of programming parameters that some audiologists talk about that will reduce the time for the map transfer to the implant plus a range of other improvements. So that's a few months away. SmartNav, I think there there are some people who would like access to some of the research tools that we have developed over 20 years with the previous systems. We're working on those research tools. They are not too far away, but I don't want to give an exact date on them.

And then on the Nexa features, that's one we are working. We have plans on what we're going to do, but I'm not going to put a date publicly on that for a whole range of reasons, including competitive ones. But I know as you talk to surgeons and as we talk to them, they eagerly await as an audiologist to get some insight into what Nexa can do. The one -- the people who've been involved in the clinical studies have already seen some of that and are excited by the opportunity to do more. But we're not going to publicly put out -- put a date on when that will be available, but we do have a multistep plan of improvements and access to new features.

Okay. Just a quick clarification. When you say you're holding price, does that mean holding it flat or the increase that you're putting through was held? And -- or are you referencing different markets that you've increased? Just is that overall across everything?

So the price increases we put through on Nexa, they are holding. So, yes, when we say holding price, it means that the price we've got, whether it was unchanged or whether it was increased, we're holding those in developed markets. In emerging markets, there's obviously a whole mix about different volumes and different tiers and that the dynamics there are quite different.

Yes. Got it. Final one for you Sarah. Just on the STI provision that you had in previous year once you had released it. Could you just give me a quick refresh on what you're doing this year? And does that mean it needs to -- you've built it back up and there's been no sort of release again into this current half.

Right. So just refresh you from the beginning of the year, we expected we'd need to build back up about $50 million following the low payout in FY '25. We built up $37 million of that in the end because we didn't have a full payout in this year, so in FY '26. So then in FY '27, we have about $15 million that we have to build back up. Does that help?

Great. $15 million, 1-5?

Yes, 1-5, $15 million. Yes.

Your next question comes from David Bailey from Morgan Stanley.

Just the commentary there about the economic sensitivity in the U.S., and you kind of alluded to it, I think, but I just want to understand it. Is it more of a perceived out-of-pocket expense as opposed to an actual out-of-pocket expense? Is it more the perception that you're going to have a big out-of-pocket payment as opposed to actually having one? Is that the impediment you're seeing or the economic sensitivity you're referring to?

Yes, it's actually a bit of both. People who are less well aware and earlier in their journey, just particularly in the U.S., I think $5,000 for a pair of hearing aids. This is clearly more complicated technology. It's going to cost me more. So we see -- we actually -- yes, we see and hear of those sorts of experiences. Then there are some people who get all the way to the end. And then they have an out-of-pocket, which is much less than that $5,000, but some are choosing to say not just now. So we do see both occurring, and that is particularly the second one because the out of pockets aren't that big are much more about the macroeconomic impact on household budgets, particularly in the U.S. at the moment.

And is there any change in policies that are driving more out-of-pocket expenses, so Medicare Advantage versus Medicare? Or is there any sort of -- anything going on in terms of how people are covered such that the out-of-pocket component has been increasing relative to what you've seen before?

Not really. I think it's the sort of the macro picture. There has been a trend over the last number of years in the U.S. for annual plans where there's an annual deductible for that deductible to go higher. And so typically, that deductible might be for the family, and that might be the first $5,000 or in some cases, $10,000 of cost they've got to pay themselves and then insurance covers everything else. So those deductibles have been sort of rising for the last few years for people on those plans.

Okay. Just a quick final one. Just you mentioned it again, I just want to confirm this. But the TICI, do you feel like it's going to expand the market as opposed to cannibalize the existing technology? Do you think there's candidates out there that wouldn't consider a cochlear implant in its current form, but would potentially consider a TICI going forward?

They definitely are. And there's actually forms of those -- or more than 2, but 2 examples. One is, and I know a number of people who fit in this camp who have 1 cochlear implant. They don't have -- they have no hearing in both ears. They have 1 cochlear implant now. They're saving their second year for a TICI.

And the second is our market research and confirmed by the work we've done on the feasibility studies and the trials. There are people out there who absolutely don't want a cochlear implant now, but would jump from a high-powered implant to a TICI because of the 24-hour hearing, because it's invisible and because of the ease of use there. So it's absolutely a growth product. And the more we look and the more we hear and the more research we do, the more confident we get of the significant growth opportunity there.

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

Dig, it looks like you finished at the top end of the sales growth range for the second half. I think, about 6%, and that does look like you've had a better fourth quarter. I'm just wondering if you can give us a bit of color around the shape of implant sales growth across the half developed market in particular?

Yes. Sarah, do you want to take?

Yes, why don't I take that? So Q4 was stronger than Q3. Coming into our expectation when we talked at the trading update, we had ranges across the different segments. Overall, for developed markets CI, we were at the lower end of that range, but we were at the upper end of the range for services, where, as Dig said earlier, that was a bit stronger in developed markets. We were at the upper end of the range in the Middle East.

And Acoustics was a bit below -- it ended up a bit below where we expected. We were tracking in the range we thought through mid-Q4, but June saw a word get out about Osia coming, and we saw a bit of holds coming in, in June. And so overall, Acoustics didn't quite land where we wanted. But across all of those, when you combine those together, that does put us in that overall range at the top end, as you said.

Yes. I'm just wondering how the exit run rate in FY '26 differs to what you're forecasting within guidance into FY '27. Am I thinking about that the right way or sales quite lumpy across the year?

Both are true. You're thinking about it the right way. And in -- particularly in emerging markets, sales can be quite lumpy. From a developed markets perspective, it's reasonably consistent going forward within the bounds of within what we've guided. There's nothing that's really dramatic assumed going into next year. But we will see over the year improvement through the year.

It's not strongly second half weighted, but there is some improvement build through the year as the programs that Dig has been talking about work more and more over time. As you said, it's gradual, but does improve. And then in emerging markets, we definitely do see that some of those sales are lumpy. Bigger government tenders and contracts are the things that drive that. So that can kind of come and go a bit.

Okay. And second question, just on the margin outlook. You spoke about -- or Dig spoke about getting back to 18% in the medium term. Just wondering if you can provide any sort of outlook on gross profit margins? Should we expect a similar sort of recovery trajectory? Or are you going to get to the bottom line margin with a bit more OpEx this time, OpEx out?

Yes. Look, the bottom line, 18% NPAT margin in the medium term is going to be addressed by both growth and some gross margin improvement and some OpEx improvement. It's all 3 of those factors. As we've said, gross margin is flat going into next year, but we are working on that over time. What the real focus is making sure we get back to 18% in the medium term and our programs have a plan to deliver that.

Yes. But can you just confirm there's no fixed overhead absorption or under absorption in FY '27. We're now past that?

So the FY '27 plan is set in such a way, and we've adjusted our overheads in such a way that's right going into next year, we don't see that continued unrecovery of overheads as we saw this year.

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

At your trading update, there was a $10 million provision for the Middle East receivables. I was wondering if any of that had been utilized or any written back?

Look, we took up some of that. We didn't see the Middle East being quiet as terrible as we know it was pretty unclear in April. So we took up some of that, but it's still pretty much within the normal range of our provisions.

Okay. And then just the second question. On the market share losses in Germany, could you provide some more just kind of comments about that and if that was actually much of an impact and what you can do to address that market share loss?

Yes. So certainly, it did have an impact on our performance. So Germany is the second biggest developed market after the U.S. It's an important market for us. Certainly disappointed to lose share through the year, but we're seeing some positive signs and again, confident that we can regain that share over time, particularly with Nexa and what we've got coming in Nexa and being through the launch and being able to focus on both market growth and talking about Nexa, what it delivers now and what it delivers in the future, we're confident that, that can help us to get that share.

Your next question comes from Chris Cooper from JPMorgan.

Sarah, thanks for walking through the gross margin drivers. I was furiously taking notes. Can I just confirm -- apologies if I missed it, but the guidance you gave in April was for 72% and then you came in somewhere below that, I think, 70.6% with only 8 weeks between the 2 periods. So can I just confirm what it was in that 8-week period that sort of went against you given those drivers you outlined were known at the time of the update?

Yes. So it would have been a little bit of sales mix in there and probably a little bit of FX as well. As I said, when I was just talking through Q4, while we did come in toward the top end of the revenue guidance range we've given at 6%, we were a little bit lower than we expected in developed markets. And so that's part of what's influencing that sales mix that you see coming through in the gross margin.

Yes. Got it. Okay. And maybe I could just follow up on your answer to one of Sacha's questions. The -- is it fair to assume that what you're saying here with the 18% NPAT margin is you can achieve that level over the medium term without necessarily needing gross margin to go back into the sort of mid-70s that you were at in the last couple of years?

That's right. We don't have a hard assumption on that gross margin, but we are working toward improving gross margin from where it is now.

Okay. So you're not expecting it to get back into the mid-70s at this point?

We're not making a firm target on gross margin at this point. We're focused on that 18%.

Your next question comes from Laura Sutcliffe from Citi.

If I could just go back to the TICI, please. Could you tell us if the trials that you have there are registrational or whether there's likely to be any other steps to generate the clinical evidence that regulators in key markets would need to approve these?

Yes. Laura, these trials are to generate the evidence that we need for regulatory approval. And in planning those trials, we have met with the regulators to understand what their requirements are. And so we're confident that the way we set these trials up, provided we get the results in line with our expectations, we'll have sufficient evidence for the regulators.

Okay. That's good news. And those populations that you have in those trials, I think they are adult populations, if I remember rightly.

yes.

Will you eventually be pursuing a label in the pediatric setting for the TICI?

I think, yes, with cochlear implants, if you look back at the history, look back to the original implants and even some of the improvements over time, it's always been adults that get approved first and children to follow. I think that's sensible from a health risk perspective. One of the things about TICI is it is a bigger implant. We're very pleased with how small we've been able to make ours, but it's still bigger than the existing implant.

And there's a microphone. So for a baby, it is probably too big until we get another generation in the future. But for older children, there's definitely potential, but our initial approval will be just for adults. And we have a long-run technology plan for steps of improvement in the TICI implant.

And if I could just squeeze one last one in. You mentioned that you're setting up programs in 4 cities in the U.S., which will go up to 12. Could you just tell us a little bit more about what that involves?

Yes. So what we -- those programs are aimed primarily at ENT practices that don't do cochlear implants. And we know that those practices are seeing people with hearing loss. Many of them actually sell hearing aids. And what we are doing is a combination of digital awareness work, whether that's sort of e-mails and webinars, but also people on the ground who are educating -- going into these practices to educate on the clinical practice guidelines.

I think it's an example where this long-run work on medicalization work that helps because we had a consensus statement in the U.S. now. The ENT society has adopted clinical guidelines for age-related hearing loss. Our people then take those guidelines into the ENT practices to say, are you aware of the latest guidelines that have been released yet -- approved and released that show the indications and the evidence for the indication of cochlear implant that show the treatment pathways. And then do you know who to refer to? Do you know the cochlear implant clinics in your city or around your practice?

So it is both an overarching digital campaign with people on the ground outcalling, going into practices to build referrals. And we back that with data on referrals that we can buy in the U.S. that shows actually who's referring now and their rates of referral, and that helps us target who we go and see there. So it's a comprehensive campaign to activate that medical channel. It will include some work in the hearing aid channel as well. So that will remain an important part of referrals, but expanding it to the ENT medical channel is a real opportunity.

There are no further questions at this time. I'll now hand back to Dig Howitt for any closing remarks.

Well, thanks all for joining the call. Thanks for listening. Thanks for your questions. We'll end the call.

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.