Cochlear Plc Ord

Thank you for standing by and welcome to the Cochlear Limited FY25 results, analyst and media briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.

Good morning, everyone, and thank you for joining our results presentation. Let's get underway. And as always, we are starting with our mission. And our mission serves as a guide across the company, but there's two important points. One is the purpose that sits in our mission enables us to attract outstanding people. And the other thing it reminds us of is the long-term nature of our business and the long-term nature of our strategy to help more people hear and be heard. And so I wanted to start the presentation today with a look at our 25-year financial history. And I'm doing that to put in context the F25. So as you've already seen, our sales were below our expectations for 25. And then it's really a question of how do we respond and I want to put the how do we respond to lower sales in the context of history. So if you look at these charts and starting on the left with our R&D, the investment in R&D, that's the most consistent chart on this page. So R&D has increased year on year. When sales have gone down, that R&D investment has continued to lift. So our first response when our sales are not where we expect them to be is to make sure that we protect R&D, and we do that because it's the core of the business. It enables us to retain our market leadership position, but it's also the performance of our products that sets us up to get the evidence to drive growth, and I'll come back to that. And we think about NEXA, which I'll also talk about being a 20-year development. It's that consistent investment in R&D over 20 years that enables us to produce a product like NEXA. Now, OPEX after R&D is then the next least variable chart on this page. Again, pretty consistent growth. But you can see we do pull OPEX back further than we do R&D. And we lift OPEX more than we do R&D too when sales are going well. And I think you'd expect that. So when we do moderate our spending, but we do try to protect in the OPEX is the investment in growth. So protecting that investment in R&D, protecting the investment in growth, leads to the two charts in the middle, which is the long-run history of growth in cochlear implants and the long-run history of growth in revenue. Now, a consequence of protecting... The growth spending and the R&D spending are the charts on the right, where there's more variability in profit, which is what you'd expect, than there is in our spending and then there is in our sales. And so that response to lower sales, which we saw this year, than our expectation, is to protect investment in the core parts of our strategy that drive our long-term growth. And we do that because we've got a market that's less than 5% penetrated, but we do that because we have confidence in our future. And I want to talk to two key aspects of our confidence in our future before we get into the detail of 25. So the first of those is the nexus system. So launching now around the world it is. We started the development of Nexa from Concepts in 2005. It was early in Chris Roberts' tenure. Yarn Yarnson had just taken over R&D at that time and Yarn shepherded this product over the last 20 years. And it's absolutely a breakthrough product. The world's first and only smart cochlear implant. in our view, perhaps one of the most sophisticated neural stimulators in any therapy. What does it bring to our patients and our professional partners? We want to make sure we have benefits up front as well as potential into the future. I'll get to the potential into the future in a minute. But right up front, because we've been able to, with new electronics, make the power transmission more efficient, We can have a smaller battery on Nucleus 8 and it gives a full day of battery life. So Nucleus 8 was already the smallest processor on the market by quite a margin. It's even smaller again. We know that consumers are very interested in cosmetics and the size of the processor and we have extended our advantage in terms of having the smallest processor with a full day of battery life. And then the map on the implant, which we call Smart Sync, the ability to get back on air quickly, is important both for recipients and for clinics. So what happens up to now is if someone's processor breaks, they either need to schedule an appointment with the clinic, go into the clinic, they get a new processor, the clinician loads their map, and the map is the unique settings that encode sound for their auditory nerve, and it's different for each person. They load that onto the processor and the person goes away hearing again. Or in some parts of the world, we've got the map in the cloud, so they call us. We load the map in our warehouse onto a processor and ship it back out to them. But there is a process that takes recipient time, takes valuable clinic time. It is often not reimbursed. You can think about this from when people go on holidays, for example, particularly with children. They're worried that the processor could break, they could lose the processor, so they go into the clinic and they get a spare. They get a loaner just in case. So you think about all this clinic time that is taken up, even when processors are reliable, They're not billable and adds no value. Now with the map on the implant, all someone needs is a blank processor. So we can ship a blank processor, clinic can ship a blank processor to them, no clinic time, appointment time needed. People going on holidays can take a new spare with them. They've got an emergency, if they don't need it, they send it back afterwards. So savings in clinic time. and savings for recipients. And one of the things we've been able to do with the amount of data that we now collect on clinical practices, we can see that over half the appointments that are made in clinic are for people after the first year of having their implant. And those appointments are really about just routine checking and maintenance. The more we can reduce them, the more clinic capacity we create for future growth. The other point I want to make on Nexa for the future too is we often talk about how full our R&D product pipeline is. Nexa is an example of this, a 20-year development that we didn't say anything about, I think for obvious reasons, until 2023, until we were getting very near the end of the development, we started to talk about new stimulation modes. And new stimulation modes to improve hearing outcomes is one of the potential future possibilities of NEXA. And it's the last one on the list on the right here. It's really one of the core reasons for developing NEXA with this upgradable firmware is to be able to now experiment with different ways of stimulating the auditory nerve, getting potentially more precise stimulation and therefore better hearing outcomes. A bit over the last year we have been running four small studies to experiment with new techniques. Those studies will wrap up over the next year which will give us real insights into the possibility with this end plan and then enable us to undertake further development. Some of the other future possibilities shown here, even more power efficiency which could lead to smaller externals. Earlier activation, so with the map on the implant, we can actually load a map in surgery, and we're going to start running some experiments on this, which means that someone, when they go home from surgery, once the bandages come off, they can put a processor on and they'll be able to start hearing. But now, it'd be some number of weeks later, they've got to come back to the clinic for another appointment or set of appointments to get that map set up. So again, that's saving clinic time, easier for recipients. There's a whole bunch of potential for diagnostics. Already some of those are active. There is more to come. Again, we think about half of clinic appointments being routine maintenance and follow-up. The more we can do on a diagnostic front saves clinical capacity into the future, but also gives both clinicians and recipients confidence in the performance of their system. And then the last one here is neural health. One of the biggest drivers of variability in outcomes for people with cochlear implants is neural health, the quality or health of their auditory nerve. At the moment, that quality can only be inferred, and at some time after implant, we're very confident that what we can do with the implant is be able to measure that neural health, which will mean much more target, potentially much more targeted expectation setting and much more targeted rehabilitation or habilitation to enable people to reach their potential. So a very quick view of just some of the potential for Nexa. The second reason we're confident, so Nexa really puts us in a really strong competitive position. It's a significant step above our competitors and those benefits come from the SlimModiola electrode, which is also unique to us. Second reason for being confident in the future is the work that is going on across the world to explore the link between cognition and hearing loss. This is all about medicalising hearing loss. We've talked about this a lot. Hearing loss is one of the most prevalent medical conditions in the world and it's one of the least treated conditions. And it's one of the least treated because people don't see it as a medical condition. They don't see that there is other health consequences from not treating it, so they don't see the need to treatment. And through our awareness campaigns, these people actually don't know of the potential solutions and their effectiveness. So what we've seen and we've talked about over the last five or six years is people a whole range of studies, starting with Spranklin actually in 2011, showing the correlation between hearing loss and cognitive decline. The Lancet publishing that hearing loss was the single biggest midlife modifiable cause of cognitive decline. The Saran study in Melbourne showing people with cochlear implants' cognition improved after getting a cochlear implant. And then on the right here, there are several more studies coming over the next few years looking at hearing loss and cognitive decline, looking at the different treatments between CI hearing loss and effectiveness, both in terms of hearing and to some degree effectiveness in terms of cognition. And it's this emerging data that gives us a growing pool of data on this link that gives us confidence of medicalising hearing loss and increasing motivation for professionals to refer if the people don't want to treat their hearing. I wanted to just call out one study in particular. This comes from Korea. It was just published a couple of months ago. And this study, in Korea they've got population-wide data from people's health records. So this study tracked over 50,000 people with severe to profound hearing loss for 14 years. It was an observational study, so it didn't track them. It looked back at their medical records. And then what it looked at was the incidence of dementia across these 50,000 people over 14 years. then looked at that incidence by type of treatment. So if we go to the chart here, the black line there is the incidence of dementia from people with normal hearing. There was over a million people that they tracked over those time. The blue line is the incidence of dementia for people with severe to profound hearing loss who got a cochlear implant. It's about 640 people, so a reasonably significant number for us. There is no statistical significance, the study concluded, in the incidence of dementia for people with a cochlear implant versus people with normal hearing. We then go to the green line and the red line. The green line is people with hearing aids. The red line is people who had no treatment for their severe profound loss. What that shows is that for people with used hearing aids, The incidence of dementia was significantly higher than those with a cochlear implant and those with normal hearing, but it was better than people with severe to profound hearing loss who didn't have any treatment. Now, this is an observational study. There are some limitations on it, but it is evidence like this that gives us confidence of our future growth because of this growing link between hearing loss and cognitive decline. and that being the motivation for people to refer, for professionals to refer, but in time for people to get their hearing loss treated as well. Okay, so now let's move into the detail of the results. You'll have seen the headlines already, that 4% revenue growth, 1% net profit and dividends. So let's get into the detail. So first into cochlear implants. And so cochlear implant, the result overall is a pretty good result, 9% growth in cochlear implant revenue, 12% growth in We saw stronger growth in the systems in the second half, which is one of the things we said would happen at the half. We look into developed markets first. Their units were up 6%. Adults and seniors growing around 10%. Again, pretty slower than we've seen in the last two years, but still pretty strong growth. And the key bit there is we continue to see ways for us to activate people on their hearing loss journey. We've collected a lot more data over the last year on referrals, on what happens to those referrals. For instance, we know now that about... people actually get referred for a cochlear implant, only about a third are actually getting to get an implant. And there's a whole bunch of reasons that they drop out along the way, but by us understanding those reasons, it's the opportunity for us to go in and to help those people back into their funnel, because only a small number are dropping out because they are not in indications. Most it's about not enough information or conflicting information or just not sufficient follow-up. So we've learned a lot more about that path. I talked about the medicalization of hearing loss and cognition. That all helps us build confidence into the future. And our DTC programs continue to be a very important part of driving growth around the world. We did lose a little bit of share, we think, through that half in a couple of countries and coming into the product launch, you know, competitors know that's coming. They have responded as you'd expect. They're very good companies. We expect to more than regain any share that we have lost with the launch of Nexa. And a slight decline in children. Again, we said that the half was surprised children was continuing to We wouldn't be surprised by a decline in children just because we have seen such strong growth, which we knew was out of line with the rate of incidence, that there should be a reversion to the more normal rate, and I think that's what we're seeing. Very strong growth in emerging markets, so up over 20%. And remember, we had two different halves on emerging markets. In the first half, we had a smaller volume, but a very strong mix towards the premium tier, which lifted our overall ASP on lower volumes. In the second half, we had far more volume going through, but it was low tier volume, and that was across a range of countries. Obviously, the volume-based pricing in China, which started in March, has been a factor in this, and we are seeing strong growth there, but that growth is in the lower-priced lower tier. And that, given the comparison between 26 and 25, the VBP in China will be a headwind for us, both on revenue and on profit. Okay, let's move on to services. Services for us is the down 10% is obviously the most disappointing part of the result. We talked about this at the half. We've seen some stabilisation of our services sales and we do expect to see growth going into 26%. But there does remain some uncertainty because there's a few factors in 25 which are unique to 25 and then there's some ongoing factors. So one thing unique to 25 is we are cycling, particularly the second half of 25, the impact of COVID and we know the biggest driver of services over time is growth in the recipient base and particularly the eligible recipient base. Five years ago in COVID, we saw a reduction in sales and a reduction in upgrades, and we are starting to cycle that, and we can see that in the eligible base. Now, that eligible base grows again as we get into 26, and particularly into the second half of 26. The other thing that we talked about at the half that we have not seen... for over time is the impact of cost of living and particularly in the US where there's just significant economic and consumer uncertainty. We look at some of what the hearing aid companies are saying. I think they're saying something similar to this. But that's where we do have an out of cost payment. The US was the largest fall in upgrades over the last year. We talked about putting payment plans in place, which we have done, and even that we are seeing is not, at this stage, sufficient to get people to take upgrades. And we do know upgrades for many people is discretionary. So if someone's processor is broken out of warranty in the past five years, they'll get an upgrade. But if it's discretionary, then we do see people delaying. So, again, at some point those people will upgrade, but right now we are seeing more hesitancy, particularly online. Part of that is Nucleus 7 is a fantastic product. And people saying, well, Nucleus 7 is pretty good. Why would I switch? And we've got really good clinical evidence that shows that Nucleus 8 is better. The other thing that we have done through the half is survey people who have gone from Nucleus 8 to Nucleus 7. Nine out of 10 of them. are saying that they would recommend switching, and 7 out of 10 are saying they're hearing better. And we will use that evidence to promote, along with upgraded marketing capabilities, to promote upgrades in the half. Sorry, through 26, and we have Kanso 3 as well, which will help us get modest growth in upgrades into 26. And then finally, acoustics, 6% revenue growth, so slower than we expect the long-run trend for acoustics. Osseo growing 30%, very happy with the Osseo growth. It was really Baja 7 coming and Baja 7 being slow. Visible later in the half, we saw a pullback on Baja 6. We expect to pick that back up this year with both Aussie continuing to grow in countries and with more geographic expansion and Baja 7 lifting Baja plus Baja upgrades through the year. Onto our strategy. Now, our strategies are unchanged, so I'm going to move pretty quickly through and over the other strategy because I did talk about our strategy up front. As we go into a lifetime of hearing solutions, our product portfolio investment in R&D continues, like I said. The Kanso, sorry, Nexa is a whole system, new software, as well as Kanso 3, and the drug-eluting electrode trials. Two pivotal studies well underway, recruiting well this important product for our future portfolio. Moving on to thriving people. Again, people, there are two parts to this. Our people and our leadership development are one of the key enablers of our growth. We continue to work hard on leadership development, particularly in the lifting capabilities of our leaders so that they are capable to lead in a growing and larger organisation. and the investments in replacing our core systems. We are in the final stages with replacing our core ERP. And what we will get here with both new data, new systems that will automate many processes, giving us efficiencies, but more importantly than that, data and clean data and consistent data, which will enable us to be making better decisions and enable us to be able to use AI as we look forward. And then a picture of Stephen Dine, one of our first next recipients meeting people in manufacturing. So just one of the things Stephen said, we talked about our mission and hearing solutions. One of the things he said is this is not a hearing solution, it's a living solution and a good reminder of the impact of what we do. And again, reinforcing our confidence for growth. And then on environmental responsibility, we continue to meet our targets. We're a very small emitter and we continue to reduce our emissions. And with that, I am going to hand over to Sarah to take us through the P&L and balance sheet in more detail.

All right. Thanks, Dig. And good morning, everyone. Let's go through the numbers. So we'll start with P&L. You can see on there sales revenue was up 3% in constant currency. Now, Dig's taking you through that, so I won't go through those details. You see, the gross margin declined by one percentage point to 74%. There are two parts to this. First, there's a shift to lower margin emerging markets in the second half. And second, we started to scale up production at the Chengdu manufacturing facility. Until December last year, we'd only been manufacturing sound processors. Now, we have regulatory approval for implants, and we've started to increase production rates. That site will continue to be a gross margin headwind for another year or so. Operating expenses increased 5% for the year, just a little ahead of revenue growth. We continued to invest in activities to support long-term sustainable growth and in R&D. We moderated the rate of growth in the second half. With softer sales, we prioritized our growth investment on the highest value activities. Total operating expenses also includes an approximately $50 million reduction in the employee short-term incentive provision. This was the result of below-target revenue and profitability outcomes. Our cloud computing related investment was around the same levels as last year at 33 million. We continue to expect our overall transformation investment to be about 250 million total. The final phase of that program focuses on our core ERP, our underlying data, and our manufacturing systems. The balance of approximately 130 million will be incurred in FY26 and FY27. Given the materiality of this investment, we'll report it as a significant item from FY26. And the increase in other income is primarily collaboration income from our innovation fund investments and revenue from various government grants. And then the final thing to note on here is the net margin pre-cloud was 18%, in line with last year. All right, let's move on to the balance sheet on the next page. Key change to the balance sheet that you'll see is the increase in working capital. That was up around $200 million on last year. A big part of that was inventory levels, which... ahead of major new product launches, and to build higher safety stock levels for critical components. We expect inventory to sales levels to start to moderate by December. The $90 million increase in trade receivables reflects a relatively stronger fourth quarter sales that we had, including in emerging markets. You can see property, plant, and equipment increased $28 million, and this is mainly investment in capacity expansion at our Lane Cove and Koala Lumpur manufacturing facilities. You see the $50 million increase in intangible assets that reflects increased IT system development, acquired technology and software development, and some impact of foreign exchange. Any increase in the other net liabilities includes the approximately $50 million reduction in the employee short-term incentive provision that I mentioned before. All right, on to the cash flow on the next page. You'll see operating cash flows declined $150 million on last year. That's driven down by the working capital, which we just went through, and a bid on higher income taxes paid. That's due to timing of tax installment payments. Finally, the capex of $103 million includes the capacity expansion that I mentioned, that investment in Lane Cove and Kuala Lumpur, and our stay-in-business capex. But now back to Dick for the Outlook.

Thanks Sarah. So under the Outlook, as you can see the numbers here, a guidance range of 435 to 460. That's 11 to 17% in reported. When we take out cloud out of 25, that's between 5 and 11. Going into the detail of that, we should really talk through on the way. We expect a strong performance in developed markets through this year on the back of the launch of the NEXA system, so expecting over 10% unit growth. We'll be waiting for the second half because we are rolling out NEXA with FDA approval at the start of July. In the US, for example, we've then got to work through contracting because we are seeking price increases in our whole range of markets for Nexa and software installation. So the launch is still coming in the US, so wait until the second half. In emerging markets, we do expect strong unit growth, but it will be in a higher mix in the lower tier. That means modest growth. And as I said, China is a headwind for us in terms of both revenue and profit into 26 compared to 25, particularly because we had a strong first half, a very strong first half in emerging markets in 25. Service, as I've talked about, we're expecting to see growth there. It's modest growth, but it's really that eligible base growing will help us. And there does remain some uncertainty there, particularly over just the sentiments that we see, particularly in the US. Q6 I've talked about then, gross margin around 74%. Now R&D, slightly higher this year, and that's a factor I talked about up front. We haven't slowed down our R&D pipeline with the lower sales this year. So as the sales catch back up, we're preserving that R&D pipeline. which means it lists as a proportion of sales. So our net profit margin heading towards 18%, but we'll be a bit below. That's reflecting the R&D and just reflecting to make sure that we continue investing both our R&D and our growth as our sales grow. And Sarah has talked to Cloud. Okay, so let's move on and we'll talk to questions. I'm going to stop sharing the screen so that you can see. Sarah and I. Thank you.

If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. And if you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from David Lowe from JPM. Please go ahead.

Thank you very much. If I could start with guidance, can I get you to talk a little bit more to how second-half weighted it'll be? And then just also in the same topic, the little bit below 18%, how much is a little bit and why the decision to do that? I mean, it's been such a longstanding strategy. I mean, I heard the explanation on R&D, but if I could get you to elaborate on that as well, please.

Yeah, okay. So our sales will be pretty significantly weighted to the second half for R&D. As I said, NEXA is rolling out, so we don't get a full six months in all of our countries of NEXA in the first half. And equally, you know, with people knowing NEXA coming, we expect to see now its imminent surgery holds. And we are seeing some of that in the US now. They'll come back pretty quickly, but some of that will flow in the second half. And similarly on upgrades... that eligible base rises in the second half. And also in the US, we have the retirement of Nucleus 7, which comes into effect in the second half. So pretty strong weighting. And if you saw this year, obviously, we had more profit in the first half than the second half. So that, you know, obviously this year, it's going to be the other way around. And so that contrast will also, you know, play when you look at it on a comparable basis. And then the second half of your question, David, was about... How much below? Yeah, yeah, so, OK, so it is... So we're going to be above 17.5, which is why we say 18, but we want a bit of flexibility there, and we are rebuilding that STI provision. So, you know, that was a significant... piece of our cost that didn't happen because of performance in this year. We expect to perform and get that back next year. So rebuilding that and making sure that we are still investing in R&D and investing in growth. You know, given our long run out, we think it makes much more sense to smooth that path back to 18% than to jump straight back up there at the risk of compromising the future.

Great. I'll leave it at that. Thanks very much. Thanks, David.

Thank you. Our next question comes from Andrew Goodsell from MST Marquis. Please go ahead.

Well, thanks very much for taking my question. And maybe just continuing on from your comment around the next launch, could you just give us a sense of what sort of response you are getting in the markets you have launched? I mean, is that what's supporting your – your sort of 10% plus growth outlook, is that giving you the sort of confidence?

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

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

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

So it's a pre-cloud to a – it's an inclusive cloud to – the 5 to 11 is – sorry, excluding cloud to excluding cloud. Now I get it.

Yes. Yeah, so by use of your – you've given us sort of an 18% margin in the P&L this year for xCloud. So if I use that – to get the NPAT come up with about 424, then the 5 to 11 is on that number, is that right?

Yeah, it's off the underlying basis.

Yeah. Excluding Cloud.

If you take the NPAT guidance range and back out 5% and 11%, you'll get to that number.

Okay. Okay, got it. Got it. Okay, and the 80 is a post-tax number. Just to clarify. Okay. Okay. All right. Thank you very much. Thanks, Andrew. Thank you.

Thank you. Your next question comes from Saul Hadassin from Baron Joey. Please go ahead.

Yeah, thanks. And good morning. Thanks for taking my questions. I guess a question on the services and particularly upgrades. And the commentary again just about that. US consumer which I think hasn't really been a feature in upgrades in the past. I know you're expecting improvement because of the increase in the size of the installed base from five years ago but you seem to be a bit cautious about the commentary just then about the outlook for 2025. I guess just some comments around why you think services should see solid growth and maybe also give us a sense of what does solid actually mean? Is that a mid-single digit revenue growth number? Is it high single digits? Any colour around the word solid, please?

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

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

Yeah, so it has been a bit slower in Western Europe and it is also coming off some really strong years of growth particularly in the adults and seniors and then getting to around 10% this year is clearly not a bad outcome, it's just not at the level We've been. What gives us confidence is that of this growth, the growth picking back up, is that we are seeing our growth programs getting traction. As I said, we've done a really good job this year of getting more insight into the referral paths and the points at which people drop out. So we've got better metrics, we've got better measures, and that will help us target our growth. where we invest in our growth programs. And Nexa, to a degree, is also just helpful in the shorter run from growth because we have contact with a lot of people who are indications of whatever reason have decided just not to go ahead now. A new product is a new opportunity to re-engage and for all these people we're hearing, it certainly will have deteriorated over time as well. So long-run, again, and, you know, we've talked about it, just links to cognition and you see the growing evidence there. That gives us a lot of confidence that, you know, both from a referring end and a candidate perspective, we'll see more motivation to get here in Australia. And, again, in some of our surveys now of people who've... Been referred and got implants and we ask them, you know, what motivated them. Cognition is one of the things that is rising in terms of people's reasons to act.

Thanks very much. That's all I had.

No problem. Thank you. Thank you. Your next question comes from Steve Wayne from Jarden. Please go ahead.

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

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

Okay. And just a bit of a follow-on from that, just the staff, STI provision release of this year of $50 million. I heard your comments that you're going to be rebuilding that provision in the FY26 year. Can you give us an indication as to, are you going to reverse the $50 million back into the FY26 year, or is it a figure less than that? And then as part of this, just trying to understand the guidance, your other income included some – was certainly larger than I was expecting, but where – what was the composition of that, and will any of that continue into FY26 as well?

Well, that's the first part. I'm sure we can do that other income. So, yeah, look, on that – the $50 million, it will – We do expect to land on the targeted outlook, and if we land on our targeted outlook and we deliver well in our programs, we'd expect to have the STI going broadly across the company next year, and therefore we've got to rebuild that provision and, you know, that goes through into our OPICs for the year. So we can just talk on the other income.

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

Okay, Sarah, so you aren't putting any of that continuation into FY26 guidance?

It will be lower in FY26. I wouldn't expect it would stay quite at that level.

Okay, great. Thanks very much. Thanks, Sam.

Thank you. Your next question comes from David Stanton from Jefferies. Please go ahead.

Good morning, team, and thanks very much for taking my question. Look, just to maybe beat a dead horse a little bit, can you give us an idea of what you think market volume growth is for cochlear implants at present?

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

Understood. So that 10% number, just to make it absolutely clear for the dummies on the call like me, that is the overall number, global number, or is that just to develop markets? Sorry, I think I missed it.

Sorry, develop market adults and seniors. Yeah, no, but important to clarify. Okay.

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

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

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

Yeah, we're getting a lot of surgeons reaching out to be interested in doing research. This is on the focused multipolar stimulation. I said we've got a couple of small studies going on that we've had going on for a year now. We're seeing some interesting results there. For example, just a small study we are seeing with this new stimulation, people preferring music with the new stimulation modes over the... over the existing ones. Small numbers of people at this stage, but very encouraging results. The logic here is pretty strong, but we need to see that clinically. The logic here is if with the electronics we can focus the charge more and therefore be more precise in the stimulation of the auditory nerve, The logic says that should get better hearing outcomes, but only when you do this clinically do we see if that's the case. So some early indications, but it is early and more research to be done.

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

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

Very clear. Thank you very much.

Thanks, David.

Thank you. Your next question comes from David Bailey from Morgan Stanley. Please go ahead.

Yeah, thanks. Good morning, Dick. I just want to be clear on this one. You know, the update you gave in June, you called out slow and expected market growth in developed markets. Can you just sort of talk through, following up from Saul's question, where that's occurring and the mix between adults and seniors, please? Sorry, adults and kids.

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

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

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

Yeah, understood. And then you've talked to the VBP in China, a bit of a revenue hit and gross margin impact as well. Is there anything you can sort of, quantify in relation to that and maybe just more broadly the dynamics there. I think there's pretty good private pay growth in those special zones but the question is maybe quantifying 26 to the extent you can and then the dynamics in the Chinese market more broadly.

Yeah, so Doug can make a few comments there. So, yeah, you're quite right. The special zones are still there, and we are selling Nexa through one of those special zones now, and we've seen a very strong uptake. So that good premium segment remains. In terms of the volume-based pricing, we're five months in, and there's definitely been a lift in overall volume. Still some uncertainty over the extent to which that will be maintained. We know the market potential is there, but we're also pretty confident that this was visible before it happened, so there was a backlog of people to come through. So we want to just see that... Overall volume is definitely up. We think it will stay up, but it is through that low tier. And one of the things that's happening is that we used to have a pretty good middle tier pricing in China and that volume that was in the middle tier, most of that's moved into the low tier and that's what brings this revenue headwind and that profit headwind as we go into 26.

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

No, I'm going to stay away from the specifics. They're still... It is still moving around, so we just want to be cautious about going beyond the dynamics to get to numbers.

Yep, no worries. That's all. Thank you. Thanks, David.

Thank you. Your next question comes from David Delanathan from Goldman Sachs. Please go ahead.

Yes, thanks. Morning, Deeg. Morning, Sarah. Appreciate the opportunity. Deeg, can I just get you to talk to the ability for the NEXA implant to expand the market? I clearly understand the longer-term dynamics there with the process of mapping side of the equation where you can actually, I guess, expand capacity in the channel. But if we think about nearer-term trends, could you give us a sense if you're seeing any leading indicators where the product is actually expanding the market?

Yeah, good question. Too early to call on whether Nexa would expand the market. We're certainly seeing some share already. Now, early days on that, but definitely seeing that happen. You're right. One of the features in Nexa, some of those will take out clinical time, therefore increasing clinical capacity to enable more people to get evaluated. So it's an enabler of growth. Looking forward, from a product perspective, we do think that a drug-eluting electrode has the potential to expand the market, particularly... And to do that, we want to be able to demonstrate that there's better hearing preservation, because that is one of the barriers for people getting an implant now, is that while there is hearing preservation, our labelling at the moment says you may lose your hearing. And, you know, we've seen some early indications that a drug-alerting electrode could help preserve residual hearing. And if people... If surgeons were able to give people more confidence on the amount of hearing they'd retain, that would take away one of the barriers. As I said, we've done this analysis of where people drop out once they're referred, and that is certainly one of the points at which people who are in the indications room would do better to pull out of the process.

Great. Thank you. My next question is on the services part of the business. In your FY26 guidance, is there any expectation within services for a new processor for the Oticon medical recipients? Just thinking about that opportunity there.

Not in 26, but something we're certainly working on. Now, that recipient-based emoticon medical is relatively small, so when it does come in, you won't see a huge kick-up in services. We are continuing to sell existing processes there, so it's a small number, but it's a small part of our services revenue. All right. Thanks, Dick. Thanks, Deb.

Thank you. Your next question comes from Marcus Curley from UBS. Please go ahead.

Good morning. Just a couple of questions on the NEXA platform. Could you talk a little bit about how you think the multipolar stimulation differs from what's offered by MED-EL and Advanced Bionics?

Yes, Mark, that's a good question. So MED-EL don't have anything that... is in any form of multipolar stimulation. Advanced bionics have some capability and they've had that for over 20 years. Being electronics over 20 years ago, it is far more rudimentary than we have. The other thing that's important, and we realised this partway through this development, is you need to be really close to the hearing nerve, which is one of our motivations for launching the Slim Body Ola electrode in about 2016, is to benefit from focus stimulation. You've got to be really close. Otherwise, that benefit of that focusing too far away, you still get a lot of channel interaction. So phantomronics don't have a sophisticated electronics, and they certainly don't have the electrode that would enable...

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

Yeah, so we've already seen a reduction up front and we do think there is more we can do on reducing power consumption with electronics and also it has potential with a drug-eluting electrode with lower impedance to reduce the power consumption again. So there is more room to go there. The obvious, the ultimate on size reduction of the externals is a TQ.

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

Yeah, early days, but good response so far. You know, it brings all of the Nucleus 8 functionality into the Kanso form factor. Kanso is an important part of the market. On average across the world, it's sort of around 20%. So there's a population of people out there on Kanso 1 and Kanso 2 who will be eligible to upgrade for Kanso 3. So it's certainly part of the services mix for this year. Okay, thank you. Thanks, guys.

Thank you. Your next question comes from Leanne Harrison from Bank of America. Please go ahead.

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

Yeah, Lynn, good question. And it's actually really hard for us to disaggregate. 25 is a difficult year because there's quite a for us to really understand every piece of what's going on because there are multiple factors and it's just hard to disaggregate those factors. As I said, the US was where we had the biggest fall and that's the place where cost of living is, you know, there is the copay and that cost of living impact is there. So that certainly helps us conclude and what we hear from, directly from people as we're talking about the orders, that was a piece of it. You know, the recipient base bit not growing. that's a contributor but actually disaggregating those into exactly of the of the reduction this bit was due to this and this to that um we're not able to to do at that level of granularity but what that doesn't stop us doing though is still is not sure knowing that would change too much the actions we've already taken which is about to you know promote it What we have got better, you know, we've got in the US the retirement of Nucleus 7, and obviously then we just have the eligible base increasing. And we've got Kanso 3 launching as well. All of those things will contribute to a better outlook and results in 2016.

OK, great. Thank you. And just another question. You mentioned taking some price, particularly with the next launches. How much price increase would you be thinking about there?

It varies by market. There's a range but all in single digits.

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

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

Okay, great. Thank you very much. I'll leave it there.

Thanks, Dan.

Thank you. Your next question comes from Andrew Payne from CLSA. Please go ahead.

Yeah, morning. Thanks for taking my question. Yeah, coming back to our services, obviously calling out the smaller eligible base impacting that area. But just looking at the strong services growth that followed that initial disruption, do you think that's an indication of the type of growth you'd expect of those headwinds ease and maybe also including some of the product launches coming up?

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

Yeah, okay, so if you're talking about, you know, especially in the US, cost of living pressures, so there's holdouts there, plus you didn't have that, you know, the kind of five-year cycle through, let's say, this calendar year, into calendar year 26, it should, you know, there should be some reasonable demand for upgrades coming through. Is that correct?

Yeah, I think your point of somewhat, I think what you're saying is, yes, look, some of those... Upgrades that would have happened in the second half of 2020 were delayed into 21. So those five years for those people has moved out. But for some of them, and that will happen in 26, and that's one of the reasons the eligible base grows in 26 compared to 25 is it's reflecting that deferral that happened in COVID.

Okay, that's great. And then just also... Just in relation to holdouts waiting for the Nexus system, is there any concerns around bottlenecks to surgeries or getting those patients through the channel and implanting devices, let's say, once the US launches them into calendar year 26, or do you think that's going to be a pretty smooth process?

I think to the extent there's holds, we will get those surgeries back through in 26. And surgeons are, and it's particularly a US issue where we've got the launch, but with the contractor we haven't put the product out just yet, it's soon. Surgeons are very conscious of the access to their surgical slots and don't want to give them up if they're not sure they can get them back. So that's moderating. We're seeing some holds that use moderating.

Okay, that's great. Thanks very much.

Thank you. Your next question comes from Sasha Crane from Evans and Partners. Please go ahead.

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

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

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

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

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

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

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

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

Thank you. The next question comes from Steve Wien from Jarden. Please go ahead. Steve, back to you.

Oh, yeah, thank you. Sorry, just given you'd mentioned this historically, that you were expecting an Indian tender from the Indian government, wondering if that appeared at all in 25, or is there any part of that that you expect in FY26?

We've certainly got a bit of volume in 25. We expect to have some Indian tenders in 26, but in terms of the Overall impact on the business, it's not a huge, either way, not a huge impact. You know, with these tenders, when they come, we can see a lift in our volume, but not a huge revenue impact.

Yes, so the government won tender that went missing in 24. You're not expecting that to come back? No, no. Okay. Thanks for the second question.

Thanks, David.

Thank you. Your next question comes from Craig Wong Pan from RBC. Please go ahead.

Thanks. Just wanted to clarify, is the margin headwind from Chengdu manufacturing becoming larger in FY26, given you're expecting to manufacture more implants there? And then is the amount of the overall margin headwind still thought to be around 50 basis points that should roll off somewhere throughout FY27 and FY28?

Yeah, look, we're not expecting that to get larger. Ramping up is helping us there. It'll probably be a little bit less than that number you quoted, but it's still ahead this year next.

And the other thing I should have just mentioned earlier on, Leanne's question just on the gross margin, is the next of being new or because the new products, the costs are a bit higher to start and then they come down. So there's a partial impact there as well.

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

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

Okay. Thank you.

Thank you. Your next question comes from Christine Trinh from Macquarie Bank. Please go ahead.

Hi, Dee, just two quick ones from me. Just in terms of longer-term targets, are you still looking to target sales revenue growth of about 10% over the coming years, or are you kind of expecting a significant uplift from that nucleus nexus system?

No, as a long-term target, that's one that we may take.

And just quickly on the cloud investment again, just confirming that 130 mil over the next two years as post-tax?

No, that 130 mil over the next two years is a pre-tax number. That's our total investment.

Thank you. Your next question is from Leanne Harrison from Bank of America. Please go ahead.

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

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

Okay, great. Thank you very much.

Thanks, Leanne.

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

Okay, thanks everyone for joining. Appreciate it and no doubt see you again in six months, if not before.