I would now like to hand the conference over to Mr. Dick Howard, CEO and President.
Please go ahead.
Good morning, everyone. Thank you for joining us for our first half results presentation. Just before we start, we do have closed captioning available that you can access through Teams if if you wish. But let's let's start on the presentation. So obviously, very quick overview of Cochlear as a whole.
I think you know this and you will read through the headlines of the results, so we'll jump through to get into the results. But just pausing on our mission, our mission has been critically important for us, for our employees around the world as we work through COVID over the last now twelve months. And our purpose has actually been central to to what we've done and has kept people focused on delivering results. It is our fortieth anniversary, our fortieth birthday this year, so an important milestone for Cochlear as a whole and a chance to recognize some of the history, but particularly to look forward to our to our future. So let's get into the results at the headline level and then we'll go into a bit more detail.
I'll give a bit of an overview of some of the aspects of our revenue and SKU sales will talk about P and L balance sheet and the cash flow. The underlying net profit as you will have seen is down 4% in constant currency. We had very good improvement across the half, the first quarter being okay and then a strong second quarter. We also see that our OpEx was well below where we've been and it's largely around COVID related savings particularly with travel and conferences. Some significant one off items in this result, a hundred and 11,000,000 after tax, so our headline statutory profit of $2.36 but the underlying of a hundred and 25,000,000.
And in that, some significant items there of a tax ruling on the deductibility of some of our IMF patent litigation expenses, gains on the innovation fund with Nexoa listing in September and Epimind are doing a raising, so that just recognizes the increase in value of those companies in our shareholding. And that we've also taken government assistance in that was provided to support jobs around the world as a one off item because we will be repaying that through this half. The majority of that, the 25,000,000 is JobKeeper, twenty four and a half million is 23,100,000.0 received from Jobkeeper in Australia in the second half. So we certainly finished the half with a very strong financial position, with good cash flow that Hugh will talk to, and that's enabling us to pay a dividend of a dollar 15 a share, so at 60% payout, we do want to get back to a 70% payout ratio. And I'll talk about our guidance at the end of the presentation.
So clearly, we had a strong q two with CI units being down 14% in the first quarter, only down 1% in the second quarter. And when we look at that by markets, we see some markets performing very strongly particularly The US, Korea, Japan, and China. Western Europe performed well. Up until November, then the escalation of COVID cases from November, we saw a slowing in Western Europe, that's certainly nothing like we saw in March and April, but we did see some pullback from the gains that we that we had seen up until the October. Emerging markets are improving more slowly and I'll talk a little bit more about that when we get to talk about CI, but importantly the new candidate pipeline across developed markets across all ages has been rebuilding and I'll talk a little bit more about that one.
One of the things that we talked about right back at the start of when COVID hit and certainly at our F 20 result was that we really saw this time as an opportunity to strengthen our competitive position. We knew we had a strong pipeline of products in our development portfolio. We launched four products in the last half, bringing to seven significant products we've launched in the last two years. That combined with a strong customer presence and the service experience we offer both professionals and recipients has helped strengthen our market position and we've seen that in market share gains across many countries through the half. And despite the lower spending, the lower OpEx, we have been able to maintain progress across our major R and D projects and certainly our growth initiatives while we slowed them in March, April, and we have been able to bring back investment in our growth initiatives through the half.
So on the cochlear implant revenue, as I said, certainly improved quarter two over quarter one and quite a different picture across developed markets to emerging markets, but even with the in developed markets, some real strengths and some recovering, but recovering more more slowly. So certainly seeing there that with US, Japan, Korea, very good unit growth, which clinics really back to the capacity they had. But also seeing that growth we saw particularly in q two was a mix of some rescheduled surgeries, some market share gains, and definitely some market growth as well. Hard for us at the moment to sort of pick it unpick what was the mix of all those that led to to that, but certainly all three of those contributed to a strong q two. In emerging markets, quite different there, down 30% across the half.
We said at quarter we were down about 40%, so you can see emerging markets did improve q two over q one. It will take longer for emerging markets to recover the surgery rates than compared to developed markets. We think that's as much about the health situation as it is about the economic situation. We're certainly seeing the pullback in the government money going into cochlear implants in some of these countries, so that's typically the sort of the pretty good volume but at lower prices, and we've seen a pullback in some of those countries on on that segment. But I think the thing that we stand back and look at this and say, okay, there's ups and downs through the half.
Countries performing a little bit differently, but the broad trend is certainly very solid and and clear momentum building. And all of that's encouraging because as we've looked at this and said two things sort of when COVID hit us. One is it's an opportunity for us to strengthen our share, strengthen our competitive position. The second one that we're looking for is is there a change in people's propensity to treat their hearing loss? Is there a change in underlying demand?
Remembering that we have this enormous clinical, unmet clinical need. So the vast majority of people who would benefit from a cochlear implant or an acoustic implant don't get access to one because there's not a wear, because there's not a referral path, might be because there's not funding, but part of it is people's awareness and propensity to act on their hearing loss. Certainly one of the encouraging signs that we've seen through COVID is that combination we think of isolation and of mask wearing has highlighted for many people the extent of their hearing loss. So people who were subconsciously augmenting poor hearing with lip reading have found that they're unable to do that either through lockdown isolation, particularly through mask wearing, have realised their hearing loss is worse than it was and we certainly see a lot of anecdotes of people who've had hearing loss for some time starting to take action. So it's certainly something we're watching as we go forward, but it does give us some confidence that underlying demand doesn't look like it's been impacted from by the impact of COVID, and it may be that there's some more encouragement there for people to to act.
So that's cochlear implants. Certainly good good performance through the half and a strong second quarter, which certainly was certainly pleasing to see. We're going to look at services. Services, as we said through our updates, has a bit more impacted the new CI system sales, because where clinic capacity is constrained, the clinic will favor new surgeries over upgrades and that makes perfect sense, it's certainly the right approach. So we saw a slowdown in services end of last year through Q1, we saw a good bounce back in Q2, in part clinic capacity freeing up and certainly the launch of Canso two in October across The US and Europe has proved very popular and certainly helping bolster our our upgrade revenue.
Cochlear family membership exceeding 200,000, that's a good sign and remembering that purpose of Cochlear Family is that we can connect better with our customers right around the world. Through that connection, we hope to be able to give them a better hearing experience to make sure that they are informed and educated on the features and functions in the system that they have, and that we can also keep them informed of upgrades, new technology, and that's so over time, we hope that by expanding our cochlear family membership and the connection that goes with it, we can gradually lift upgrade penetration. Remembering that obviously there's at least a five year lag from probably someone becoming a Cochlear Family member and seeing seeing upgrade revenue from it. We also see that products like remote check and more connected solutions give us just more opportunity to connect, both improve hearing outcomes to lower system cost, but really to improve the experience of people and give them more reason to connect with us. So services, good performance in the in the second quarter, maintain confidence that services will grow over time as we get through the clinical capacity constraints that have had an impact earlier in the certainly earlier in the half.
Move on to acoustics, and there's really two different components to acoustics. Our sales fell by 7% there in constant currency in the half. But if we dig underneath that, there's really two things going on. We're seeing a very very strong uptake of Osia in The US. Products continues to grow, it's very well received.
We've seen clinics that we're doing, Vaha and taking on Osia, switching about 70% of their volume over to Osia. That's part of what we want to do with Osia but there's a broader opportunity for Osia is actually to really expand the acoustic implant market and being able to do that because it provides very good power output across a strong broad range of frequencies, so high fidelity sound, and is also cosmetically a very appealing product. So we see a genuine opportunity to expand acoustic implants. With Ossia, we're early days in The US, but some some very encouraging signs there. As we've said, we do want to roll Ossier out over countries, and it'll take us perhaps up to three years to do that.
We're getting regulatory approvals. In some countries, we're going to need new reimbursement codes to make sure that the that the price that we get for Osteo is appropriate, and we will go we will make sure that we take a long term view here and get the approvals, get the reimbursement so that we're really setting up for long term growth in acoustics. So we continue to be very excited by us here and what we're seeing. The flip side is on the Baja part of our business which is heavily focused on The US and The UK, and in The UK where CI surgeries have been slower than much of the developed world, even more that trend is even stronger in Baja with significant pullback in surgeries, and while they have started did start to recover, still well behind where they were. So that has certainly been a short term drag on Baja.
And we're also with Baja five, know, several in the cycle with Baja 5, the number of upgrades in Baja has been declining as well. So all all that says some COVID circumstances bringing down the revenue a little bit late in the cycle and upgrades. We had some confidence looking into the future both with Osia, but also there's an important role for Baja going forward and do think that we can get back to really driving growth in the acoustics revenue component of the of the business. Okay. So with that, I'm gonna hand over to Stu Sayers to talk through our financial results, and then I'll come back at the end with our recap of strategy and the outlook.
Thanks, Dick. Morning, everybody. On the p and l, Dick's already mentioned revenue, so I'll make a couple of comments around gross margin and OpEx. You know, the gross margin, we have dropped from 75 down three points to 72. There's really three factors driving that.
The first is at the beginning of the half, we did have some significant COVID disruption to the manufacturing plant having to run shifts week on, week off. Those kind of things run the plant at a much less efficient rate than we would normally do. That was very much early in the first quarter, but did have a significant cost impact of the COGS line. The second is, as Dick's mentioned, we've we've launched quite a few new products, and some of those have incremental COGS costs in their first year. A good example of that would be Kanso two.
It's a new sound process. It's a great product. But every clinic that is servicing customers or or or fitting customers with that product also needs a troubleshooting kit that has a working Kanso two device in it. So that's a device we make, but we don't sell. That also is the COGS line.
And then thirdly, while we're launching the new products, we still have a a big tail of legacy products that we're servicing and maintaining, and we have a lot of inventory that goes with that. And a lot of the lifetime buyers given the age of some of that stock and some of that some of that so there's products. And we periodically look at do we need to expire or obsolete, you know, that stock, and in which case we write it down, and we did that in the first half as well. So all of those three depressed gross margin a bit in the first half. If we move down to OpEx, you'll see we're down 9% on the half, $33,000,000 less than last year.
The biggest contributor was travel and conference spend that shows up in the sales marketing line, but that's not the entire difference there. Obviously, that pretty much went to zero in q one and very close to it in q two. But also a significant number of small cuts across the business, and that's things like not replacing open roles, not hiring new heads, looking at reducing the amount of contract labor we had for period in the business. Lots and lots of small cuts that add up to a significant drop in in OpEx across the board. And and FX was was of assistance here as well.
Those reductions in OpEx were heavily weighted in q one, and that was really attached to then where the outcome was most uncertain. As we saw that revenue start to come back and actually come back quite strongly, we shifted that orientation to more much more focusing on growth and and chasing and driving growth in year and into f twenty two. And so you was we'll see that continue as we move into half two. The one line bucking the trend on the on the reduction on OpEx was the admin line. You'll see that's up 13%, fourteen % in constant currency.
The single biggest and by far the bulk of that increase was insurance, and within that, DNO insurance was up 300% year on year. That's the by far the biggest contribution there. There's a small impact there as well from those growth investments. There's some IT expense that's also coming through that line. Last thing on this page, think it's worth touching on, is just the hedging line, not because it's big, but actually because it's so small.
The the contract gains and losses in the first half are just $400,000. The reason that's so low, even though we've had big currency movements, is we effectively had wound down the short term hedge book at the start of the half. We didn't have enough certainty on on cash movements to be really confident of what we're gonna be hedging, so we wound that book down pretty close to zero. And that's why that FX line is so small in the first half. If we move on to cash flow, couple of things to note here.
When we we pride ourselves and have have always pride ourselves on being a strong cash generating business, and half one was really no exception to that. You see that the one seventy five of the EBIT line, and despite paying out over a hundred and 4,000,000 in the in the last of the IMF payments, we're still strongly cash generating and and 44.9 better cash position at the end of the half than than at the beginning. One other thing to call out here is the CapEx line. You see that 35.3. Expect we're gonna do about that again in the second half, so it will be roughly 70 mil of CapEx for the year.
For the last couple of years, we've been slightly higher than that, just up over a hundred, and that drop is a function of two big projects, the Chengdu and Denver offices completing. And as those have rolled down rolled off, that's causing that drop from over a hundred down to 70. We think looking forward, 60 to 80 is probably the new normal for us for CapEx for the next couple of years. In terms of capital employed, we'll note that the big move here was inventory, 27 mil down, and that was really the function of two deliberate decisions. The first was that we actually chose to increase our inventories around the world going into the half so that we had some buffer in case there was any supply chain disruption.
We really didn't see any material disruption, and so we're able to wind back some of those some of those stocks over the course of the half. And then the second thing, as we've already mentioned, the writing down of the obsolete and the expired stock also hits that inventories line. The other big move here you'll notice is that other net assets line from negative 76 climbing a hundred and 52 mil up to positive 76. And that's really three big factors, Two of them AMF related and one FX. So first off, this is where we were keeping the AMF provision on our books.
And as we paid off those payments and paid off the legal fees, that provision has wound down. It's also where the the tax asset shows up that we get for, as Dick mentioned, the ATR ruling that lets us get tax deductibility on that AMF payment. So those two things drove a a significant lift there. And then the the the third and smallest of the impacts was then just marking to market our current FX book. And then last but no means least, really delighted to be returning to paying a dividend for the half.
We have traditionally aimed to pay out 70% of underlying net profit. We're gonna be paying 60% for for this half. We do wanna walk back to 70% over time, but we think 60% is a good reflection of the fact that there is still a degree of uncertainty in the outlook. At 60%, it's a dollar 15 a share. It is gonna be unfranked.
Because of the IMF driven losses last year, our franking credit balances have been depleted. It's gonna take us at least a couple of years to build those back up. And so for the next couple of years, the the dividends aren't gonna be unfranked. So those are the headlines. And with that, I'll hand back to Dick.
Okay. Thanks to you. Let me just close off with a recap of our strategy and the outlook. So a reminder on our strategic priorities, which are to retain market leadership, but as you said, that's been a significant focus through the COVID period. We we saw an opportunity there.
I think with our product launches, our service, executed well on that. Growing the hearing implant market, as you said, we pulled back some investment, we're putting turned that investment back on into into driving growth as we've seen the revenue recover, really trying to set ourselves up for continued growth into the into the future. And we do want to deliver consistent revenue and earnings growth. It's been a challenge over the certainly the last twelve months. We have more confidence that while there is still uncertainty out there, we can perhaps see more stability looking forward than we certainly had over the over the last twelve months.
Let's spend a minute on our market leadership position. It really is driven by the breadth of our product portfolio, but also the service and support that we offer both to professionals and to recipients. And that's that service and support is certainly something we've worked on for a long time and strengthened over the last few years in particular. But we do have a very strong product portfolio, part of our competitive advantage rests in our ability to, through scale, to be able to invest in all of the aspects of the system to advance the overall performance of the whole system and the experience for both professionals and for your clinicians and customers in helping people to hear, but also that service element of being responsive, being fast, and the more that we bring out connected solutions like remote check, the more we are able to lower the overall cost of care for people, improve the convenience of care, improve the overall experience that people have. So we've got quite a comprehensive portfolio of products and services to hold the significant market position we have, we think it's appropriate we continue to invest in building out all aspects of this portfolio.
Okay. Looking forward for the rest of F twenty one, we are and have become over the last six months increasingly confident of the resilience in the in the hearing implant business. Hospitals have clearly found a way to continue to do surgeries at good rates across most of the developed world and back at normal rates in some of these countries. There is certainly short term uncertainty, we expect in second half that developed market units will be about in line with first half. We have had a slower first six weeks of the half than we saw in q two, and that's largely around COVID related impacts in some Western European countries, a couple of states or sub regions in The US where lockdowns are more restrictive.
There's been a pullback in surgeries. So a little bit slower start to this half, but again, we're confident that that is a is a shorter term issue rather than any anything of concern over the over the medium term. Emerging markets will recover, but it is slower, as I said earlier, that government money has pulled back in some of the the countries. I think it will come back. The the demand and the need is very clearly still there, but I think it will take longer.
From what we're seeing, it will take longer than developed markets to to return. Stu said we we have investing, we are going to lift our investment in the second half, but in in our OpEx particularly, both in r and d and in our growth programs. That's really important to make sure that we are set up well for going into f twenty two and beyond. So we'll see an increase in opex through this half. Our underlying net profit, we're guiding between 02/25 to $2.45 from where we sit now.
That does factor in the slower start through through January and February that I've talked about. We're also basing this on a 70¢ exchange rate for Australia and The US. That lift from 72 in the first half does have a significant impact on on our net profit. And as Stu said, we do want to get back to paying a 70¢ payout ratio as we see conditions improve and the stability continue or get more stable in the surgery trends into the future. Okay.
So with that, we'll wrap up the presentation and turn over to questions.
Thank you. Your first question comes from David Lowe from JPMorgan. Just
maybe if I could start with guidance. I have a fairly firm memory that historically, certainly under as you've been the CEO, that when guidance is given, you tend to spend to meet it. So if the revenue line runs ahead, the OpEx spend tends to go up. Now I recognize that's not something you can do in the last month of the year. But should we assume that that sort of pattern is likely to continue or to return in the current environment?
Yeah. David, good question. A few thoughts on that. So certainly, you know, we do obviously try to sort of regulate our spending a bit to make sure that we're delivering appropriate level of profitability. One of the reasons for for a sort of slightly larger range for our guidance for the year given where we are in the year is that if we do see a COVID related slowdown in surgeries that's more than we've anticipated in the half, we really don't want to pull back spending because we're investing in, we know that the surgeries will come back and so we do want to continue to invest through this half to set ourselves up for the future.
So we'll be, I think short answer to that is we will moderate the spending less in this half than perhaps we've done previously if there is a change in the sales because we believe based on that change in sales being a short term COVID related issue rather than anything longer run.
Yes. I think my experience of that, if you tend to increase it rather than decrease it because the sales often seem to exceed. But, yeah, hopefully, that'll be the case again this time. Yeah.
And there are limits, as you say, on how much you could increase spending over four and a half months. Yes.
Of course. Look. The other question I have is just share gains. I see that comment there. We certainly heard feedback at The US, but gains have been quite material in some sectors that at the expense of over advanced Bionics.
But could you just talk a little bit to what you've seen in terms of share movements and how much it varies between markets, please?
Yes. And it's look. It's always hard to quantify share gains in the in the short run because there's ordering patterns and, you know, that that we know our sales is hard to get a handle on our our competitors' sales in a short period of time. But definitely, you know, The US stands out as a market where we have gained share. I think historically The US is the share can move around a bit faster than some of the some of the other and we have performed very well based in terms of our product portfolio and our service, so that's helped lift.
But we're doing we're doing well from a share perspective across several countries at the moment, and in part that is the strength of our product portfolio, but it's also, you know, through COVID, because we were financially secure, we could say to our teams that their jobs were safe. Their role was to support our customers and so they've been very present with clinics albeit mostly virtual and I think that's reinforced our strength and the support we can provide. That combined with the product portfolio has helped us lift share across a whole range of markets. Think The US is one where we've moved share more than some of the others but we have seen some good gains in, I think, across the board and across a broad range of countries.
Great. Thanks very much.
Thanks, David.
Thanks. You. Your next question comes from Steve Wein from Jarden. Please go ahead.
Good morning, Dick. Hi, Steve. I just wanted to drill down on, you know, in terms of your revenue profile,
what the
patient profile has looked like in terms of a rebound? Is there certain cohorts that are responding faster than others?
So in yes, Steven. So in in markets where the clinics have been back at pretty much normal capacity, so US, Japan, Korea, the age distribution there is pretty much the same as it was pre COVID. So that's very encouraging that particularly people 60 which in The US is the majority of our, sorry the largest segment of our sales, back at the same level as it was twelve months ago. So it sort of plays to this point of talking about that we haven't seen any decline in the propensity of people to act on their hearing loss even if they're older. In markets where it is restricted as you'd expect, we're seeing a higher proportion of children because the children get obviously and should get priority for surgical slots.
But all that and what we also see in our DTC pipeline is the age distribution that reflects what we saw pre COVID. So all of that gives us confidence that to the extent there are some disruption in the age distribution, it's a short term issue rather than a longer term structural issue.
Yep. Got it. Can we just switch to the systems revenues? There was, at the time of your first quarter, quite an obvious slowing within the processes, which was completely at odds with the implants. Are you seeing that that deferral of processor upgrades is more related to people's deductibles within their policies or they're sitting on their hands waiting for a new product?
I I think a few things and and Steve might want to comment on this. Obviously, he has a lot of knowledge on the upgrade services side, is that we did see in first quarter both lower clinic capacity through COVID. That increased into the second quarter, and the launch of Kanso two also helped lift, and there was probably some people getting some knowledge of Kanso two ahead of time, so there's probably a bit of deferral there. Stuart, let you talk a bit out of too.
Yeah. Absolutely. So part partly clinic capacity and partly patient propensity to come in. So we saw we we saw a noticeable difference that if you were coming in with actually, a high proportion of seniors were still coming in to get get a new system than we had expected. But we really did see a significant drop in the number of existing recipients who who were wanting to come in and have their annual checkups.
Then so those kind of things that are then quite often a trigger for the for the upgrade process. So I think combination of clinic capacity, propensity to actually go into the clinic in the first place from the patient's perspective, and then possibly a bit of slowdown ahead of two. But we're seeing that, yeah, that that's rebounding pretty strongly in in q two, and and obviously the nice thing about it is everyone you you don't get this month is someone you can you can still get next month.
And so you did mention deductibles in there, which is a just an issue specifically in The US. We did see earlier on, so it's a pullback of people having had not having because they've been at home, hadn't used up their deductible and and were deferring a little bit less of that more recently.
Yeah. Great. One final one for me to you, Stu, if if I can. On the gross margin for the second quarter, it sounds like that's that's going to be more of a cleaner gross margin than what you've outlined for first quarter. Can you give us sort of any insights as to what that looked like so that we can, I guess, extrapolate for the remainder of the year?
Yeah. Sure. So looking forward into the second half, obviously, we don't expect to see a repeat of the the COVID related inefficiency. The we still will see a bit of the the first year of launch stock and the the write downs. We'll need to take a look again at the at the end of the half.
They're probably not quite as high as we had at the first half. So I think confidently better than 72. I don't think we'd be back near 75 yet. Yeah. So that's probably, you know, in that sort of 73 ish range better bet for the second half.
And and remember, there'll be an FX impact that comes through also, the stronger FX impact on the gross margin second half.
Actually, just on that, you're not disclosing your FX hedge book profit this half. Is that how where is that sitting? And why the change?
Yeah. No. We we actually made that change in the past, so it's only we do it at the full year, not at the half year.
Ah, okay. Yeah. Yeah. Okay. Got it.
Thank you.
Thanks, Faith.
Thank you. Your next question comes from Sean Lyman from Morgan Stanley. Please go ahead.
Congratulations on the appointment. I have a couple of questions on the newer products, Dick. So the first one is Remote Check. I don't know if you could give us a bit of granularity on the in market experience with that product and and how that might have been, you know, freed up some of the the channels if you like. And the follow-up question would be, you know, on the custom SoundPro fitting software, and is the real world experience that you can kind of push those fitting practices out into the more retail based channels?
Thanks.
Yep. Yeah. Thanks, Sean. So first on RemoteCheck, certainly, we've been pleased with the rollout so far. And this is a product that takes a bit to roll out because it links into clinic IT systems and so, you know, that raises concerns of cyber security because there's there's patient data that gets transmitted from the patient to the clinic for the clinic to review.
So it takes a bit of work upfront to actually get all that we've done all the work to show we can do that but to then meet the or each clinic or hospital requirements. But as we do that, we do see then good adoption from a patient perspective out of that where it's seeing sort of 85 to 90% of the checks that are being done don't need a clinic visit to follow-up, so there's no issue that needs a face to face appointment. I think we've done enough to see that that level should should continue, and it's clearly that's better for patients when that lowers overall healthcare costs, certainly moves to sort of enable the system to be more streamlined and free up clinic capacity for new implants as well. So certainly pleased with what we're seeing, but it will take some time to roll remote remote check out given, you know, it's a clinic by clinic process and we obviously want to do it across countries and are doing it across countries and languages. Custom Sound Pro being well received and given definitely a software change is a pretty significant change to clinical practice and we're hitting our internal targets for the rate of rollout and adoption on Custom Sound Pro and training clinics without actually being able to, in many cases, able to be physically present and that's gone very well.
Custom Sound Pro was certainly set up so that the I think more traditional way of programming where lots of individual tuning can be done is possible, but there's also a more automated way of doing the programming as well. And so that more automated way does we think enable broader reach for CustomSound Pro in terms of the the numbers of people who can access it, assess it, use it confidently, and get good outcomes with patients. Early days on that but certainly well received so far and obviously one of the things that we want to do is to enable simplification of the mapping, the programming both from a capacity perspective and convenience perspective. And what we're seeing so far is good, but it is early days in that launch.
Great. Great. Thanks, Dick. I might just squeeze one more in, and sorry if this has already been touched upon. But you have to give us a bit of granularity on what you're seeing on new pipeline versus catch up surgeries?
Yeah. So in in the it's hard to unpick, but in the countries that are that are going well, Japan, Korea, US, for example, all new surgeries. The catch up is all done. Now obviously given some parts of The US are going have a little bit of catch up to do from where we are at the moment. Across most of Western Europe, we saw that heading into the it's sort of the October, most of the catch up was done.
There's probably a little bit of a backlog building in a few or there is a bit of a backlog building in a few countries now, so we'd hope that, you know, when things free up, it should come back pretty quickly. But I think the vast majority of the surgeries we're seeing now are new surgeries rather than catch up. Certainly in the last half day, there was there were catch up surgeries.
Great. Great. Perfect, Nick. Thank you. That's all I have.
Thank you. Your next question comes from Andrew Goodsore from MST Marquee. Please go ahead.
Thanks very much for taking my questions. Just actually, just picking up on that last comment, just a segue to, I guess, unmet demand. I guess some of the calls we've done as well pick up that the referral channel sort of hasn't entirely kicked back in. I guess it's a country by country type scenario. But do you sort of think that there's still a bit of unmet demand in there?
And I guess perhaps, you know, trying to get back to what you think is sort of an underlying growth rate that you might expect?
Yeah. Good question. Certainly hard to put a number on what the underlying growth rate would be. I think we're we're certainly seeing in our DTC pipeline building building quickly and that's which which is very pleasing. So so that's that's only one channel, then there's a channel of referral and hearing aid referral or CPN referral which is particularly a US issue.
There's other other countries as well and we're obviously trying to build more referral networks as we go forward because that, you know, is one of the keys to our growth. Certainly some of that referral has gone a bit more slowly. Although I will say, you know, on the CPM side, we we had quite low expectations going back a few months because we thought that, you know, that that the channel would slow down and we've actually been a bit surprised against our lower expectations that that the referral is working better than we had thought. But it's it's still not, you know, certainly across the whole developed world, the referral is not back to where it was. But, again, we got confidence that it will get back there when we when we look at sort of the behavior of people and propensity to act on their hearing loss.
So it's really hard to pick a part in the short run, but not seeing a longer run issue. And as you know, I think your, you your calls are saying it's a bit mixed. That's what we're seeing too, but overall, still, you know, quite positive in what we're seeing.
In terms of what you've got in front of you, I guess that that probably gives you a bit of capacity for, you know, multiyear sort of recovery, if I think about it like that. But I was just going to then focus on emerging markets. Obviously, they're not all uniform, and you've commented on some that are coming back down 30%. And just I
mean, just how quickly do you
think that'll sort of do you think that'll roll back, you know, with some confidence, or is it sort of more related to lower lower rollout of vaccine and things like that?
It's a it's a tricky one. It is variable. So there's some really strong performances in there that, you know, India and Brazil, the the government money or the government programs have virtually stopped or significantly slowed. And that is as much about the government health care systems being caught up with COVID nineteen and just financial. It's just just how much funding is available.
So I think both of those things I think will take some time to play out because, yeah, rollout of vaccines in in many of these countries will will take several years, I think, and the economic impact of the the slowdown will also take some time to to play through as well. So so it's emerging markets. It's much it's hard for us to have a good view of of the time over which they'll recover. As an as an overall part of our sales, it's obviously a relatively smaller part. What we are seeing is that the private pay segments in those markets are performing quite well.
So to to some and then in some of those countries that private pay is probably substituting for some of the government surgery. So the people who might have been gonna get a a government funded implant realizing that that's now not gonna happen, and so they find the money for to to pay themselves. So there's a little bit of a shift from to bolster the the private pay segment. So I'm not sure if that helps too much, but it's it's complicated.
No. That's good. I've I've just crossed out roaring back.
So it's probably getting back a little bit. Think while. Definitely crossed out roaring back in emerging markets.
Yeah. Yes. And just a final quick one. Just any issues around We did hear a couple of clinics closing down, but it sound you know, just looking at your numbers today, just sounds like they're at the fringe.
Yes. Yeah. Yeah. Certainly.
If we look at
The US particularly, clinic capacities in bounced back quickly, again slowed up a little bit in a few places now, but it will come back. So, yeah, some short term issues on capacity, but we don't see anything from a medium term outlook with the concern on the clinic capacity.
That's fantastic. Thank you.
Thanks, Andrew.
Thank you. Your next question comes from Saul Hedasson from UBS. Please go ahead.
Good morning, Steve. Good morning, Steve. Just a really quick question for me. The growth in units versus revenues for cochlear unit sales, looks like there was that about a 10% benefit from from ASP mix that you call out on the call. Just wanted ask.
So what's the rough price differential in in a high level sense between developed versus developing markets as it relates to the ASP per unit? Can you give us any guidance on that?
Yes. So so I'll give you a little bit without getting too specific, partly because in in emerging markets we'll have we as we talked about before, we have price tiering. So our latest system in emerging markets will typically sell at the same price as that system in the developed market. So in India, what CAMZO two and a CI six thirty two implant, you'll pay pretty much the same price that you pay in a developed market. Then we have the tiering below that and that the government purchases that I talked about are being really the area that's really slowed up, is typically the lowest price segment because it's often the tender type volumes.
So is that is really what we're seeing is that that low end pricing is that that volume has has come off quite a bit, and that's why you see that the average of the ASP move. It's just by cutting that that lower price volume off lifts the ASP. There's nothing more underlying that that change than that.
But maybe just to press a little bit
more on that. I mean, we're thinking at 25 to 30% average price differential.
Does that sound about right in terms of
It's actually topped it's a bigger range from sort of the the lowest price government tenders to which which might be sort of few generation old technology to the latest premium system of the cans a two. It's bigger than that to 25, 30 percent. I'm not going to guide you on exactly how big.
Sure. And if the math is right, I think it implies that that units from emerging markets were about at 80%, twenty five to 30%
half versus developed stuff.
So they were certainly off by 30% if you're saying what's the proportion. We just say that, given what we disclosed, that our emerging market revenue is around 20% of our total revenue developed market being 80%, that the implant volume is higher than that 20% because the average system price is lower, but we haven't given out a specific number on what proportion of the overall implant sales goes into emerging markets.
Okay. No worries. Thanks for that. That's all I had.
Thanks, Saul.
Thank you. Your next question comes from John Deakin Bell from Citi. Please go ahead.
Hey, Dick. Just following on kind of a similar line. I was just hoping to focus on the margins going forward, EBITDA or the starting at the net profit margin and the EBITDA margin because pre pandemic, you kind of find the business as being around 18% net profit margin, which translated for for several years to be about 28 EBITDA margin. Now this is a bit different, and I note consensus before today was similar for FY twenty two back at that 28%. Is there any reason why why that wouldn't be the case?
I know that the SG and A is one line that's moving a lot, but but by FY '20 '2, for example, should we be thinking about the business in the same terms as we were back in 2019 with respect to to EBITDA margins?
Yeah. Yeah. John, broadly, yes. Just with one caveat on it that, you know, the Australian dollar has risen obviously very quickly and significantly. That even even with some hedging puts pressure on our margins, so we've got a decision there as to to what extent do we continue to invest in longer run growth versus to preserve that 18% margin.
And I think if the Australian dollar stays up where it is now, it makes sense for us to probably pull that margin off a little bit in the short run to make sure that we can continue to spend on on future growth.
Okay. Thank you. And that's all I have.
Thank you. Your next question comes from David Stanton from Jefferies. Please go ahead.
Morning, team, and thanks for taking my questions. Just to sort of follow on on John's excellent question. I wanted to understand sort of second half FY 'twenty one operating expenses. Note that travel's declined and the like, but you've got some you've got in terms of your guidance, you still got what implied same to lower profit going forward. Why won't why will operating second half operating expenses increase going forward, please?
Yes. You David, a couple of things there. One, the OpEx in the first half and particularly the first quarter, I I would say, was was very depressed. Almost sort of artificially low. So marketing and and sorry.
The the travel and conferences was was literally almost zero. But then, as I said, a bunch of other restrictions that we that we put on the business just to while we were still more uncertain on the outlook. And so going into the second half, we're not expecting massive return in in travel and conferences, but there will be some, and particularly in some markets where, you know, we we I think Korea has been a good example where, you know, that that country is largely operated as if it wasn't an impact for a large part of the half. But also then we are looking at we're seeing more confidence in revenue and more confidence in revenue growth in half two and into '22. And so there are things we wanna do now around r and d, around some IT that enables some of those r and d things and around some activities directly with customers and and building out the pipe more that we think warrants investment now to drive that growth into the half and into the into into '22.
And following up on that, Stu, just apologies if you've you've written this down somewhere, but can you give us some idea about r and d spend as a percentage of sale percentage of revenue for for second half twenty one?
So, again, David, I'll jump in on this. So we still wanna hold R and D at around 12% of our revenue. Over time, it'll move around a little bit on that as we, you know, as we see opportunities to put a bit more in and so that that's a balance. I'd probably push a bit higher than that, I think, into the second half. But I think yes.
Look. And to reinforce what Stu said, what, you know, we said going into this year is we are in a strong position. It makes sense for us to invest into the into the future. And now that we've seen that revenue coming back, and that's what we'll be doing into the second half and through into the '22.
Yeah. That's worth noting too. R and D dropped a little bit in the first half, but it was almost all just reductions in travel. And so the intent was to try and keep that keep that momentum going.
Understood. And final one from me. Again, I haven't seen this anywhere. You used to call it out. Tender sales, Chinese tender sales in the first half, please?
Negligible. The I think the the government ran a very, very small tender that not even not not even worth commenting on. You know, literally hundred units or something. And as we've been talking a while that the business in China has really shifted to the strong private pay and more money at the provincial level, and that that can be through either provincial tender or a form of reimbursement that supports some of the private pay and and much, much less through the central government tenders. Now they say, well done.
We're going back five years that central government tender was a very significant part of our China business. It's now negligible, and the private pay is a much, much larger as a proportion and also in absolute terms. I know that the next next five year plan will be released in the next month, but and in that, we'll probably get some insight into both what the government intends to plans are for for hearing loss and cochlear implants and how they intend to implement that, whether it's through tender or through that through provincial level.
But we should assume that probably gonna be much lower than what it was maybe five years ago going forward.
Yeah. Yeah. So we're
we're certainly very focused on the private pay business in China. We've been investing significantly to strengthen and build our team there, and and that's certainly working in terms of the results that we're we're seeing in China in terms of the market growth and and our growth.
Understood. Thank you very much.
Thanks, David.
Thank you. Your next question comes from Chris Cooper from GS. Please go ahead.
Hi, good morning. Thank you. So a slightly longer term question for you, please, Dave. You commented in your prepared remarks that you don't believe that underlying demand has been impacted by COVID and may have actually improved. Can we deduce from that comment that your estimate of cochlear implant units in fiscal twenty two is equal to or higher than the expectation you had from prior to COVID?
Is that a fair interpretation of what you're saying there?
No. I wouldn't I wouldn't deduce that from it. A couple of points. First of all, you know, the the impact of COVID is that it did hit growth. And so, you know, I don't think you can draw a line through the growth rate pre COVID and just see a sort of a one one or eighteen month one year or eighteen months dip, and then everything will be back on that growth.
You know, we pull back some of our spending. The clinics were closed for a while. Referrals were down. All of that will put some hole in that growth. So I think what I said what I'm saying here though is that one of our concerns going into COVID is that people, particularly older people, would get hesitant to get health care their their hearing attended to because of fears of COVID or other health issues, we haven't seen that happen, we have seen some encouraging signs that actually people who haven't acted on hearing loss have acted.
That's certainly an opportunity for us and hopefully that continues beyond COVID in terms of, you know, raising awareness and propensity to act. So it does give us some optimism about the potential for growth, but in '22, we won't bounce back to, you know, a straight line through where we were heading pre pre COVID.
Well, and also remember, '22 is only four and a half months away, and emerging markets are a long way from being fully recovered. And even the developed markets, we're still seeing significant disruptions at a at a at a sort of a district level and and and potentially the country level too. So there's still still some COVID effects that are gonna play through in '22 as well.
Okay. Maybe put it another way. I mean, is there a year in the future where where you expect to get back to your pre COVID expectations for that particular year? I guess what I'm trying to get to is, you know, is is there kind of a a proportion of patients that were, you know, deferred or discouraged in some way through COVID that won't be coming back at some point in the future in your opinion?
I think, yeah, I see where you're going Chris. I think it's sort of hard to know. What you're saying is is there, you know, because of the, say, gap in referral, a backlog there that will come back into into the future. And I think, yes, they will come back in the future. What's not clear though is because we there's, you know, there's not a great referral path or there isn't a great referral path.
There's hardly there's not a referral path at all in some places, and we've got to build that. The effort to bring those people back couldn't detract from other people who are unaware, be being made aware and brought into the referral path. So I think while they'll come back, it won't surprise me if there are people who are sort of pushed out forever in a sense or delayed forever rather than just a quick a quick bounce back. So I think it's it's too early for us to call that, but I I certainly we are modeling our future on the basis of a really quick bounce back, but we do think there's an opportunity to continue the awareness activities we're doing on the back of COVID because there is heightened awareness, and hopefully that does help our our growth rates into the future.
Got it. Thank you. And and and just just lastly, I've actually lost track of how many consecutive quarters now it's been that you've been reporting share gains. Anything you're seeing near term, midterm, long term, which might lead you to believe that the kind of impressive performance you've had on market share might change in some way going forward?
I think certainly we don't anticipate share gains continuing on forever and we've got we have very good competitors. They will launch new products and we do see share moves on new new product launches and that's why we build out the whole portfolio and why we're strengthening our our service offering to try to make make that share moves a bit less susceptible to launches, but that will still be there. So it's very hard to project forward. I'm certainly very pleased with the work that we've done over the last twelve or eighteen months from a from a strengthening our competitive position. But our competitors are good and they will bounce back with something and, you know, that will at some point certainly moderate the share gains that we've had, but, you know, we want to make it as hard as possible for them as we can.
Great. Thanks for the help.
Your next question comes from David Bailey from Macquarie.
Just in relation to the CAMZO2, any initial feedback you've received thus far? People paying out of pocket for that one. Is it out of cycle? And then should we think about the candidate two as being more more material contributor to the the services component, or is the consideration for the new recipients as well?
Steve, do wanna talk talk on that one?
Yeah. So so look. Very well received. We had lots and lots of preorders for Kanso two and a combination of private pay and and people using utilizing reimbursement. I think it's hit that sweet spot of the the freedom and the convenience that you get from not having something on your ear.
We know that's a big detractor for a for a segment of our population. And then the streaming benefits that that you get through that you were only able to get through n seven. So it's it's we know it's a highly attractive device, and that's causing lots and lots of demand. And sorry. Your second question was?
Just in whether it's you know, if we think about it as being a more material driver for the services or upgrade component versus, you know, the the cost per implant component. I'm sort of wondering if it's a if it's a consideration for new recipients.
It should be cost per
Yeah.
It's it's certainly a consideration for new recipients as well. And it so I think, again, it's it's it's the same features that make it attractive for an existing recipient, make it attractive for a a new candidate as well.
Yeah. Yes. Yep. Okay. And then just one final one.
There's some commentary there around market access. Just wondering if there's been any change, you know, there's any change in in in terms of market access. There's been some some change come through there in in Belgium, but have you seen a a a change or an increase or any change in the the rate of of reimbursement expansion or criteria relative to to more recent use?
There've been a number of smaller ones in recent times. The the one in Belgium was now about eighteen months old, sort of the the last big one. There was expansion of the reimbursement for Baja upgrades in France, and we've certainly seen a lift in Bahar upgrades on on the back of that. There were some changes in Singapore. Obviously, Singapore is a very small market for us, but all of that helps.
So we can certainly continue to work on market access, and these are long run projects to to build the data and then to influence government or payers to demonstrate to them that what we have is a very cost effective health outcome in in you know, it's a very competitive market for health care spending. So certainly an area working hard. A number of smaller changes. It hasn't been the last thirty six months, not a not a big change like the the Belgian one.
No worries. Thanks very much.
Thanks, John.
You. Your next question comes from Lyanne Harrison from Bank of America. Please go ahead.
Good morning all, and Ed. Thank you for taking my questions. I wanted to come back to the the net profit guidance, and you made some comments there that it factored in slower January and February trading. Can you talk a little bit to, you know, the trend you're seeing, perhaps whether it's week on week, especially given, you know, in some of the key markets during that period, the COVID caseload and new hospitalizations are are reducing?
Yeah. They end up talking a little bit. I won't get too specific into sort of what's happening week by week. Will say, as we said, that we've we've it's been a little bit slower, yeah, over the first six weeks of the half than it was in q two. From what we can see that that is, you know, it is COVID related, you know, and for example, Southern California is pretty much in lockdown, parts of Upstate New York are in lockdown.
So that obviously has a direct impact on on surgeries. Similarly, parts of Western Europe, some of the countries there are still quite heavily restricted. The The UK, although The UK does look like it's starting to pre up. There's certainly the the COVID infection rates have come off a long way, the vaccine's rolling out. So, you know, there there's there's still a level of uncertainty which we're trying to which influences our guidance, and and we're also certainly seeing some slightly slower certainly slower in that first six weeks than we saw in q two.
But, again, look, this is a it's a short term issue. Yes. You know, I think I think just the the timing of the recovery of these surgeries, do they all recovered before the June 30, or do some go into next year? That we we can't tell from here, and and that just makes us a little bit cautious.
Okay. And then and then I think, you know, you know, like, because it's probably another four months, four and a half months ahead. Does the guidance factoring or assume any further COVID disruption in in that period, or do you assume that, you know, given, you know, case load and how hospitals are coping with coronavirus that, you know, there'll be steady improvement.
But if we expect it to be it takes in a a steady improvement. So as we said, our, you know, cochlear implant systems in the second half will be in line in developed markets in line with what they were in in the first half. So, you know, we we've got in there some allowance for what we're seeing at the moment, but but, you know, if there was some major significant major outbreak break that had a material shutdown, I don't think that's going to happen both of the outbreak market. I don't think there's going to be a major shutdown like we saw previously, then obviously something like that's not factored in. But I think we put let's say we put reasonable bounds around what we can see happening at the moment, we expect to have the CI units in line with the second half and the first half.
In the developed markets, we expect that emerging markets will continue to show recovery through the second half, so therefore put more units in the emerging markets in the second half. So I hope that answers it. There's some sort of, you know, obviously, there's a level of judgment there as to what we think the COVID impact will be.
Thank you. That's helpful. Just one last question. You know, in terms of your key markets, you know, you talked about The US in detail and and more broadly Western Europe. But can you provide some color on what you're seeing particularly in Germany, also in the adult market there and and, you know, and clinical capacity?
Yeah. Germany is a this can do. Look. In in Germany, we are seeing strong performance through to the October.
Mhmm.
We then saw that Germany imposed some restrictions from November on, and we've certainly seen that have an impact on our sales in Germany. They've they haven't they've come off a little bit. They haven't they haven't sort of fallen to zero or anything like that. So definitely a bit of a slowdown, and and I think, yeah, what, you know, what should read about caseload in Germany, the impact on lockdowns, we've seen that reflected in in our sales. But, again, we expect that to come back as those restrictions are eased.
And and also the adult mix in that market?
Sorry. The adult mix. Yeah. Been a fairly
large fairly large market.
Yeah. No. It's been again, up top October was in line with what we were seeing pre COVID. So it's
a strong
proportion. Very much.
Thanks, Diane.
Thanks. Thank you. Your next question comes from Gretel Janu from Credit Suisse. Please go ahead.
Thanks. Good morning. Firstly, just in terms of the guidance, are you able to quantify, the FX impact that you expect for second half just given current spot rates?
No. We haven't we haven't done that. It is significant. If it was average of 72¢ in the first half and 77 in the second half, clearly that will and and we do guide on with very little hedging in the second half. So you can sort of we haven't provided the exact number, but you could probably estimate it from from that.
Yep. Sure. And then just going back to market share gains, you know, you've given us a lot of color on that. But I guess your peer has recently launched some new processes. So I guess, you know, are you seeing this as a risk in the short term, or do you think that you'll be able to continue to make kind of more share gains, you know, over the next six to twelve months?
I I think we're, of course, certainly optimistic on on our share looking forward. I mean, over in this year, you know, two significant pairs of both launch products. One one a bit earlier, one just now. There's often, you know, often there's little moves on a on a new product launch. Look.
We're very we have a very strong portfolio, and I think what we're seeing coming out is our competitors will be trying to catch us with these launches or or catch aspects of what we offer with with these launches. It's probably going to have some impact, but I don't, you know, it's too early to call if it's a if well, I don't expect a significant impact, but I as I said earlier, we have good competitors, and they will, you know, be fighting hard to win share back from us. We've got a good portfolio. We've a very, very strong field teams who work work very hard to support customers, and we'll keep doing it. So, you know, I said, we're I don't wanna give an outlook for what's gonna happen to our market share because of, I think I think probably not very helpful, and I don't know that we can do it very accurately other than say that we're in a good position now and and from what we you know, we have a good product pipeline pipeline as well into the future, and we'll could work to strengthen our position.
Right. And then just finally, just outside of, you know, the COVID elective surgery restrictions, all that volatility, I guess, what do you think is the biggest headwind to recovery over the next six to twelve months? Is it more on, you know, surgical capacity restrictions where cochlear implants are not given priority, or is it more capacity constraints in the audiology clinic?
I think I I think think still the biggest headwind for us is awareness. You know, that that's the so the number one issue is that people don't know that there's a solution there, and and that and that's both consumer awareness, but also professional awareness. The people with hearing loss who are seeing many audiologists or even ENTs are not who are cochlear implant clearly in cochlear implant criteria are not getting referred on. You know, that's the addressing that's the core of our growth strategy, and that will be is the major headwind and will be the major headwind as we see some recovery coming out of COVID.
Excellent. Thanks very much.
Thanks, Greta.
Thank you. Your next question comes from Lisa Clive from Bernstein. Please go ahead. Hi there. Questions for me.
Just touching on the last question you answered. I guess it was in 2017, you made the cycle acquisition. Can you give us a bit of color on how that changed your positioning in The U. S. Market?
Is it helping to grow the pipeline of elderly patients and just educating the audiology community better? Second, given how well you've managed through the pandemic, in hindsight, the capital raise really end up being necessary, is there any potential for a buyback or other potential uses of that cash? And then, third, you mentioned there's 200,000 people in the cochlear family. What are the sort of tangible benefits from this? Are you seeing faster upgrade cycles, you know, due to more engaged patients?
Thanks.
Okay. Yeah. Thanks, Lisa. So on Cycle, we we bought Cycle, you know, out out one of the as I said, the one of the biggest barriers is there isn't a clear referral path from hearing aids onto cochlear implants even though there are many people in the hearing aid channel who would get better outcomes with cochlear implants. So one of the things we're doing is trying to build that referral path.
In the acquisition of Cycle, it gives us opportunity to really learn and understand that channel better through Cycle do some education on the criteria and indications for cochlear implants and who's a potential candidate. So we have seen, and that's a long term program to do that, we have seen an increase in the number of referrals that we had from cycle clinics. It's still small numbers, but it's it's definitely growing, so we're encouraged that we're on the right path there. But no, it is a hard you know, it's it's it can take sustained effort to get referrals happening routinely. Look.
On the capital setting, look. We're we're in a our balance sheet's a very healthy, strong position. That's that's a really good position to be in now. You know, there is still a level of well, for all of the recovery we've seen, there's still a level of uncertainty. So at the moment we are quite comfortable sitting with more cash than we normally would while we just see how this plays out.
And, you know, as we go through the next year, we'll think more about depending on where the recovery goes, we'll just think more about what what options does that does that give us. And finally, on cochlear family, as I said earlier, it's a long term project in terms of making a difference to our upgrade penetration because once typically when someone becomes a family member, particularly if it's when they get their first system, they're not eligible for an upgrade for five years, that connection I think gives, will give them better experience, more reasons to engage with us and stay engaged, all of that's got to help them have a, we think have a better experience and hopefully also more likely to upgrade when they're eligible.
Great, thanks.
Thanks Lisa.
Thank you. Your next question comes from Ray Tollefordsen from Team Invest.
Morning, Dick and Stu. I'm also a long term shareholder, so sort of wearing two hats here. You talked about the R and D. I was wondering what happened when you reduced that. Were the employees redeployed, or were they put on JobKeeper?
And secondly, how easy is it to ramp up or down R and D activity?
Yeah, Ray. Yeah. Good good question. So, no, we we didn't reduce the the employees in our r and d. That spending that that the r and d felt it was, as you said, largely around travel and conferences, not around our core projects and certainly not around our people.
One of the things we said going into the capital raising was we wanted to make sure we maintain our people are very valuable, make a significant contribution particularly right across the business and there's no exception to that. We wanted to keep them all employed and working on very the very strong product pipeline that we had. In terms of flexing our R and D spend, it is there are we can move it around a little bit in the short term, but it's hard to swing it too much in that most of the the majority of that R and D spending is on is on engineers, on people. So it's hard to move that too quickly.
Okay then. Thanks. That's all.
Okay. Thanks, Ray.
Thank you. Ladies and gentlemen, this is your last opportunity to register for a question by pressing star one on your telephone. We will pause as we wait for business people to join the queue. Your next question comes from Kate Partner from Morgan Financial Limited. Please go ahead.
Good morning. It's Kate Painter from Morgan. Yes. I just wanted a question on your R and D. There were some notices on the exchange over the last couple of years about an investment into an unlisted company looking at implants.
I think it was related to, breathing. Have you got any comments, and can you tell us, what your interest is there, please?
Yes. So that that company, Kate, was Nixoa. It's it was at that stage a startup company. I'm a startup company that's doing an implant to treat sleep apnea. We have made a few investments in Nexaro, they did conduct an IPO in September of the year, we put €5,000,000 into increased our investment by €5,000,000 in the IPO and part of the one off items in our profit were statutory profit was a gain on our investment in Nexoa.
So on paper, we've made a good gain there and but, you know, the purpose of us investing in companies like that is that, you know, there are potentially things we can learn from the technology that they've got and there's certainly knowledge that we have that may be valuable to those companies. Now we're careful not to put our IP in, but some small investments let us understand those fields more without taking, distracting us or taking significant risk.
Thank you very much for that.
Your next question comes from Matthew Rubar from Enlighten Capital Management. Just
a question, just following up on those questions on R and D. I mean, just in terms of, like, a marginal spend of r and d at Cochlear, what do you think the time frame for a payoff from r and d spend is? And how do you think about that internally? Obviously, you're investing over different time frames. If you were to spend a dollar of marginal r and d today, do you see that as sort of a one year, two year, three year payoff as a weighted average?
What would you think?
Yeah. Basically, we actually don't think about r and d that way. You know, think about r and d is how do we do a few things. How do we improve the hearing outcomes for from our for our customers? How do we improve the convenience, the lifestyle options for our customers?
How can we change how care is delivered and simplify or lower the cost of care and what new indications could we go into like like the Osteo implant. We've said we'll set aside 12% of our sales for that. It's because it's that's about the amount of R and D that we can do and actually push all the way through the organization in terms of the regulatory approvals and clinical and launch and so on. We do obviously think about what short term projects and what are longer term projects, but but it's not as specific as if we put a dollar in here, we expect to get x dollars back in three years. The the business is far too complicated to put a a simplistic put a in and you get three a out on it.
It's all about the the judgment of what's the full portfolio and how does that enable us to compete and how does that enable us to to grow.
Yep. That's very helpful. Thank you.
Thank you. There are no further questions at this time. I will now hand back to mister Howard for closing remarks.
Okay. So thank you all for joining the call today, and we will obviously talk again in six months time. Obviously with now we have guidance out there and we won't be doing the sort of the regular market update that we did through the last half obviously unless something significant changes. But thank you for joining.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.