I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.
Good morning, everyone. Thank you for joining us for our first half results presentation. Just before we start, we do have closed captioning available that you can access through Teams if you wish. Let's start on the presentation. obviously, very quick overview of Cochlear as a whole. I think you know this, and you will have read through the headlines of the results. we'll jump through to get into the results, but just pausing on our mission. Our mission's been critically important for us, for our employees around the world as we work through COVID over the last now 12 months. our purpose has actually been central to what we've done and has kept people focused on delivering results.
It is our 40th anniversary, our 40th birthday this year, an important milestone for Cochlear as a whole, and a chance to recognize some of the history, but particularly to look forward to our future. Now let's get into the results at the headline level, 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 Stu Sayers will talk about P&L, balance sheet, and the cash flow. Our 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, then a strong second quarter. We also see that our OpEx was well below where we've been. It's largely around COVID-related savings, particularly with travel and conferences.
Some significant one-off items in this result, AUD 111 million after tax. A headline statutory profit of AUD 236 million, but the underlying of AUD 125 million. In that, some significant items there of a tax ruling on the deductibility of some of our AMF patent litigation expenses, gains on the innovation fund with Nyxoah listing in September and Epiminder doing a raising. That just recognizes the increase in value of those companies in our shareholding. We've also taken government assistance 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 AUD 25 million is JobKeeper, AUD 24.5 million is AUD 23.1 million received from JobKeeper in Australia in the second half.
We certainly finished the half with very strong financial position, with good cash flow that Stu will talk to, and that's enabling us to pay a dividend of AUD 1.15 a share. That's 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. Clearly, we had a strong Q2 with CI units being down 14% in the first quarter, only down 1% in the second quarter. When we look at that by markets, we see some markets performing very strongly, particularly the U.S., Korea, Japan, and China. Western Europe performed well up until November. The escalation of COVID cases from November, we saw a slowing in Western Europe, and certainly nothing like we saw in March and April.
We did see some pullback from the gains that we had seen up until the end of October. Emerging markets have improved more slowly, and I'll talk a little bit more about that when we get to talk about the CI. 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 FY2020 full year 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 from 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. Despite the lower spending, the lower OpEx, we have been able to maintain progress across our major R&D projects and certainly our growth initiatives. While we slowed them in March, April, we have been able to bring back investment in our growth initiatives through the half. Under Cochlear Implant revenue, as I said, it's certainly improved quarter two over quarter one and quite a different picture across developed markets to emerging markets. Even within developed markets, some real strengths and some recovering but recovering more slowly. Certainly seeing there that with U.S., Japan, Korea, very good unit growth, with clinics really back to the capacity they had.
Also seeing that that growth we saw, particularly in Q2, 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 unpick what was the mix of all those that led to that? Certainly all three of those contributed to a strong Q2. In emerging markets, quite different there, down 30% across the half. We said at the quarter we were down about 40%, so you can see emerging markets did improve Q2 over Q1. It will take longer for emerging markets to recover the surgery rates compared to developed markets, and 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.
That's typically the pretty good volume, but at lower prices, and we've seen a pullback in some of those countries on that segment. I think the thing that we do, 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 clear momentum building. 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 unmet clinical need.
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 aware, because there's not a referral path. Might be because there's not funding. 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 a combination, we think, of isolation and of mask-wearing has highlighted for many people the extent of their hearing loss. People who were subconsciously augmenting poor hearing with lip reading have found that they're unable to do that either through sort of lockdown isolation or particularly through mask-wearing, have realized their hearing loss is worse than it was. We're certainly seeing a lot of anecdotes of people who've had hearing loss for some time starting to take action.
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 by the impact of COVID. It may be that there's some more encouragement there for people to act. That's cochlear implants. Certainly good performance through the half and a strong second quarter, which was certainly pleasing to see. If we go on to look at services. Services, as we said through our updates, is a bit more impacted than new CI system sales. Because where clinic capacity is constrained, the clinic will favor new surgeries over upgrades, and that makes perfect sense. That's certainly the right approach. 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 Kanso 2 in October across the U.S. and Europe has proved very popular and certainly helping bolster our upgrade revenue. Cochlear Family membership exceeding 200,000. That's a good sign. 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. That we can also keep them informed of upgrades, new technology. 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 us seeing upgrade revenue from it. We also see that products like Remote Check and more connected solutions give us 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. Services, good performance 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 certainly earlier in the half. Move on to acoustics, there's really two different components to acoustics. Our sales fell by 7% there in constant currency in the half. If we dig underneath that, there's really two things going on. We're seeing a very, very strong uptake of Osia in the U.S.
Product continues to grow. It's very well-received. We've seen clinics that were doing Baha and taken 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 the broader opportunity for Osia, is actually to really expand the acoustic implant market. Being able to do that because it provides very good power output across a broad range of frequencies, so high-fidelity sound. Is also cosmetically a very appealing product. We see a genuine opportunity to expand acoustic implants. With Osia, we're early days in the U.S., but some very encouraging signs there. As we've said, we do want to roll Osia 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 gonna need new reimbursement codes to make sure that the price that we get for Osia is appropriate. 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. We continue to be very excited by Osia and what we're seeing. The flip side is on the Baha part of our business, which is heavily focused on the U.S. and the U.K. In the U.K., where CI surgeries have been slower than much of the developed world, that trend is even stronger in Baha, with significant pullback in surgeries, while they have started to recover, still well behind where they were. That has certainly been a short-term drag on Baha.
We're also with Baha 5 now late in the cycle with Baha 5, the number of upgrades in Baha has been declining as well. All that says some COVID circumstances bringing down the revenue, a little bit late in the cycle on upgrades. We have some confidence looking into the future, both with Osia, but also there's an important role for Baha going forward, and do think that we can get back to really driving growth in the acoustics revenue component of the business. With that, I'm going to 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, Dig. Morning, everybody. On the P&L, Dig's already mentioned revenue. I'll make a couple of comments around gross margin and OpEx. You'll note at 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 companies run their plant at a much less efficient rate than we would normally do. That was very much early in the first quarter. It did have a significant cost impact at the COGS line. The second is, as Dig mentioned, we've launched quite a few new products. Some of those have incremental COGS costs in their first year. A good example of that would be Kanso 2. It's a new sound processor.
It's a great product, every clinic that is servicing customers or fitting customers with that product also needs a troubleshooting kit that has a working Kanso 2 device in it. That's a device we make, but we don't sell. That offsets the COGS line. Thirdly, while we're launching the new products, we still have 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 lifetime buys, given the age of some of that stock, and some of those products. We periodically look at, do we need to expire or obsolete any of that stock? In which case, we write it down, and we did that in the first half as well. 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, AUD 33 million 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 Q1 and very close to it in Q2. 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 a period in the business. Lots and lots of small cuts that add up to a significant drop in OpEx across the board. FX was of assistance here as well. Those reductions in OpEx were heavily weighted in Q1, 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 much more focusing on growth and chasing and driving growth in year and into FY2022. You will see that continue as we move into half two. The one line bucking the trend on the reduction in OpEx was the admin line. You'll see that's up 13%, 14% in cost and currency. The single biggest, and by far the bulk of that increase, was insurance, and within that, D&O insurance was up 300% year-on-year. That's 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 I think that's worth touching on is just the hedging line, not because it's big, but actually because it's so small. The contract gains and losses in the first half are just AUD 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 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. We pride ourselves, and have always prided ourselves, on being a strong cash-generating business, and half one was really no exception to that.
You see the AUD 175 million of the EBIT line. Despite paying out over AUD 104 million in the last of the AMF payments, we're still strongly cash generating, AUD 44.9 million better cash position at the end of the half than at the beginning. One other thing to call out here is the CapEx line. You'll see that AUD 35.3 million. We expect we're going to do about that again in the second half. We'll be roughly AUD 70 million of CapEx for the year. For the last couple of years, we've been slightly higher than that, just up over AUD 100 million. That drop is a function of two big projects, the Chengdu and Denver offices completing. As those have rolled off, that's causing that drop from over AUD 100 million down to AUD 70 million. We think looking forward, AUD 60 million-AUD 80 million 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, AUD 27 million down. 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. We were able to wind back some of those stocks over the course of the half. 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 -AUD 76 million climbing AUD 152 million up to +AUD 76 million. That's really three big factors. Two of them AMF-related and one FX.
First off, this is where we were keeping the AMF provision on our books. As we paid off those payments and paid off the legal fees, that provision has wound down. It's also where the tax asset shows up that we get for, as Dig mentioned, the ATO ruling that lets us get tax deductibility on that AMF payment. Those two things drove a significant lift there. The third and smallest of the impacts was then just to market our current FX book. 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 going to be paying 60% for this half.
We do want to 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 AUD 1.15 a share. It is going to be unfranked. Because of the AMF-driven losses last year, our franking credit balances have been depleted. It's going to take us at least a couple of years to build those back up. For the next couple of years, the dividends are going to be unfranked. Those are the headlines. With that, I'll hand back to Dig.
Okay. Thanks, Stu. Let me just close off with a recap of our strategy and the outlook. A reminder on our strategic priorities, which are to retain market leadership. As you said, that's been a significant focus through the COVID period. We saw an opportunity there, and I think with our product launches and our service, we executed well on that. Growing the hearing implant market, as Stu said, we pulled back some investment. We turned that investment back on into driving growth as we've seen the revenue recover. Really trying to set ourselves up for continued growth into the future. We do want to deliver consistent revenue and earnings growth. That's been a challenge over certainly the last 12 months.
I think we have more confidence that while there is still uncertainty out there, we can perhaps see more stability looking forward than we've certainly had over the last 12 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. That service and support is certainly something we've worked on for a long time and strengthened over the last few years, particularly. 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 clinicians and customers, in helping people to hear.
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, and improve the overall experience that people have. 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. Looking forward, for the rest of FY 2021, we are and have become, over the last six months, increasingly confident of the resilience in the hearing implant business, that 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 the second half, the developed market units will be about in line with the first half. We have had a slower first six weeks of the half than we saw in Q2. That's largely around COVID-related impacts in some Western European countries, a couple of states or sub-regions in the U.S. where lockdowns are more restrictive. There's been a pullback in surgeries. A little bit slower start to this half. Again, we're confident that that is a shorter-term issue rather than anything of concern over the medium-term. Emerging markets will recover. It is slower. As I said earlier, that government money has pulled back in some of the countries. I think it will come back. The demand and the need is very clearly still there. I think it will take longer.
From what we're seeing, it will take longer than developed markets to return. Stu said we are investing. We are going to lift our investment in the second half, in our OpEx particularly, both in R&D and in our growth programs. That's really important to make sure that we are set up well for going into FY 2022 and beyond. We'll see an increase in OpEx through this half. Our underlying net profit, we're guiding between AUD 225-AUD 245. From where we sit now, that does factor in the slower start through January and February that I've talked about. We're also basing this on an AUD 0.70 exchange rate for Australia and the U.S. That lift from AUD 0.72 in the first half does have a significant impact on our net profit.
As Stu said, we do want to get back to paying a AUD 0.70 payout ratio, as we see the conditions improve and the stability continue or get more stable in the surgery trends into the future. Okay. With that, we'll wrap up the presentation and turn over to questions.
Thank you. Your first question comes from David Low from JPMorgan. Please go ahead.
Thanks very much. Just maybe if I could start with guidance. You guys have a fairly firm memory that historically, or certainly as you've been the CEO, that when guidance is given, you tend to spend to meet it. If the revenue line runs ahead, the OpEx spend tends to go up. I recognize that's not something you can do in the last month of the year, should we assume that sort of pattern is likely to continue or to return in the current environment?
Yeah, David, good question. A few thoughts on that. Certainly, 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 a 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. We do want to continue to invest through this half to set ourselves up for the future.
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. Hopefully, that'll be the case again this time.
Yeah. 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 out of the U.S. that gains have been quite material in some centers at the expense of some over Advanced Bionics. 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. Look, it's always hard to quantify share gains in the short run, because there's ordering patterns, and we know our sales. It's hard to get a handle on our competitors' sales in a short period of time. Definitely, the U.S. stands out as a market where we have gained share. I think historically, the U.S.'s share can move around a bit faster than some of the other markets. We have performed very well, both in terms of our product portfolio and our service, so that's helped lift. We're doing well from a share perspective across several countries at the moment. In part, that is the strength of our product portfolio, but it's also through COVID. We were financially secure, we could say to our teams that their jobs were safe.
Their role was to support our customers, they've been very present with clinics, albeit mostly virtual. 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. I think the U.S. is one where we've moved share more than some of the others. We have seen some good gains, I think, across the board, across a broad range of countries.
Great. Thanks very much.
Thanks, David.
Thank you. Your next question comes from Steve Wheen from Jarden. Please go ahead.
Good morning, Dig.
Hi, Steve.
I just wanted to drill down on, in terms of your revenue profile, what the patient's profile has looked like in terms of a rebound. Is there certain cohorts that are responding faster than others?
Yes, Steve. In markets where the clinics have been back at pretty much normal capacity. U.S., Japan, Korea, the age distribution there is pretty much the same as it was pre-COVID. That's very encouraging that particularly the people over 65, which in the U.S. is the largest segment of our sales, are back at the same level as it was 12 months ago. That 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. What we also see in our DTC pipeline is the age distribution that reflects what we saw pre-COVID.
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 processors, which was completely at odds with the implants. Are you seeing 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 think a few things, and Stu might want to comment on this. Obviously, he has a lot of knowledge on the upgrade services side. Is that we did see in the first quarter base lower clinic capacity through COVID, that increased into the second quarter, and the launch of Kanso 2 also helped lift. There was probably some people getting some knowledge of Kanso 2 ahead of time, so there was probably a bit of deferral there. Stu, you talk a bit about this too.
Yeah, absolutely. Partly clinic capacity and partly patient propensity to come in. We saw a noticeable difference that if you were coming in with Actually, a higher proportion of seniors were still coming in to get a new system than we had expected. We really did see a significant drop in the number of existing recipients who were wanting to come in and have their annual checkups. Those kind of things that are then quite often a trigger for the upgrade process. 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 Kanso 2. We're seeing that's rebounding pretty strongly in Q2.
Obviously, the nice thing about it is everyone you don't get this month is someone you can still get next month.
Stu, you did mention deductibles in there, which is just an issue specifically in the U.S. We did see earlier on, it's, I think, pullback of people, because they'd been at home, hadn't used up their deductible and were deferring. A little bit less of that more recently.
Great. One final one for me to you, Stu, if I can. On the gross margin for the second quarter, sounds like that's going to be more of a cleaner gross margin than what you've outlined for the 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. Looking forward into the second half, obviously we don't expect to see a repeat of the COVID-related inefficiency. We still will see a bit of the first year of launch stock, and the write-downs, we'll need to take a look again at the end of the half, are probably not quite as high as we had at the first half. I think confidently better than 72%. I don't think we'd be back near 75% yet. Yeah. That's probably in that sort of 73%-ish range, better bet for the second half.
Remember, there'll be an FX impact that comes through also. The stronger FX impact-
Yeah.
in the second half.
Actually, just on that, you're not disclosing your FX hedge book profit this half. Where is that sitting?
Yeah.
Why the change?
Yeah, no, we've actually made that change in the past. It's only we do it at the full year, not at the half year.
Okay. Yeah. Okay. Got it. Thank you.
Thanks, Steve.
Thank you. Your next question comes from Sean Laaman from Morgan Stanley. Please go ahead.
Good morning, Dig, and good morning, Stu, and congratulations on the appointment. I have a couple of questions on the newer products, Dig. 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 how that might have been freed up some of the channels, if you like. The follow-up question would be on the Custom Sound Pro 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. First on Remote Check. Certainly been pleased with the rollout so far. This is a product that takes a bit to roll out because it links into clinic IT systems, and so that raises concerns of cybersecurity because there's patient data that gets transmitted from the patient to the clinic for the clinic to review. It takes a bit of work up front to actually get all. We've done all the work to show we can do that, but to then meet each clinical hospital requirements. As we do that, we do see then good adoption from a patient perspective. Out of that, we're seeing sort of 85%-90% of the checks that are being done don't need a clinic visit to follow up. There's no issue that needs a face-to-face appointment.
I think we've done enough to see that that level should continue. 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. Certainly pleased with what we're seeing, but it will take some time to roll Remote Check out, given 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 normally 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. Training clinics without actually, in many cases, being 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. There's also a more automated way of doing the programming as well. Certainly, that more automated way does, we think, enable broader reach for Custom Sound Pro in terms of the numbers of people who can access it, use it competently, and get good outcomes with patients. Early days on that, but certainly good, 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 a convenience perspective. What we're seeing so far is good, but it is early days in that launch.
Great. Thanks, Dig. I might just squeeze one more in. Sorry if this has already been touched upon, but are you able to give us a bit of granularity on what you're seeing on new pipeline versus catch-up surgeries?
Yeah. It's hard to untick. In the countries that are going well, Japan, Korea, U.S., for example, where all new surgeries, the catch-up was all done. Now, obviously, given some parts of the U.S. are going to 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 end of 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. We'd hope that when things free up, it should come back pretty quickly. I think the vast majority of the surgeries we're seeing now are new surgeries rather than catch-up. Certainly in the last half, though, there were catch-up surgeries.
Great. Perfect, Dig. Thank you. That's all I have.
Thank you. Your next question comes from Andrew Goodsall from MST Marquee. Please go ahead.
Thanks very much for taking my questions. 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 a country-by-country-type scenario. Do you still think that there's still a bit of unmet demand in there? I guess perhaps trying to get back to what you think is sort of an underlying growth rate that you might expect.
Yeah, Andrew, good question. Certainly hard to put a number on what the underlying growth rate will be. I think we're certainly seeing in our DTC pipeline building quickly, and which is very pleasing. That's only one channel. There is a channel of referral and hearing aid referral or CPN referral, which is particularly a U.S. issue. There's other countries as well. We're obviously trying to build more referral networks as we go forward because that is one of the keys to our growth. Certainly, some of that referral has gone a bit more slowly. I will say, on the CPN side, we had quite low expectations going back a few months because we thought that the channel would slow down. We've actually been a bit surprised against our lower expectations that the referral is working better than we had thought.
It's still not certainly across the whole developed world, referral is not back to where it was. Again, we got confidence that it will get back there when we look at sort of the behavior of people and propensity to act on their hearing loss. It's really hard to pick apart in the short run, but not seeing a longer run issue. As I think your calls are saying, it's a bit mixed. That's what we're seeing too. Overall, still quite positive in what we're seeing.
In terms of the work you've got in front of you, I guess that probably gives you a bit of capacity for multi-year sort of recovery. If I think about it like that. I was just going to then focus on emerging markets. Obviously, not all uniform, and you've commented on some that are coming back down 30%. Just how quickly do you think that'll claw back with some confidence, or is it sort of more related to slower rollout of vaccine and things like that?
Yeah. It's a tricky one. It is variable. There's some really strong performances in there that India and Brazil, the government money or the government programs have virtually stopped or significantly slowed. That is as much about the government healthcare systems being caught up with COVID-19, and it's financial. It's just how much funding is available. I think both of those things, I think will take some time to play out because, yeah, rollouts of vaccines in many of these countries will take several years, I think. The economic impact of the slowdown will also take some time to play through as well. It's emerging markets is much, it's hard for us to have a good view of the time over which they'll recover. 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. To some, and in some of those countries that private pay is probably substituting for some of the government surgery. The people who might've been gonna get a government-funded implant, realizing that that's now not gonna happen, and so they find the money to pay themselves. There's a little bit of a shift to bolster the private pay segment. I'm not sure if that helps too much, but it is complicated.
No, that's good.
for us to project-
I've just crossed out roaring back, so it's probably going to.
Yes.
a little while.
I think you can definitely cross out roaring back in the emerging market.
Yeah.
Yes.
Just a final quick one, just any issues around clinic capacity? We did hear of a couple of clinics closing down, but it sounds, just looking at your numbers today, it just sounds like they are a fringe.
Yes. Certainly. If we look at the U.S. particularly, clinic capacity's bounced back quickly, again, slowed up a little bit in a few places now, but it will come back. I think so, yeah, some short-term issues on capacity, but, we don't see anything from a medium-term outlook with concern on the clinic capacity.
That's fantastic. Thank you.
Thanks, Andrew.
Thank you. Your next question comes from Saul Hadassin from UBS. Please go ahead.
Good morning , Dig. Good morning, Stu . Just a relatively quick question from me. I think the growth in units versus revenues for Cochlear unit sales, looked like there was about a 10% benefit from ASP mix that you call out on the call. I just wanted to ask, so what's the rough price differential, 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. Saul, I'll give you a little bit without getting too specific. Partly because in emerging markets, as we talked about before, we have price tiering. Our latest system in emerging markets will typically sell at the same price as that system in the developed market. In India, if you want Kanso 2 and a CI632 implant, you'll pay pretty much the same price that you pay in a developed market. We have the tiering below that, and the government purchases that I've talked about have been really the area that's really slowed up, is typically the lowest price segment, because it's often the tender type volumes.
It's that is really what we're seeing is that low-end pricing, as that volume has come off quite a bit. That's why you see that the average, the ASP move, it's just by cutting that lower priced volume off lifts the ASP. There's nothing more underlying that change than that.
Maybe just to press you a little bit more on that. We're thinking a 25%-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 lowest price government tenders, which might be sort of a few generational technology to the latest premium system with the Kanso 2 is bigger than that to 25%-30%. I'm not gonna guide you on exactly how big.
Sure. If the math is right, I think it implies that units from emerging markets were about a 30%, 25% versus developed? Yeah.
They were certainly off by 30%, if you're saying what's the proportion. When you say, given from what we disclosed, that our emerging market revenue is around 20% of our total revenue, developed market being 80%, but the implant volume is higher than that 20% because the average system price is lower. 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, Dig, just following on a similar line. I was just hoping to focus on the margins going forward, or the EBITDA, or starting at the net profit margin, then the EBITDA margin, because pre-pandemic, you framed the business as being around 18% net profit margin, which translated for several years to being about 28% EBITDA margin. I note consensus before today was similar for FY 2022, back at that 28%. Is there any reason why that wouldn't be the case? I know that the SG&A is one line that's moving a lot, but by FY 2022, for example, should we be thinking about the business in the same terms as we were back in 2019 with respect to EBITDA margins?
Yeah, John. Broadly, yes. Just with one caveat on it that the Australian dollar's risen, obviously, very quickly and significantly. That even with some hedging, puts pressure on our margins. We've got a decision there as to what extent do we continue to invest in longer run growth versus preserve that 18% margin. 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 future growth.
Okay. Thank you. That's all I have.
Thank you. Your next question comes from David Stanton from Jefferies. Please go ahead.
Morning, team. Thanks for taking my questions. Just to follow on John's excellent question. Wanted to understand second half FY 2021 operating expenses. I note that travel's declined and the like. You've got, in terms of your guidance, you've still got what implied same to lower profit going forward. Why will second half operating expenses increase going forward, please?
Yes, David, there's a couple of things there. One, the OpEx in the first half and particularly the first quarter, I would say, was very depressed. Almost artificially low. Marketing and- oh sorry, t he travel and conferences was literally almost zero. As I said, a bunch of other restrictions that we put on the business just while we were still more uncertain on the outlook. Going into second half, we're not expecting massive return in travel and conferences, but there will be some, and particularly in some markets where, Korea's been a good example where their country has largely operated as if there wasn't an impact for large parts of the half. Also then we are looking at, we're seeing more confidence in revenue and more confidence in revenue growth in half two and into 2022.
There are things we want to do now around R&D, around some IT that enables some of those R&D things, and around some activities directly with customers and building out the pipe more, that we think warrants investment now to drive that growth into the half and into 2022.
Following up on that, Stu. Just apologies if you've written this down somewhere, can you give us some idea about R&D spend as percentage of revenue for second half FY 2021?
Again, David, I'll jump in on this. We still want to hold R&D at around 12% of our revenue. Over time, it'll move around a little bit on that as we see opportunities to put a bit more in. That's a balance. I'd probably push a bit higher than that, I think, into the second half. I think, yeah, look, and to reinforce what Stu said, what we said going into this year is we are in a strong position. It makes sense for us to invest into the future. Now that we've seen that revenue coming back, that's what we'll be doing into the second half and through into 2022.
Yeah, it's worth noting, too, R&D dropped a little bit in the first half, but it was almost all just reductions in travel. The intent was to try and keep that momentum going.
Understood. Final one from me. Again, I haven't seen this anywhere. You used to call it out. Tender sales, Chinese tender sales for the first half, please.
Negligible. The government ran a very, very small tender that not even worth commenting on. Literally 100 units or something. As we've been talking a while, the business in China has really shifted to the strong private pay and more money at the provincial level. That can be through either a provincial tender or a form of reimbursement that supports some of the private pay, and much, much less through the central government tenders. As I said, well, David, going back five years, that central government tender was a very significant part of our China business. It's now negligible. The private pay is much, much larger as a proportion and also in absolute terms. The next five-year plan will be released in the next months.
In that, we'll probably get some insight into both what the government plans are for hearing loss and cochlear implants, and how they intend to implement that, whether it's through tender or through provincial level.
We should assume that probably going to be much lower than what it was maybe five years ago, going forward?
Yeah. Certainly, we're very focused on the private pay visitors in China. We've been investing significantly to strengthen and build our team there, and that's certainly working in terms of the results that we're seeing in China in terms of the market growth 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. Morning. Thank you. A slightly longer-term question for you, please, Dig. You commented in your prepared remarks that you don't believe that underlying demand's been impacted by COVID, and may have actually improved. Can we deduce from that comment that your estimate of cochlear implant units in FY 2022 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 deduce that from it. A couple of points. First of all, the impact of COVID is that it did hit growth. I don't think you can draw a line through the growth rate pre-COVID, and just see a sort of a one year or 18 months dip, and then everything will be back on that growth. We pulled 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. I think all that said, what I'm saying there, though, is that, one of our concerns going into COVID is that people, particularly older people, would get hesitant to get healthcare, 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 raising awareness and propensity to act. It does give us some optimism about the potential for growth, but in 2022, we won't bounce back to a straight line through where we were heading pre-COVID.
Well, also remembering 2022 is only four and a half months away.
Yes.
Emerging markets are a long way from being fully recovered, and even the developed markets, we're still seeing significant disruptions at a district level and potentially the country level too. There's still some COVID effects that are gonna play through in 2022 as well.
Okay, maybe put it another way. Is there a year in the future, 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 there a proportion of patients that were deferred or discouraged in some way through COVID, that won't be coming back at some point in the future, in your opinion?
I see where you're going, Chris. I think it's sort of hard to know. What you're saying is there, because of the, say, a gap in referral, a backlog there that will come back into the future. I think yes, they will come back in the future. What's not clear, though, is because 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 could detract from other people who are unaware, being made aware and brought into the referral path. 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 bounce back.
I think it's too early for us to call that. We aren't modeling our future on the basis of a really quick bounce back. 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. Hopefully, that does help our growth rates into the future.
Got it. Thank you. 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, mid-term, long-term, which might lead you to believe that the 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. We have very good competitors. They will launch new products, and we do see share moves on new product launches. That's why we're building out the whole portfolio and why we're strengthening our service offering to try to make that share moves a bit less susceptible to launches, but that will still be there. Look, it's very hard to project forward. I'm certainly very pleased with the work that we've done over the last 12 or 18 months from strengthening our competitive position. Our competitors are good, and they will bounce back with something. That will, at some point, certainly moderate the share gains that we've had. We want to make it as hard as possible for them as we can.
Great. Thanks for the help.
Thank you. Your next question comes from David Bailey from Macquarie. Please go ahead.
Yeah, thanks very much. Good morning. Just in relation to the Kanso 2, any initial feedback you've received so far, people paying out of pocket for that one? Is it out of cycle? Then should we think about the Kanso 2 as being a more material contributor to the services component or is the consideration for new recipients as well?
Stu, do you want to talk on that one?
Yeah. It's been very well received. We had lots and lots of pre-orders for Kanso 2, and a combination of private pay and people utilizing reimbursement. I think it's hit that sweet spot of the freedom and the convenience that you get from not having something on your ear. We know that's a big detractor for a segment of our population. Then the streaming benefits that you were only able to get through Nucleus 7. We know it's a highly attractive device and that's causing lots and lots of demand. Sorry, your second question was?
Just in whether if we think about it as being a more material driver for the services or upgrade component versus the cochlear implant component, I am sort of wondering if it is a consideration for new recipients.
It's certainly a consideration for new recipients as well. I think, again, it's the same features that make it attractive for an existing recipient, make it attractive for a new candidate as well. Yeah. Yes.
Yep. Okay. Then just one final one. There's some commentary there around market access. Just wondering if there's been any change, if there's any change in terms of market access. There's been some change come through reference there in Belgium, but have you seen a change or an increase or any change in the rate of reimbursement, expansion or criteria relative to more recent years?
There have been a number of smaller ones in the recent times. That one in Belgium was now about 18 months old, sort of the last big one. There was expansion of the reimbursement for Baha upgrades in France, and we've certainly seen a lift in Baha upgrades 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. We certainly continue to work on market access, and these are long-run projects 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 what's a very competitive market for healthcare spending. Certainly an area we're working hard. A number of smaller changes. It hasn't been, in the last 36 months, not a big change like the Belgium one.
Yeah. No worries. Thanks very much.
Thanks, David.
Thank you. Your next question comes from Lyanne Harrison from Bank of America. Please go ahead.
Good morning, all. And Dig, thank you for taking my questions. I wanted to come back to the net profit guidance. You made some comments there that it's factored in slower January and February trading. Can you talk a little bit to the trend you're seeing, perhaps whether it's week on week, especially given some of the key markets during that period, the COVID caseload and new hospitalizations are reducing?
Yeah, Lyanne. I'll talk a little bit. I won't get too specific in terms of what's happening week by week. I will say, as we said, that it's been a little bit slower over the first six weeks of the half than it was in Q2. From what we can see, that is COVID-related. For example, Southern California is pretty much in lockdown. Parts of Upstate New York are in lockdown. That obviously has a direct impact on surgeries. Similarly, in parts of Western Europe, some of the countries there are still quite heavily restricted. The U.K., although the U.K. does look like it's starting to free up. Certainly, the COVID infection rates have come off a long way. The vaccine's rolling out. There's still a level of uncertainty, which influences our guidance.
We're also certainly seeing some slightly slower, certainly slower in that first six weeks than we saw in Q2. Again, look, it's a short-term issue.
Yes.
I think just the timing of the recovery of these surgeries. Are they all recovered before the 30th of June or do some go into next year? That we can't tell from here, and that just makes us a little bit cautious.
Okay. I think, like I said, it's probably another four months, four and a half months ahead. Does the guidance factor in or assume any further COVID disruption in that period? Do you assume that, given caseload and how hospitals are coping with coronavirus, that there'll be steady improvement?
We expect there to be, in fact, seeing a steady improvement. As we said, our Cochlear implant systems in the second half will be, in developed markets, in line with what they were in the first half. We've got in there some allowance for what we're seeing at the moment, but if there was some significant major outbreak that had a material shutdown, I don't think that's going to happen. Most of them in the outbreak might, but 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. I think we've 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 in the first half in the developed markets.
We'd expect that emerging markets will continue to show recovery through the second half, so therefore, a bit more units in emerging markets in the second half. I hope that answers it. 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. In terms of your key markets, you talked about the U.S. in detail, and more broadly, Western Europe. Can you provide some color on what you're seeing, particularly in Germany, also in the adult market there, and clinical capacity?
Yeah. Germany is a- Yes, can do. Look, in Germany, we are seeing strong performance through to the end of October.
We then saw that Germany imposed some restrictions from November on, we've certainly seen that have an impact on our sales in Germany. They've come off a little bit. They haven't sort of fallen to zero or anything like that. Definitely a bit of a slowdown. I think what you read about caseload in Germany and the impact on lockdowns, we've seen that reflected in our sales. Again, we expect that to come back, as those restrictions are eased.
Also the adult mix in that market.
Oh, sorry, the adult mix, yeah.
It's a fairly large market.
Yeah. No, it's been, again, up to end of October was in line with what we were seeing pre-COVID. Strong performance.
Thank you very much.
Thanks, Lyanne.
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 done that. It is significant. It was average of AUD 0.72 in the first half and AUD 0.77 in the second half. We do guide on with very little hedging in the second half. You can sort of, we haven't provided the exact number, but you could probably estimate it from that.
Yeah, sure. Just going back to the market share gains. You've given us a lot of color on that, but I guess your peer has recently launched some new processors. I guess, are you seeing this as a risk in the short term? Do you think that you'll be able to continue to make more share gains over the next 6 to 12 months?
I think we're certainly optimistic on our share looking forward. Over in this year, two significant competitors have both launched products, one a bit earlier, one just now. Often there's little moves on a new product launch. 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 catch aspects of what we offer with those launches. It's probably going to have some impact, but it's too early to call if it's significant. I don't expect a significant impact, but as I said earlier, we've got good competitors, and they will be fighting hard to win share back from us. We've got a good portfolio. We've got a very strong field teams who work very hard to support customers and will keep doing it.
I think I don't want to give an outlook for what's going to happen to our market share because it's probably not very helpful, and I don't know that we can do it very accurately other than say, look, we're in a good position now, and we have a good product pipeline as well into the future, and we'll keep working to strengthen our position.
Great. Just finally, just outside of the COVID elective surgery restrictions, all of that volatility. I guess, what do you think is the biggest headwind to recovery over the next 6 to 12 months? Is it more on surgical capacity restrictions where Cochlear implant is not given priority, or is it more capacity constraints in the audiology clinics?
I think still the biggest headwind for us is awareness. That's the number one issue, is that people don't know that there's a solution there, and that's both consumer awareness, but also professional awareness. That people with hearing loss who are seeing many audiologists or even ENTs are not who, Cochlear implant, clearly in Cochlear implant criteria, are not getting referred on. Addressing that's the core of our growth strategy, that is the major headwind and will be the major headwind as we see some recovery coming out of COVID.
Excellent. Thanks very much.
Thanks, Gretel.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Lisa Clive from Bernstein. Please go ahead.
Hi there. A few questions from me. Just touching on the last question you answered. I guess it was in 2017 that you made the Sycle 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 did really end up being necessary. Is there any potential for a buyback or other potential uses of that cash? Third, you mentioned there's over 200,000 people in the Cochlear Family. What are the sort of tangible benefits from this? Are you seeing faster upgrade cycles, due to more engaged patients? Thanks.
Okay. Yeah, thanks, Lisa. On Sycle, we bought Sycle, as I said, 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. Core to one of the things we're doing is try to build that referral path. The acquisition of Sycle, it gives us opportunity to really learn and understand that channel better. Through Sycle, do some education on the criteria and indications for cochlear implants and who's a potential candidate. That's a long-term program to do that. We have seen an increase in the number of referrals that we've had from Sycle clinics. It's still small numbers, but it's definitely growing. We're encouraged that we're on the right path there.
No, it takes sustained effort to get referrals happening routinely. Look, on the capital side, our balance sheet's a very healthy, strong position. That's a really good position to be in now. For all of the recovery we've seen, there's still a level of uncertainty. At the moment, we are quite comfortable sitting with more cash than we normally would while we just see how this plays out. As we go through the next year, depending on where the recovery goes, we'll just think more about what options does that give us. 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 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, we think will give them better experience, more reasons to engage with us and stay engaged. All of that's got to help them, 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 Tofersson] from Teaminvest. Please go ahead.
Hi. Good morning, Dig and Stu. I'm also a long-term shareholder, sort of wearing two hats here. You talked about the R&D, I was wondering what happened when you reduced that. Were the employees redeployed or were they put on JobKeeper? Secondly, how easy is it to ramp up or down R&D activity?
Yeah, Ray, good question. No, we didn't reduce the employees in our R&D. That spending, the R&D fell bit was, as Stu 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 R&D is no exception to that. We wanted to keep them all employed, and working on the very strong product pipeline that we had. In terms of flexing our R&D spend, we can move it around a little bit in the short term, but it's hard to swing it too much in that the majority of that R&D spending is on engineers, on people. It's hard to move that too quickly.
Okay then. Thanks. That's all.
Okay. Thanks, Ray.
Thank you. Your next question comes from Kate Paynter from Morgans Financial Limited. Please go ahead.
Good morning. It's Kate Paynter from Morgans. Yes. Just wanted a question on your R&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 sleep apnea. Have you got any comments, and can you tell us what your interest is there, please?
Yes. That company, Kate, was Nyxoah. It was at that stage, a startup company. It's a startup company that's doing an implant to treat sleep apnea. We have made a few investments in Nyxoah. They conducted an IPO in September of the year. We increased our investment by EUR 5 million in the IPO. Part of the one-off items in our statutory profit was a gain on our investment in Nyxoah. On paper, we've made a good gain there. The purpose of us investing in companies like that is that, 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 very careful not to put our IP in, but some small investments let us understand those fields more without distracting us or taking significant risk.
Thank you very much for that.
Thank you. Your next question comes from [Matthew Rubba] from Enlighten Capital Management. Please go ahead.
Morning, team. Just a question, just following up on those questions on R&D. In terms of a marginal spend of R&D at Cochlear, what do you think the timeframe for a payoff from R&D spend is? How do you think about that internally? Obviously, you're investing over different timeframes, if you were to spend AUD 1 of marginal R&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, Matthew, we actually don't think about R&D that way. Our thinking about R&D is how do we do a few things? How do we improve the hearing outcomes 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? What new indications could we go into, like the Osia implant? We've said we'll set aside 12% of our sales for that because that's about the amount of R&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 are short-term projects and what are longer-term projects, 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 business is far too complicated to put a simplistic put A in and you get three A out on it. It's more about the judgment of what's the full portfolio, and how does that enable us to compete, and how does that enable us 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 Mr. Howitt for closing remarks.
Okay. Thank you all for joining the call today. We will obviously talk again in six months' time. Obviously, now we have guidance out there, we won't be doing the regular market update that we did through the last half, obviously, unless something significant changes. Thank you for joining.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.