I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.
Hi, everyone. Thanks for joining us today for our first half results announcement. So let me get started, and as I said, we'll do a presentation up front and then open for questions. We always do like to start with our mission, and particularly this half, where we've been very focused on the launch of Nexa, which is sort of the core of our mission, of getting people hear and be heard, and sort of highlights of being able to talk to professionals about their excitement around the technology and Nexa and what that brings for the future. And be able to meet a bunch of recipients who have excited by the technology and be able to benefit from features like Smart Sync. Let's get into the result.
As I said, this year, this half is really all about Nexa. And it's certainly a big undertaking to launch Nexa, and I'll explain a bit more about what's involved in just a few minutes. And overall, we saw a very successful launch that really does set us up for the future. And in doing that, and I'll go into some of the detail, we saw price increases, and we did see some delays in those price increases, some delays in sales, and that's really what's brought us short of where we expected to be in the first half, which led to the sales revenue being down 2% in constant currency and the underlying net profit of AUD 195 million.
So what that means for the outlook, and I'll talk more about the outlook a little bit later, but at a high level, we now think we'll come in at the lower end of our original guidance range before we adjust for the recent rise in the Australian dollar. And the reason for that being in the lower end rather than just in the range more broadly is the shortfall in the first half. We don't see that we will catch up in the second half. And then on to FX. Obviously, the Australian dollar has been on quite a run just over the last few weeks.
If it stays about where it is today, that's about a AUD 30 million net profit hit through the half, and you'll see later on, we've provided a bit more detail because it has been moving around so that if it does continue to move around, you can have a chance of estimating what that impact will be. Let's go on to talk through the segments. I'm gonna spend a bit of time on Cochlear implants, obviously, with the Nexa launch. 'Cause the key with a launch like this is a significant exercise right across the company. It's a change to our manufacturing process, obviously change to the distribution. It's also involves new software in all of the clinics around the world that are using Nexa.
So we think about just the logistics of that launch, it's a significant effort across the organization, and it does take time. So we said at the start of the year that our performance, our revenue, and our profit would be weighted to the second half, and it still is. So if you think a bit more about Nexa, first of all, as we know, we had approvals in Western Europe and parts of Asia-Pacific at the start of the half, so we're able to start shipping into a number of countries in Western Europe and Australia from early in the half. We then have to install software.
Some of that went quickly, but for instance, in the NHS, our new software got stuck in a queue in the NHS it was actually some months before we were shipping Nexa into the U.K. and a half. In the U.S., we got FDA approval in early July. We started shipping in September to hospitals that had recontracted with us for Nexa. So again, we've really, in the U.S., we've got four months of Nexa sales in that first half. For the hospitals that contracted up front, and some of them took longer, which meant even less impact of Nexa in that half. We did as we went into this, and we said at the start of the year, we would seek price increases in countries where the reimbursement system enables a price increase for new technology.
In most of the countries where that's the case, that does mean contracting hospital by hospital, so that's the case in Germany, it's the case in the U.S. And in going through that, we have been able to achieve the price increases that we set out to do, albeit take a bit longer in some instances. And obviously, when we're around w hen we're negotiating price, there's an opportunity for our competitors to compete with us quite aggressively, and we did we expected that to happen. We saw that happen. We saw a number of instances where when we were pushing for price, our competitors were offering discounts for bulk purchases in those hospitals, and that enables them to get a bit of stock on the shelf.
So certainly a few cases where we lost a little bit of market share going through the contracting process. That's a bit of a description of what happened. Where did we end up? And the way that we end up is important for the confidence it gives us looking forward. And so the result of all that is, by December, over 80% of our developed market sales were in Nexa, so we've, that's obviously a very significant shift. We did see in November and December, across key markets, a 10% lift, those key developed markets, a 10% lift in our Cochlear implant units compared to the prior year, and so that's a sort of a good indicator of the impact that Nexa had once it was installed.
And we did get a low single-digit price increase. So we got the price increases we sought in the markets that we went for. It ended up with a low single-digit impact, and obviously not much of an impact for that in the first half, given the timing. But as a result, we ended up with just a low growth in overall CI units. Now, we do know while we've been very focused on Nexa, that the key to our success is driving growth in the cochlear implant market. So we have continued to execute our growth strategies, and we continue to push launch new growth strategy.
I'll talk a little bit more about that, and push more resource into driving growth, particularly in the adults and seniors. Just one example of that is we're launching right now some new messaging on cognition, using the latest results from independent studies showing the links between cognition and hearing loss, the benefits to cognition from using cochlear implants and starting to use that to again to raise awareness of the need to treat. If I move on then to look at emerging markets. Emerging markets, we said going into the year that we expect to see volume growth, but at lower prices but in the lower tiers, and that was particularly because of the China volume-based pricing, which came in in March last year.
So we had the full six months, and we also had that against a comparable half, where we had noted higher than normal premium tier sales in emerging markets. So we saw very good volume growth in the emerging markets, but it did lead to lower overall revenue, and that's directly as a result of the volume-based pricing in China. That said, we did execute very well in China. We're holding a strong market share. We're seeing strong growth, and the team there have managed that transition very well. So overall in Cochlear implants for the half, you saw the sales down 2% in constant currency, a little bit up in developed, but down in emerging.
Well, certainly from my perspective, very pleased with how we executed on the Nexa launch, pleased with the execution through emerging markets, and both of those things set us up well for a strong second half in Cochlear implant units. Okay, let's move on to services. Our services was in line with our expectations, opposed with cochlear implants, so we're a little bit behind where we expected to be. Services was in line. We did see growth in developed markets of 4% in constant currency. And this follows on what we've been talking about is, and executing on, is we've strengthened our digital marketing, a new platform, better able to segment and target people eligible for upgrades.
Stronger messaging around Nucleus 8, based on direct feedback from people who have gone, particularly from Nucleus 7 to Nucleus 8, and the benefits of that, emphasizing the waterproofing in Nucleus 8, and the launch of Kanso 3. All of that led to that 4% growth in developed markets. And what we see looking forward is stronger, much stronger growth in the second half, particularly with the retirement of Nucleus 7 in the U.S. We've seen a significant uplift in people inquiring about upgrades just over, just over the last few weeks, which is in line with our expectation, but gives us confidence of our outlook for services into the second half. And then on to, on to acoustics. So acoustics, down 3% in constant currency.
And if we look at that by market, we actually continue to see good, very good growth in the underlying markets for acoustics and particularly Osia, and we saw it particularly through Western Europe and Australia. One of our competitors launched a new product just over 12 months ago into the acoustics segment, and we know that it's sort of the second six months after launch, where you start to see the impact of that launch. We saw that. We lost a bit of share, particularly in the U.S. and the U.K., and that's better with a new product, people are gonna try it. We remain very confident of our product features and product benefits, particularly in terms of hearing outcomes with Osia over the competition, and we have significantly better MRI indications.
And so while, while we've lost a little bit of share, we still hold a very significant share in that acoustic implant market, and we expect to regain some of that share plus see market growth as we as we look into the, into the future. But did see an impact from a competitive launch a bit over 12 months ago, and it is that sort of six months later, where you're starting to see the that impact. Okay, b efore I hand over to Sarah, I did want to make a few points on on our strategy.
As we talked in the release about some restructuring that we have been doing across the company, which is really something we've been working on over the last few years, and it's all about making sure that we are making the company fit to drive growth and fit to get scale as we grow. So there's three things that I wanted to call out in areas where we've been doing quite a bit of work to either drive growth or set ourselves up for the future. The first of those is the transition to the cloud, which has been a program that has been very visible for the last four or five years. And this is just about switching our platforms over to the cloud.
It's also about actually getting consistent and aligned processes across the company, and re-engineering our data to get consistent data architecture and data structures. Those two things, combined with the systems, enable us to get scale as we grow, and they also become platforms for the use of AI, which is going to be part of us getting efficiency, part of us getting scale, but also getting insights into how we drive growth. So those programs continue to progress well. The second area that we've worked hard on over the last six months, and certainly since the Nexa launch, is to restructure our R&D.
And it's the right time to do it after a big launch, but as our products are now much more complex than they used to be, our R&D organization is larger than it used to be, quite naturally. And in doing that, what we're doing is restructuring to make our R&D more modular, which improves accountability, but also enables us to target the capabilities we need and make sure we get concentrations of the right capabilities we need for future technology development. So important piece of work there that's well underway and appropriate to do after the Nexa launch, to make sure that our R&D organization stays future fit and able to continue to develop an outstanding range of products. And then, the third area is around driving growth, and we know that's the key to our longer term success.
We continue to work hard to lift the growth rate, particularly in that adults and seniors segments. We've got a number of programs we've talked about over time, but we continue to add some new programs and new experiments, particularly focused on referrals out of the medical channel, rather than perhaps the hearing aid channel. We're diverting more of our sales and marketing resource towards growth and towards building these referrals. And that's both requires some organizational change to do that and some reskilling of some of our commercial teams to have that—'cause there's different conversations that they have in the referral channel than they might have either in hearing aid or in the cochlear implant clinics. We've done some restructuring across our commercial organizations to set ourselves up there too.
But just three important areas of strategy that where we're making changes that don't have any benefit now, but are setting ourselves up to have benefit into the future. Okay, and with that, I will hand over to Sarah.
All right. Thanks, Dig. So I will take us starting with the profit and loss. You see the sales revenue has declined by 2% in constant currency, but Dig's taken us through those details, so I won't go into it further right now. We go to gross margin. You see a 2-point decline to 73%. Now, this was largely expected, and there's three things that I'd call out in here. First is the mix shift to lower margin emerging markets in the first half, including the impact of the China volume-based pricing coming through. Second is Nexa. At launch, Nexa has higher COGS. We expect that, but we also expect that as we come up the experience curve, as the commercial volumes grow, we do expect that to decrease over time. Finally, Chengdu is a facility that is continuing to ramp up.
We're really happy with the production we're getting there, but there's still room to go in that facility, so we'll continue to see Chengdu be a small headwind to gross margin for another year or so. Our operating expenses declined 2%. That's a net effect. As Dig's talked about, we've continued to invest to drive the long-term sustainable growth and to invest in R&D. So that's strengthening our sales capabilities, getting more scalable in how we support our go-to market, investing to strengthen the referrals pathways in the way that Dig talked about, and then also putting investment into R&D so that we support that project and services pipeline that we have coming. However, at the same time, we've been very deliberate in this half about phasing our costs into the second half.
That's to balance out the second half weighting of the revenue profile that we expected to have. Finally, we're cycling a few once-off projects that finished up in the first half of last year and are finished at this point. That brings us to the underlying net profit margin of 17%. What you see below that are some items I'd call out, in particular, the AUD 24 million of cloud computing-related expenses, which we expected to invest there and will be reported as a significant item below the line. You'll see the fair value losses on investments of AUD 9.6 million. That's related to Saluda, which is a small, long-term financial investment that we've had that was revalued on their listing back in December. Let's go on to the balance sheet on the next page.
Right, the main feature of the balance sheet is the AUD 48 million increase in working capital. Now, that's a factor mainly driven by having fairly conservative safety stock coming into this half and holding that as we launched Nexa, Kanso 3, and Baha 7, progressively rolling out around the world. We continued also to build that stock ahead of what we expect will be a big second half. We also continue to expect that that inventory will moderate over the second half. The other thing I'd note on here is you do see that AUD 36 million change in trade receivables. That variability is pretty normal and largely due to our emerging markets. If you remember back to the end of FY 2025, we had seen receivables increase due to larger emerging market orders, and this is just the unwinding of that as the receipts come through.
I note the other net liabilities increase of AUD 33 million. That's an increase in net tax assets, and it's very much a timing effect that will unwind by June. Let's talk about cash on the next page, if we can, please. All right. The main feature in the cash flow you see is the AUD 103 million decrease in net cash. There's a few factors behind that. We have a number of quite lumpy payments in that first half. The AUD 48 million increase in working capital that we just spoke to. There's a AUD 34 million cloud investment that we mentioned. There's those taxes paid, noting that that's AUD 30 million higher than what's expensed in the P&L due to the timing effects. And there's also the discretionary bonus that gets paid in the first half.
Now, this was AUD 16 million, which is much smaller than our STI normally is. That reflects that in FY 2025, there was no STI paid to senior levels of management. Final call-out on here is our capital expenditure of AUD 40 million. That is continued expansion in our Lane Cove and Malaysia facilities. All right, Dig, back to you for the outlook.
Okay, thanks, Sarah. So, on to under the outlook, and I've touched on this upfront, but just a little bit more detail here. As we're aiming to help 60,000 people hear this year, obviously, as we said at the start of the year, and I said up front, waited till the second half, but we were a bit behind where we had expected to be for Cochlear implants, which means now the lower end of that 435-460 range, we don't expect to catch that back in the second half.
I've talked to each of Cochlear implants and Services where we have some good confidence on the signs we're seeing of an uplift in the upgrades in the second half, and that's, you know, that's something, as we talked about, we've been working towards is getting that upgrades and Services number back up. I expect some lift in Acoustics as well as we both see the market growth, we'll get some share, and with the Baha 7 available there from an upgrade perspective. Now, in terms of the foreign exchange, we've gone into more detail here, that that guidance range was set at 0.66 and 0.56 for the Australian dollar to the U.S. dollar and the euro.
If it stays where the spot rates are now, that's about a AUD 30 million hit across the second half. We have just provided there that for a little bit more detail, so for each cent change against the U.S. dollar, it's about a AUD 3 million impact for that in the half, and for each cent in euro, it's about AUD 4 million, and that's around our exposure for this half, and also takes into account our hedging coverage for the half as well. Okay, so let's finish the presentation, and then we'll move into questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question today comes from David Low with UBS. Please go ahead.
Thanks very much. Dig, if we could just start with the restructuring, just to be clear on that, you know, when you talk restructuring, are we talking charges that we should be thinking about coming through the P&L? And I guess you talked about the seniors pathway. Can you talk a little bit about how things are playing out there and, you know, maybe touch on where you think market growth is, particularly in some of those key markets where seniors have been a strong driver, please?
Yeah. Yeah, David, so on the first one, the cost of the restructuring, we take—we just took up through OpEx, through the P&L, and we've done that for the last couple of years. It's a reasonable amount of money, but not huge amounts, but it, it's quite an active—it is an active program. We're making sure that we keep the organization ready for the future as we're changing and as the markets and our technology changes. In terms of growth, yeah, look, this, it is the most critical issue for us. What we've seen is some good progress on our DTC front.
You know, Nexa is an opportunity, been an opportunity to re-engage with people who've who we've engaged with in the past, who either haven't been ready or haven't been in indications, and we've seen some good good progress there. On the flip side, the sort of referrals from hearing aids have been a little bit softer through the last half. Possibly that's in line with what the hearing aid companies are saying about slower growth in hearing aid units. But the big opportunity for us is to as it always been, is to generate more referrals. You know, we've been working hard in hearing aids on that. We are now doing more on the medical channel.
We've done quite a lot of analysis of the people who turn up at clinics that we don't have connection with before they get to a clinic and where they have come from. What we're seeing is quite a number of them have had referrals from other ENTs, sometimes from GPs. We're now running some programs to experiment with how do we engage those people who are already referring to get them to refer more, and who are physicians like them, who would also be able to who are seeing people who are in indications, but also able to refer. Further programs there, and as I said, we're also rolling out messaging on cognition, the links between cognition and hearing loss, and that we've talked about many times is a really important long-term part of our strategy.
One of the big reasons people don't get referred is people don't see hearing loss for seniors, particularly, as a very important medical issue. And as the evidence grows that not treating hearing loss increases the incidence of dementia, and the evidence showing treating hearing loss and treating hearing loss properly with Cochlear implants for people with severe to profound loss, significantly reduces the incidence of dementia. That evidence is there. As it keeps growing, it's important that we communicate that in the right ways to professionals and also to consumers. So Dave, is that enough?
Yeah, no, that's, that's a lot. Thank you, Dig. Can I just ask quick financial questions? Profit margin, actually, and I know you're saying 17%, but it's frankly 16.5% versus the 18% we're used to. What should we expect second half full year? And I did think the hedging program over the years, I've been led to believe that it was pretty effective at protecting the next six months at least, so I'm surprised at the level of exposure. Maybe it's changed, maybe I'm, you know, out of date. Could I get you to touch on those two topics?
Yeah, I can. Yep, I can talk about some of those. So, certainly, first of all, the margin in the outlook will be excluding currency. We expect to be a bit under 18%. The currency is gonna bring that down further if it stays where it is. Our hedging program is only a partial hedge. It's really hedging the cash flow that comes back to Australia. We're not trying to hedge our net profit, it's more about hedging the cash flow, which gives us time to adjust. And, you know, in this outlook, what we're not gonna try and do is try and adjust our cost base, particularly given how quickly the Australian dollar has risen to have an impact in FY 2026.
We are looking at FY 20 27 and looking at the cost base and trying to get our, you know, take the action we need to get the P&L back in line with our, you know, the long-term structure of the P&L. And if you go back and look, I've been here 25 years, if you go back and look at our 25-year charts in the annual report, the Australian dollar's moved between $0.60 and $1.10 over that time.
Yeah.
There's pretty good consistency in the COGS, in the OpEx, in the net profit margin. You can see it moves around a bit when the currency moved extremes, but you know, the hedging gives us time to react and normalize it. Assuming the Australian dollar stays up, that's the action we'll take again, as we've done in the past, just to get our P&L back in line with our long-term targets.
I'll get back in the queue. Thank you.
Thanks, Dave.
Your next question comes from Andrew Goodsall with MST Marquee. Please go ahead.
Oh, thanks very much for taking my question. Just with Nexa, if I remember correctly, you wanted to be in about 90% of your jurisdictions by now. Could I just check where that's at? And then, in the 10% growth that you highlight in developed markets, just where you think that is relative to underlying market growth?
Yeah. So, so Andrew, we've, we've got to just over 80%, in, in December. That will continue to lift. So, you know, countries like France have a, w ell, they have a CE mark, they have a registration process, that, sort of takes six months or more. So, you know, we're expecting to get that registration in the second half in France. Japan and Korea are always a bit slower, they're expecting to come on. So we expect that Nexa percentage to, to continue to lift, but quite reasonably happy with being at 80. And there's still a few contracts that, that we haven't locked down, that we expect to lock down over, over this quarter that will give us a bit, bit further lift in, you know, the U.S. and in, Germany, particularly.
In terms of the outlook for market growth, we think our CI developed market growth will be a bit under 10% as we look into the second half. And I think that's pretty much in line with market growth. We have lost a little bit of share, as I said, in some of these, particularly in some hospitals around the contract in the first half, which we'll get back. It's a short-term impact. But we're, you know, having through the Nexa launch, focused very much on how do we drive growth and how do we drive that adults and seniors growth.
We've seen some good progress over, you know, the last four years, but we know we've got more to do to get that growth rate at the level we want and sustained at the level we want.
Just a quick second question on buyback. You haven't made any mention. Looks like it was not really utilized in the first half, and maybe that reflects where your cash flow was, but just any comment on that going forward?
Yeah, so. Yeah, no, that's a good observation. Buyback remains in place. But, we want, you know, we've got a target for our cash level. Yeah, and we're a bit under that at the moment, so we want to get our cash back up to there, which we will do. You know, the inventory is high. I'm very comfortable with that going through a launch, but through the launch and with stability, we'll get the inventory back down, and we'll see the cash generation pick up on the back of that.
The buyback will sort of work around that timing?
Yeah, yeah. So certainly, it's gonna, it remains on foot, but we want to see our cash flow improve a bit.
Thank you.
Your next question comes from Davinthra Thillainathan with Goldman Sachs. Please go ahead.
Great. Morning, Dig. Morning, Sarah. Thanks for taking my questions. Dig, just picking up on that bit about market share loss, I guess, in the first half. Curious, do you feel like that was more in the U.S., versus Europe, I guess, in the developed markets? And then somewhat related to that, we've sort of picked up commentary in places like Germany as an example, to sort of get the price uplift that you're putting through for Nexa, you kinda need the hospitals themselves to get an uplift in their funding through DRG reimbursement, as an example, and that can take some time to come through. Could you please just highlight if that's correct and how long it could take to come through, please?
Yeah. Okay. First of all, just on where we've lost a bit of share, it's more actually on a sort of a hospital-by-hospital basis rather than sort of market specific. Certainly some cases in the U.S., some in Germany, and it is where, you know, our competitors saw our launch coming, and sensibly responded with some pretty strong messaging and marketing. That's what we'd expect. But also from a price perspective, as I said, we've seen instances of discounts for buying bulk and, you know, then they get their implants on the shelves, and they'll get used over time. So those sorts of things have an impact in the short run. It's a very sensible strategy on their part through a launch.
But not, you know, it's a short-term issue on share, not a longer term piece. In terms of DRG and price increase, so a price increase for a device isn't directly linked to the DRG, but if hospitals aren't getting an increase in the DRG, and the DRG is basically the amount of money that they are reimbursed for the procedure, that it covers the device costs, plus the hospital costs, plus the surgeon costs. It's going to see if the DRG doesn't move and the product price does, then the amount of money in the hospital to carry out the procedure is reduced, so hospitals do push back on that.
So, yeah, that creates some tension in the negotiations, and we knew that going in. You know, therefore, we get some pushback, but equally, when you have an opportunity to get a price increase, we should go and it's right for us to go and see what we can do. And so we got the price increases we were after, so the negotiations were quite difficult in places. You know, we did better in some places than others. In terms of the DRG rising, yes, so it is the o ver time, the device price does have an impact. There's often an assessment process that looks at the costs of procedures and looks at the DRG.
And so if the procedure cost goes up because the device, then there can be an increase. We certainly know the reverse is true. If you pull the—if we pull the device price down, then often it's the payers will look at that and see the procedure cost is less and pull the DRG down. But it's not necessarily a linear relationship, and neither is it specifically time-based of, you know, if this happens on a point in time, in 18 months' time, you then see a proportionate impact.
Great. Thanks, Dig. Maybe one for Sarah then on your gross margin. I've noticed the reduction relative to your previous guidance by about 100 basis points. Could you help us understand the moving bits there? I believe the Nexa delay is likely a contributor, but I would have thought, the other sort of bits that play into it, you know, sort of manufacturing perhaps in terms of, your inventory build as well, that has occurred. So is that a drag in the second half? Could you sort of help us work out what's driving that 100 basis points, please?
Sure. Look, it is a combination of factors, and it's the things that you said. So part of that is that we were holding a reasonably conservative level of safety stock because when we go into this product launch and over this first half, remembering we have Nexa, also Kanso 3, also Baha 7, all coming out to the market, what you don't want to be doing is get caught short if it suddenly goes faster than you expected, right? So as Dig has talked through, we did go through this. You have to go through this contracting process, you have to get the software installed and all of that, and as he said, it took a little bit longer. But we've been holding some inventory at safety stock levels so that if it went the other way, we were prepared for that. So that's, that's a contributor.
Certainly the contributing factor around the needing to build and make sure we have the right stock ahead of the second half, which as we've talked about, we do expect to be significant. We've got that inventory as well. As it will start to moderate over the second half.
All right. Thanks.
Your next question comes from David Stanton with Jefferies. Please go ahead.
Morning, team, and thanks for taking my questions. Perhaps I could talk more longer term, at least initially, you know, call it FY 2027 plus. You know, should we be thinking about greater than that 10% volume growth into FY 2027, given the ongoing rollout of the Nexa? And what are the implications, again, longer term 2027 plus for that previous NPAT margin guidance, please?
Yeah. Okay. So the first, thanks for your questions. So yeah, look, we, we'll, we continue to aim to get a sort of 10% revenue growth, year on year and do that over the, over the long term. Look, we think, you know, we're working through what FY 2027 will look like now, but certainly expect us to continue growing. Not gonna give you a rate of, you know, not gonna give you our guidance for 2027, right now, that would be, that would be premature. But over time, look, the, you know, the, the opportunity to grow is there. Our growth programs are, are having an impact. We're, we're, expanding and putting more into those, growth programs, and the evidence to, for people to be treated continues to.
Yeah, continues to grow, and we see that in our consumer surveys. There's right, there is definitely growing awareness of the links between hearing loss and cognition in candidates. Sorry, David, I thought that. I think there was a second part beyond just the-
What's the implication for margin? Implications for margin, please.
Yeah. Look, I so I think, as I said earlier, the in the shorter run, the Australian dollar does put pressure on our margin, mitigating to some degree by the hedging, but not completely. But as you've seen over time, as the dollar moves, we'll adjust, you know, where our costs are, what we spend, and how we spend it to try to get the margin back in, back in line. And that, you know, that's why those lines are pretty consistent over 25 years in terms of net profit and R&D investment, gross margin.
Understood. So, 18% underlying is still the target over the medium term, at least?
Yeah, still target over the medium term. I think, look, I think, you know, it's, it's certainly with the currency where it is, it's not gonna happen this year. We'll see where the currency goes over, you know, into 2027 and the outlook there, but again, I'm not gonna give guidance on margin for 2027 at this stage.
Understood. And perhaps to ask in a different way, question's already been asked, you know, this reorganization, you know, what does that do to, or in the short term, at least, to G&A as a percentage of revenue? Will there be any changes in the second half from that, please?
No, we'll manage it within the envelopes that we set. You know, we had a reasonable restructuring cost in the first half, and we have 1% OpEx growth. You know, so we are w e know what we've got coming, and we budget around it, we manage around it.
Thank you. I'll get back in the queue as well. Thank you.
Thanks, David.
Your next question comes from Saul Hadassin with Barrenjoey. Please go ahead.
Morning, Dig. Morning, Sarah. First question, Dig, at the full year 25 results, you spoke to 10%+ growth for units in developed markets. You haven't given a specific rate this half, but in terms of what you just said around what you're seeing in the marketplace now as it relates to market growth and your share, can you give us an update as to what you think unit sales growth will do this fiscal year based on the revised guidance?
Yeah, look, we think on the, on the developed markets will be under 10% this year. As part, you know, if we're pretty much sort of flat in the, in the first half, 20% in the second half is beyond what we think we can do. You know, even with some extra in, so over the year it is gonna be a bit under 10%.
And I guess just on that point, Dig, it sounds like from what you've been saying on the call, that the opportunity in the, in the seniors market is there, but you're having some degree of difficulty at least accessing that or tapping into that. Is that, is that what we should be reading through? I mean, in terms of a sustainable rate of growth for developed markets, when you factor in pediatrics being flat and the growth coming from adults and seniors, I mean, I'm not sure you gave an actual percentage growth rate for the market but should we be thinking that developed market growth at an industry level is more like upper single digit rather than 10% or 10%+ ?
No, we certainly still think 10% is well achievable. You know, the potential is there. We're working hard at getting it. If you look back over the last few years, we certainly saw stronger growth back in 2023 and 2024. That's slowed into 2025. We're expect—we expect that we should be able to lift that up with the activity that we're undertaking.
Great, last one. Just on services and the idea that you should get some uplift based on expressions, you know, coming in from recipients relating to obsolescence. The feedback from clinics in the last few months out of the U.S. is that insurance companies continue to be problematic in allowance for processor upgrades, including wanting to see clinical notes to see whether there is, in fact, any issue with the processor. You've mentioned a strong recovery or strong growth of processors in second half. How confident are you that you'll be able to deliver on that revenue line?
Yeah, look, certainly what we are seeing is that the insurance companies are pushing harder, requiring more information. We've set up so that we're able to provide that information, 'cause clinical notes are normally there; it's just a matter of getting the access to them. And we have seen that uplift in interest and inquiries because of the N7 retirement, and that uplift seems certainly in line with our expectations, so that gives us confidence in the outlook that we have set. And that's in the U.S., and then in Western Europe too, we've seen stronger, yeah, upgrade performance in that in the last half as well. And again, expect that to continue into the second half.
Just on that Dig, last point, in the context of the revised guidance, can you give us a sense of what strong growth means in a percentage terms, in terms of that services revenue line in second half?
No, we haven't gone into breakdown of the by line, what we expect in the second half. But we are, yeah, we are anticipating a good strong, a significant uplift in services.
Okay, thanks. That's all I had.
Thanks, Saul.
Your next question comes from Steve Wheen with Jarden. Please go ahead.
Yeah, good morning, Dig. I just wanted to ask about the, I guess, the delay in the contracting process that you saw during first half. With that contracting, I mean, was the issue that was causing some of that frustration price, or was there other factors to the contracting process? And now that you've got 80% of your target contracted, can you just give us an indication, have they all made the software upgrades as well?
Yep. Okay, so on the software for. Y es, yeah, so the software installation issue early on, particularly in the U.K., a few places, but that's, you know, there's just a logistics and time to do it, but that is done. And then in terms of the sort of the contracted more broadly when it says price. Yeah. And it's just, you know, people push i t's a range of things from the obvious, so people push back on price and saying justified.
And in hospitals, there's particularly more rigor around prices, so it's, "Yep, okay," you know, "We put a price increase," saying, "Yeah, okay, we've got a value committee, and that value committee meets in three months' time, and we take all our price increases there." So, you know, there's nothing we can do, apart from wait for the three months to elapse and for those meetings to be held. You know, in terms of it taking longer than estimated, look, we haven't done a price increase like this around a new implant in a very long time. So, you know, we put our best estimate of what it would take us, and, you know, with some ambition in it, as we should, and we've fallen a bit short of that.
But we've, you know, overall got the results that we were looking for.
Yeah. Okay, and so as part of the contracting process, do they, are you asking those customers to commit to a certain volume, or it's they're just agreeing on price only, and then it remains to be seen what they order? Just asking that from the perspective of your confidence in the second half.
Yeah. Yeah, there's a whole range. So certainly, in some places, there is price and volume linked, in others, it's just a price.
Yeah, got it. Just one quick question on the accounting for Sarah. Last year, at the end of FY 2025, you released the STI provision into the P&L because they weren't gonna be triggered and indicated that you would be rebuilding that provision during FY 2026. Just wondered where you got to with the rebuild and whether or not you would be rebuilding it to that sort of level, given sort of the performance of first half.
Yeah, look, we are continuing to rebuild that, so you see that coming through in the employee benefits provision. The rebuild happens like it normally does, which is over the year, so we've accrued for, you know, about half of that, but the rebuild will continue. It's, I think if I'm answering your question.
Yeah. So, you're saying $25 million of provision has been put into the P&L, this half. Where does that sit? Is that in the SG&A line?
So the employee benefits provision has increased. It's offset by what's paid in that discretionary, where that came out this year.
So from a P&L perspective, yeah, it's through the SG&A. Well, it's actually through every line item, right? So there's people in manufacturing in COGS.
Yeah.
who get the STI, so some of it goes through there, some through SG&A, some through R&D. Wherever we got people
Yeah.
There's a provision being built.
Yep. Okay, thanks for your help.
Yeah. No worries, Steve.
Your next question comes from David Bailey with Morgan Stanley. Please go ahead.
Yeah, thanks. Morning, Dig. You've given some commentary around the expectations for developed markets for the full year, unit sales, I'm talking here, so maybe a bit less than 10%, good growth in the second half. Just on the emerging market side, I do note that there was some very strong growth coming through in the second half of 2025.
Yeah.
Particularly in China, I'm guessing. Maybe just help us understand what you're expecting for unit sales growth in emerging markets in the second half, and maybe an overall number for unit sales for the second half or full year, considering both developed and emerging markets would be helpful.
Okay. So, we do expect strong, strong growth in emerging markets across the board, so both, you know, CI, and, and in acoustics into the, into the second half. We've got a lot of the emerging market business works off, sort of either tenders or orders, and those orders, we get reasonable visibility into the, in, in advance. So we can see quite a strong forward order book. It's particularly into, into Q4. And, so, so that, that sits, under t hat, that sits in our, in our, in our outlook. And, you know, similarly, as we saw a strong second half, a number of those orders are sort of annual orders into, into some countries, so they, they, they come back at the same time of year.
be easy for us if they didn't occur in Q4, but that's, you know, they don't care about our financial year. Look, in terms of where do we expect overall CI growth for the year, we haven't given a guide on the number, but we do expect pretty strong unit growth overall. Part of that's driven by China, but we see obviously a pickup in the developed markets in the second half and a pickup more broadly in the emerging markets as well. But we haven't given a guidance on the CI unit number.
Yeah. Okay, that's fine. Maybe just a more of a medium-term question. You know, I've asked this before, so, but I'll ask it again, just on the totally implantable. It looks like there's been a new pivotal study coming through on clinical trials for Cochlear. Can you maybe just talk a little bit about the potential timing for Cochlear? And maybe it looks like there is a competitor that could launch toward the end of calendar year 2027. Just so what are you sort of seeing in terms of that space and potential launches for others versus what Cochlear might be able to achieve?
Yep. Yeah, look, exciting, exciting area. We have got pivotal studies up on ClinicalTrials.gov and recruiting for totally implantable. The pivotal study is a step to regulatory approval, so for the new technologies like that, do need to complete a pivotal study, meet certain endpoints, you know, around safety and around hearing performance, that the regulators then take into account in review. So those studies are gonna run, you know, probably 18 months or so. It sort of depends on recruiting speed. There's a six month and a 12-month follow-up, and then there's a regulatory process on top of that. And being a new product, it's not necessarily on the standard regulatory timelines. So still, look, still a few years away. Yeah, we got, t here's other competitors on the journey.
I, the thing I'd say, I think, is that the timelines are unpredictable, both around the study, around the, the results, and then around the regulatory process. We are certainly confident or very confident of the performance of our TICI. You know, we, we first did a TICI 20 years ago. We've done a couple of feasibility studies with, you know, over the last six or seven years with the technology to give us confidence in the technology. So, you know, and us going to a pivotal study, it's an indication we're confident of the, the performance of the product and the ability to, meet the, the, the regulatory hurdles. But that doesn't give you a great guide as to exactly how long it's gonna, it's gonna be, but it's still, still at least a few years away.
Thanks.
Thanks, David.
Your next question comes from Craig Wong-Pan with RBC. Please go ahead.
Thanks, and good morning. Just with services, you saw a good improvement in developed markets, but a decline in emerging. Do you have any ideas of why there was that decline in the emerging markets?
Yeah, we do. It's a c ertainly, part of that is just timing. I said, the emerging markets, these orders can happen in a lumpy way. And part of it is that part of upgrades in China is caught up in the VBP process. So that's had some impact.
Okay. And then just a question on gross margins for Sarah. The drivers there, you talked about of that compression, so mix, Nexa, and then Chengdu. Could you provide any color as to the splits between those? Like, what was there any kind of particular one that was bigger than others?
Look, we don't provide the detailed breakdown of that. I mean, the mix shift to lower margin emerging markets and the Nexa higher COGS for right now, which will come down over time, are a reasonable share of that. Chengdu, as we've said previously, is kind of just under half a point, and will continue to be that working out for the next year or so.
Okay. And then just a question on the restructuring that was done. You still got into 13% of sales for R&D. Is there any benefits kind of beyond the FY 2026, where that comes down because of this restructuring or through the sort of, SG&A lines as well?
So the 13% in R&D wasn't from the restructuring. It was just with our lower sales last year, we chose to continue to invest at a rate, at a sort of dollar rate in R&D and have the sales catch up, so that'll get back to 12%. Now, this restructuring is. Don't expect sort of changes in margin or the lines. It's about making sure that we've got the right resources in the right places with the right skills. So it's, you know, and some of it will give us efficiency for sure, but then we will use that to reinvest, either in growth or in a new technology area.
So it's very much about making sure that we've got the right capabilities for the future and the right structure and accountability for the future, that enables us to get scale, but it's not done with the goal of it will just deliver efficiency, in itself.
Okay. And then just last question on the drug-eluting electrode, there's two studies out there, I mean, that you're conducting. When could we expect some readouts from that?
So those studies, so one of them has closed, so we've seen the data, but we'll, you know, we will use that data. That data is for the regulators. So that's our priority there. What we as we go through over time, we'll probably disclose some of that data as much to our customers on what we see, but we haven't made decisions on when we'd do that at this stage. As I said, the core purpose of that data is for the regulators.
Okay, thank you.
I think perhaps I would add to that, we're pleased with the results that we are seeing. Without showing you the data, I can certainly say we are seeing what we had expected to see.
Thank you. Your next question comes from Sacha Krien with Evans and Partners. Please go ahead.
Hi, good morning. Thanks for taking my questions. Look, first of all, on services and your second half expectation. I'm just wondering if you can give us a sense to the extent to which payers are approving upgrades, on service discontinuations since January 1, 2026? I mean, you talked about inquiries, but I'm just want to get a sense of how much you're seeing approvals on that basis.
Yeah, so thanks, Sasha. So once we retire a product, we're no longer repairing it, then it does enable, it does open up for the insurers to be able to cover it. And then, obviously, they, you know, they do that because they want to see that the processor has a proper life or it isn't repairable. So it does sort of open that path up, and obviously we have to retire products because there's actually, you know, an ability for us to support the components. These are using electronic components, which have pretty short life cycles. There is a limited time that we can support the external products, and that's the reason for retirement.
I think insurers recognize that, you know, something that's external can't run forever and can't be repaired forever because just it's not technologically possible.
Yeah, that makes sense. I just w e've had some feedback that some payers are saying it actually needs to be broken rather than not repairable. So I'm just, I guess I'm just wondering, are you saying that the majority of payers will basically approve on the basis of service discontinuation?
So there's actually not really a difference between not repairable and broken.
All right.
Because if it needs repair, there's something broken, and if that can't be fixed, then the processor is broken. So I'd say there's not perhaps semantics rather than a real difference. Like, if the person keep using their processor, the insurers might expect them to do that. If they can't, and we're unable to repair it, then they will replace it.
Okay. Then FX, I know you're not giving guidance for 2027, but I'm just wondering, roughly, if we're talking about a AUD 30 million headwind in the second half, does that equate to about AUD 60 million next year on the same currency levels as today?
Well, it depends, right? The amount that we've put in that number's changed every day this week as the Australian dollar's risen. So yeah, that number's sort of as good as.
Yeah, but it's only got worse though, right?
Yeah. Yes, so who knows? But I said, look, you know, there's hedging there, and then we will work to adjust our cost base to track back to the margins that we're aiming for. Obviously, doing that at a sensible rate while we can keep investing in the business, and that's what we've done over time, and we continue to do that.
Okay, and then last question. Just wondering if you can give us a sense of pediatric developed market growth during the period, and it's, it's been a bit soft. Has that come back at all?
Yeah, look, we did see it was flat pretty much through the half, but we did see some declines in a few places, which has been unexpected. Certainly, the U.S. was one. I think there's probably some local conditions around sort of some of the support and infrastructure there, but broadly flat.
Yeah. I mean, the repositioning or restructuring that you're talking about towards the medical channel, does that mean you've got t here's a little bit less confidence in being able to achieve that sort of market growth without these changes that you're making? So growth has slowed and-
Yeah.
with the focus that you had.
Put it more as we have, as we grow, we're able to expand the growth programs that we take on, and as we implement our growth programs, what we always said is, we experiment, and we learn, and from that, we then adapt the programs. So I'd say this is a natural extension of the work we're doing, and what we've learned along the way, and the application of more resource to driving growth, which is part of us growing and part of us reprioritizing our internal activity to you know make clearer choices on resource allocation and putting more into growth, which again you know is just part of the strategy process.
As we develop as a company, as an organization, and get better visibility over what we're doing, better data on what we're doing, and are better able to redirect resources to higher value activities.
Okay, thanks.
Thank you.
Your next question comes from Elizabeth Davies with Bank of America. Please go ahead.
Hi, this is Lyanne Harrison. Can you hear me?
Yeah, hi, Lyanne.
Oh, hi. So just coming back to the Nexa pricing. I know, I understand you took low single-digit pricing this time, but given that you hadn't taken price for a long time, also the efforts that went into the contracting, why didn't you ask for higher prices, whether it's mid- or high single-digit increases?
So low.
Or has anything changed your. Sorry.
Yeah. No, good question for clarification.
Also.
So low single digit is the outcome we achieved across the board. In some markets.
Okay.
We can get increases, and some can't. So where we went for increases, we went for more than that. The sort of weighted average of that gives us low single digits. So yeah, you're quite right. If we're gonna take the effort and the delay, we wanna push for more of a higher single digit, but we know we couldn't get that. It's not all the places we had that opportunity.
Okay, and so then with that pricing strategy, where you were able to or where you had taken smaller increases, are you likely to go back to those hospitals or customers a bit more frequently to try and get increases later down the track?
Yeah, look, it varies by market. We certainly have, again, depending on the circumstances in market. So in the U.S., we have been working for a while to get more regular price increases through. In other markets, we don't have that opportunity. And one of the things we have with Nexa and with the upgradeability, which we've talked about in the past, is in markets where you can't get an increase until you've got clinical evidence of a benefit, with Nexa and its upgradeability, as we explore that, as we demonstrate some of the benefit that we think is there, there is potential to go back to those markets to make the case for a price increase based on evidence of improvement in outcomes or quality of life. So yeah, we've got a.
Okay.
Quite a comprehensive pricing strategy around Nexa, of which we've implemented some of it so far, and some of it will extend, you know, it extends over several years into the future as we think about and bring about the potential.
Okay. And then, the next question for Sarah on gross margins. Understanding, you know, Nexa has higher costs, or higher COGS currently b ut you expect that to decrease over time. At what point do you expect, you know, obviously Nexa with, you know, increased prices, et cetera, when would that become sort of gross margin neutral, or a gross margin tailwind?
Look, on that one, I mean, I'd look back to prior products where we know that it takes, you know, a year or so for those COGS to kind of come—as we come up the experience curve, it does take time, but that's what helps us bring those COGS down over time.
Okay. And then just one last question, following up on what Sasha was asking about that medical channel. What proportion of your referrals come from that medical channel at the moment?
Yeah, that does vary by market. But some of our markets, we're seeing half of that. So there's a component of our referrals that we get through GPs, that can be sort of 30%-40%, but depending on the sort of 20%-40%, depending on the market. Then we have between 60% and 80% that is self-referred, or gets there in another way. Up to half of that can be medical channel referrals.
Okay.
So it's quite a significant part of the business, and certainly of current referrals that we don't get involved in, and we can see the opportunity to expand that further when we look at the base of potential referrers against those who are referring.
Okay, great. Thank you. I'll leave it there.
Thanks, Lyanne.
Your next question comes from Laura Sutcliffe with Citi. Please go ahead.
Hello, thank you for taking my question. I think you mentioned back in August that you were seeing some surgeries delayed, by choice, waiting for the Nexa. I was just wondering if, considering your exit rates in November and December, whether you were starting to see some of those come through, and if perhaps they'd provided a boost at that point during the year, or whether they're coming steadily, or whether you're still waiting for them?
Yeah, I think to the extent surgeries were delayed, and there certainly were some, we think they were caught up through the half. Now, what's hard to know, though, is you know, 'cause surgical slots can be tight, those got caught up in the half but didn't push. You know, someone who was scheduled and maybe was scheduled in December is now scheduled into the middle of February, you know, because someone who was. You see what I mean? It sort of pushes the pipeline down a bit. But I think fortunately, we did see some deferrals, but not a huge number through that early period.
So the gains from, you know, the gains we get from here are gonna be more around just market growth and picking up share, and rather than sort of a backlog of deferred. There's certainly backlogs for surgery, but they're more than normal than they are just deferred Nexa.
Great, thank you. That's it for me.
Thanks, Laura.
Your next question comes from Christine Trinh with Macquarie Capital. Please go ahead.
Morning, everyone, and thanks for taking my question. Just a quick one from me. Just sounds like quite a lot of work is going on to kind of tap into that seniors market, you know, medical channel, direct to consumer. I just wanna know how we should be thinking about sales and marketing going forward over the next year or so. Thanks.
Yep. No, thanks, Christine. No, we will manage that within the bounds of our normal G&A. That's why we're talking about, you know, reallocating resources internally, not expanding G&A to do it.
Your next question comes from Siobhan Drury with EY. Please go ahead. Siobhan Drury, your line is now live. Please proceed with your question. We'll move on to the next question from Elizabeth Davies with Bank of America. Please go ahead.
Sorry, it's Lyanne Harrison here again. I had one follow-up.
Yeah.
In previous reporting calls, you talked about the cost of living challenges that was weighing on services revenue. Are you still seeing that as a headwind through this first half, or has it alleviated somewhat?
Look, I think it still sits there in, you know, in the U.S. where there's a co-pay, and sort of macroeconomic conditions, it still sits there. But yeah, look, we haven't called it out explicitly. I think we sort of did that on the way down because it was definitely part of the services falling. It is still an underlying issue, as is, you know, the insurance pressure that's been talked about. But with those things, we remain confident of the ability to grow the services into the second half.
Great. Thank you very much.
Thanks, Lyanne.
There are no further questions at this time. I'll now hand back to Mr. Howitt for closing.
Okay, look, thanks, everyone, for joining the call. Appreciate your time. Thank you.