Cochlear Limited (COH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cochlear FY '26 Results Analyst and Media Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.

Good morning, everyone. Thank you for joining us. Let's get underway. So in FY '26, as always, our mission is central to what we do. And we enabled over 55,000 people to hear for the first time or to regain their hearing and more than 50,000 of our over 800,000 recipients received a new speech processor last year, giving them access to better hearing. I'll give an overview of the year and then focus on actions to drive growth in the developed adults market. In FY '26, sales revenue grew 2% in constant currency to $2.3 billion and underlying net profit was $322 million. These results were below the expectations we set last August, but they were at the upper end of the guidance we revised in April and revenue in the second half was up 6%. During the year, we advanced our strategic priorities, including successfully launching the Nucleus Nexa System, which I'll cover in more detail later. And when market growth slowed, we acted quickly to optimize our cost base, lowering fixed cost to fund investment in growth programs, and Sarah will talk to this later. We accelerated work to medicalize hearing loss and we are working to make adult cochlear implantation, the standard of care for people with severe to profound hearing loss by building clearer treatment pathways and expanding medical referral channels. Despite lower sales growth, we increased R&D investment to support our innovation agenda, and we're strengthening our implant portfolio by building on the Nexa platform. Now I'll spend some time on cochlear implants. I'll talk through last year's performance by region and then share the insights we gained into market growth and how our growth strategy addresses these insights to drive growth into the future. The long-term opportunity has not changed. The clinical need is significant. The outcomes from our product are very good and adult penetration remains low. In FY '26, overall cochlear implant systems were up 5% and revenue was flat in constant currency. This was due to a high mix of lower-priced sales in emerging markets, especially in China. We'll talk a bit more to that. The first to developed markets, where cochlear implant revenue was up 1%. The launch of the Nucleus Nexa System, the world's first smart cochlear implant system with upgradable firmware was very well received. Adoption has been strong with the Nexa System accounting for more than 95% of our implant sales across developed markets by June. Feedback has been positive and an average 3% price increase was achieved. In the U.S., revenue increased 4%. Market share was maintained across the year and growth remained strong in DTC and for clinics with established referral networks but there were clear headwinds that slowed growth overall. These included a higher rate of insurance delays and broader economic pressures, which made people more hesitant to proceed with surgery. In Western Europe, revenue declined 8%. Financial and demand pressures on health care systems constrained capacity in major countries last year. While these pressures have existed for some time, it's very unusual for them to apply across all major markets at one time. So there's a number of examples I could give, but I'm only going to give a few. This includes the U.K. where referrals were up, but surgery rates did not increase due to NHS waiting lists and temporary clinic closures. Industrial action in Spain, significantly lowered access to operating theaters, and we lost some market share in Germany, largely the result of implementing a price increase with Nexa shortly before reimbursement rates were lowered. Asia Pacific grew 7%, strong performance across the region, particularly in Australia and Korea. In Australia, where we've built out referral pathways, surgeries grew 15% in private hospitals, where we helped candidates navigate around public system waiting list. We also generated significant referrals to the public system. Those referrals led to an increase in waiting lists rather than more surgeries as the public system was capacity constrained. We're working hard, obviously, to reduce those waiting lists. In Australia, Singapore, Korea and Japan, we increased market share with the launch of Nexa. And in Korea, we also expanded our professional customer base, which added to growth. Now into emerging markets, where revenue declined 2%. Strong performance in Latin America and Eastern Europe was offset by declines in the Middle East as a result of the conflict that started in March, and also in China from a full year of volume-based pricing. In China, there was also an unexpected reduction in reimbursement in the special zones in the second half, which reduced our sales in the premium segment. So now I want to move on to looking at detail about adult growth with a focus on the U.S. to illustrate the sources of price and how our strategy addresses these. There are broadly 2 ways in which candidates get to surgery. There's growth driven by actions we take to lead people to surgery, primarily through our direct-to-consumer activity. And there's an underlying level of market growth driven by aging population and increasing awareness of the importance of treating severe to profound hearing loss. Over more than a decade, our direct-to-consumer campaigns and concierge services have driven strong double-digit growth, expanding to roughly 1/3 of surgeries in the U.S. These cochlear supported surgeries grew 10% in FY '26, below our historical average but still strong growth in a more challenging environment. And what we might call the self-navigated pathway. The referral path is inconsistent and the majority of people who get surgery find their way -- their own way to cochlear implant clinic. A small number get a direct referral to a CI clinic. Self-navigated pathway has historically provided mid- to high single-digit growth, and it actually declined in FY '26. So experience in the U.S. tells us 3 things. First, there were genuine referral and capacity headwinds last year that slowed down both pathways. Second, our DTC programs work even when market conditions are challenging. And third, the self-navigated pathway was significantly more affected because it's not driven by consistent medical referrals. Our growth strategy addresses both pathways to surgery. Our DTC programs work, and we continue to grow them. And we have evidence that targeted interventions in the self-navigated pathway can drive growth at a lower cost than DTC alone. The growth in private surgeries in Australia was largely a result of building referrals in this self-navigated pathway. In the U.K., educating, referring audiologists to direct -- through direct engagement has doubled high-quality referrals to cochlear implant clinics over the last 4 years. Now these referrals haven't yet converted to a proportional surgery growth due to NHS bottlenecks but the referral increase demonstrates this education works. And in the U.S., clinics with established referral networks continued their strong growth in FY '26, while those without them didn't. So to improve referrals in the self-navigated pathway, we now have pilot programs in 4 U.S. cities, working directly with ENT doctors who don't perform cochlear implant surgery, educating them on clinical practice guidelines and appropriate candidacy criteria. So we know the path forward. We'll keep expanding Cochlear supported DTC programs which are effective at driving growth. At the same time, we're scaling interventions in the self-navigated pathway, building sustainable referral networks. We have evidence these interventions work from Australia, the U.K. and the U.S., and we're now implementing them systematically across major developed markets. So turning to self-navigated pathway into a professionally supported pathway is a critical outcome of medicalizing hearing loss. So let's go on to look briefly at the process of medicalizing hearing loss. Our objective is to build a professionally supported referral program. We've seen medicalization fundamentally transform treatment patterns in other conditions. As an example, obesity shifted from being viewed as a lifestyle issue to a recognized medical condition with clear treatment pathways and therapeutic interventions. Closer to home, pediatric cochlear implants became medicalized nearly 20 years ago. In the 1990s, parents of children born with hearing loss only had a self-navigated pathway to get access to cochlear implants. Today, they are the standard of care. Over 80% of children in most developed countries will get 1 or 2 cochlear implants by the time they're 12 months old. We're now doing the same for adult hearing loss following a clear roadmap based on actions that have worked in other therapy areas. And we've made substantial progress over the past decade, building the foundations to do this. Global consensus statements and clinical practice guidelines have been established, and these are being adopted country by country to guide clinicians on appropriate candidacy criteria and referral pathways. The clinical evidence connecting untreated hearing loss to dementia and falls continues to strengthen. It provides the medical rationale for treatment rather than treating hearing loss as being considered only quality of life enhancement. And we continue to progress on elements of medicalization that you can see on this slide. We're working with partners to have hearing loss defined as a medical condition and establishing a vital sign for hearing loss, a simple standardized measure that helps both clinicians and patients understand severity and appropriate treatment pathways. This creates a common language between primary care physicians, audiologists and specialists. We're building integrated care pathways that connect audiologists, ENT specialists and implant programs into seamless referral systems. These pathways reduce friction in the patient journey and ensure candidates who meet criteria are directed to treatment. And we're working with policymakers and payers to ensure appropriate reimbursement as hearing loss becomes recognized as a treatable medical condition rather than an inevitable part of aging. So this medicalization works directly -- work directly supports the referral pathway development I described earlier. When referring clinicians understand candidacy criteria and benefits, the patient pathway becomes more consistent. Instead of patients navigating complex decisions alone, they're guided by medical professionals through established protocols, and this creates sustainable, scalable growth. Now let's move on to Nexa. A major achievement for FY '26 was the successful launch of the Nexa system, our next-generation implant platform. Nexa offers benefits today to improve power efficiency means that the Nucleus 8 Sound processor is even smaller, extending our advantage in cosmetics. And a smaller processor is more comfortable. We actually are seeing an increase in the time per day people wear their processor with Nexa compared to previous implants, and we know this leads to better hearing outcomes. Smart Sync provides both recipients and audiologists with a better experience and [ SmartNav 3 ] reduces surgery time and provides more information to surgeons. So there are benefits for all of the stakeholders from the Nexa system upfront. And Nexa builds on our long-standing advantage in electrode design. Our Slim Modiolar Electrode sit closer to the auditory nerve with more electrode contact points than competitors' devices. Clinical evidence demonstrates this gives better hearing outcomes faster than other electrode designs. And Nexa has the potential to take this further in 2 ways. First, it can measure the health of an individual's auditory nerve. And second, it can use that measurement to customize stimulation patterns to each patient. In clinical studies, recipients using new coding strategies showed significant preference for music quality compared to traditional cochlear implants. And this combination of neural health measurement and flexible stimulation has the potential to enable personalized outcomes for every recipient, extending our competitive advantage. And next is the platform for 2 very important implant developments that will drive growth. Drug-eluting electrodes aim to preserve residual hearing, removing a barrier to surgery and totally implantable devices address cosmetic concerns and more importantly, enable 24-hour hearing, benefits that are clearly resonating with patients based on recruitment rates that we see in our clinical studies. And both of these programs made significant progress over the last year. So now let's move on to services and then acoustics. Services grew 6% in constant currency with very strong performance in developed markets, which were up 13%. This was a result of the retirement of the Nucleus 7 Sound Processor in the U.S. And across the world, we improved marketing of the benefits of Nucleus 8 over Nucleus 7 based on direct feedback from customers who had made that transition. In emerging markets, revenue declined due to disruption in the Middle East and lower pricing in China. Continuing growth in the recipient base, as always, provides the foundation for services revenue growth. And in the year, Acoustics revenue grew 1% in constant currency. We had a better second half than first half. We did lose some market share in the year due to increased competitive activity. However, the launch of the next-generation Osia processor in FY '27 will enable us to regain that share and drive market growth. The new processor has FDA approval and CE mark and it has market-leading features, including a rechargeable battery, improved connectivity and most importantly, improved power output, enabling a wider fitting range and improved sound quality. The new processor also opens up the opportunity for Osia recipients to buy replacement processors. It's the first upgrade opportunity for Osia recipients, building our services revenue for Acoustics. And now I'll hand over to Sarah to go through the financial results.

All right. Thanks, Dig. Good afternoon, everyone. Let's go through the financial statements, starting with the P&L. Sales revenue was up 2% in constant currency. Now Dig's taken you through that, so I won't go through the details. The gross margin declined 3 percentage points to 71%. Let me talk through why it changed from original guidance and what we're looking at for FY '27. At the start of FY '26, our gross margin assumptions incorporated 3 known headwinds. First, the introduction of VBP in China. That's a structural headwind we're working to address over time. Second, being early in the Nexa manufacturing experience curve, which typically takes 18 to 24 months to reach full efficiency at commercial volumes. And third, the continued ramp-up of the Chengdu facility to full utilization in FY '27. These 3 factors were all built into our original budget and guidance assumptions of 74% gross margin. But a couple of changes happened in the year that we hadn't anticipated, and these reduced sales of top-tier products, specifically weaker developed market sales growth and the second half removal of China special zone reimbursement. These changes affected our gross margin in 2 ways: through product mix and through manufacturing overhead absorption. First, on product mix. The weaker top-tier demand meant a greater proportion of our sales came from lower-margin products than budgeted. This mix reduced gross margin by 1.5 percentage points versus expectations. Second, lower sales volumes meant we reduced production rather than building excess inventory. This was the right operational decision, but it meant lower absorption of our fixed manufacturing overhead costs. That created a 1.2 percentage point manufacturing variance. We've now reduced our fixed overheads to align with the FY '27 plan. In addition, the stronger Australian dollar reduced gross margin by 0.6 percentage points. Based on FX rates at the start of FY '26, we budgeted for a tailwind, and we got a headwind because most of our revenue is in foreign currencies, while a large share of our manufacturing cost base is Australian dollar denominated. Looking ahead, FY '27 guidance has gross margin staying flat. Now there's 2 reasons for that. First, we assume the FY '26 sales mix persists without a net shift toward higher-margin top-tier products in this year. While stronger developed market growth would help, we've assumed the current mix for this year. Second, while we're cycling the FY '26 manufacturing variance and we're moving further up the Nexa manufacturing learning curve, this is offset by annualizing that China special zone reimbursement change plus the FX headwinds we see. Over the medium term, as developed market growth lifts and as we benefit from COGS improvement programs underway, we expect gross margin to improve. Now operating expenses. Comparable operating expenses were down 1%, reflecting cost management across the organization while continuing to invest in R&D and growth initiatives. Reported operating expenses increased 5% as this includes $32 million in restructuring costs from fourth quarter organizational changes and $37 million in STI provisioning following the low payout in FY '25 and a partial payout in FY '26. R&D expenses increased 15% to $323 million, which is 14% of sales revenue, up from 12% in FY '25. This reflects our commitment to key R&D projects and to development of our products and services pipeline, which underpins our competitive position and growth opportunities. This investment this year supported the progress that Dig mentioned on the development of the drug-eluting electrode and the totally implantable cochlear implant. Our cloud computing investment to modernize core systems and improve scalability was $66 million post tax, taken below the line in FY '26. This is an increase from the prior year, reflecting the delivery stage of the current program, which introduces new ERP and manufacturing execution systems. We've completed the first go-lives. All manufacturing lines at both Sydney sites and in Malaysia now use the new system. So that's the majority of our manufacturing volume. In-year expenses were $15 million post-tax lower than expected for this due to final phasing of milestone payments. There'll be approximately $60 million after-tax spend in FY '27 to complete the program, which remains on track for FY '27 completion. Total cost for completing the 6-year cloud program is just over $200 million post-tax. That's higher than originally expected due to scope expansion. We remain on track to deliver scalability, data capability and operating efficiency benefits, and that's built into our guidance. Fair value losses on investment and share of losses on equity accounted investments was $109 million, mainly driven by the noncash write-down of our investment in Epiminder. Underlying net profit of $322 million reflects a net profit margin of 14%, below our medium-term 18% target. About half this outcome was driven by reduced developed market sales impacting across revenue, COGS and tax lines and half by the $69 million in transitional costs, that's the restructuring and STI provision replenishment, which will largely not repeat. We've managed costs carefully to deliver free cash flow. On the P&L side, we've reduced recurring costs by updating our operating models and using the cloud technology platforms we've invested in plus AI capability. These changes are permanent, not once-off. As a result, we've cut fixed costs 2 percentage points as a share of revenue, increasing our flexibility to respond when market conditions vary. Changes to date deliver around $40 million in run rate impact from FY '27. We have work ongoing in FY '27 and FY '28 with overall cost improvements expected to deliver about 50-50 margin improvement and reinvestment in growth. We've also reallocated $25 million into growth initiatives, including direct-to-professional referral programs, such as Dig talked about, digital and AI tools that support candidates through their journey and evidence generation to develop the standard of care for adults. While making these changes, we still invested over $40 million more in R&D than in FY '25, and we're committed to keeping R&D at least 12% of revenue, the engine of our growth and market leadership. On the balance sheet, you'll see tight working capital management, cut inventory $75 million, 13% in the second half as planned following the Nexa rollout. Inventory unwind will continue over this year, although we expect to see an increase at the half before decreasing over half 2. That's so we support readiness for the remaining go-lives of our manufacturing and ERP systems. We also made sure receivables normalized following the Nexa launch that was at the end of FY '25. And as a result, we've more than doubled free cash flow compared to last year. Specifically on the balance sheet, you can see working capital reduced to $789 million, reflecting lower trade receivables and inventory following Nexa launch and first half rollout. You also see the change to investments in other financial assets, which reflects changes in the value of our innovation fund investments with the write-down in Epiminder being the largest contributor. On cash flow, operating cash flow improved $130 million on last year, driven by better working capital, which we just covered, and lower income taxes paid due to reduced profitability. You can also see we invested CapEx of $91 million, covering both stay-in-business CapEx and productivity improving CapEx. That's mainly at our Lane Cove and Macquarie manufacturing plants. Now let's talk about FX a little bit and the impact on net profit. In FY '26, foreign exchange contract gains gave an after-tax benefit of $9 million versus a $12 million after-tax loss in FY '25. Taken together, that makes a $21 million year-on-year movement that you see here, which helped offset spot exchange rate movements. Overall, the constant currency outcome was pretty flat compared to FY '25. On hedging, our approach reduces but does not eliminate the impact of short-term currency fluctuations on earnings. It mainly protects cash flow. Our hedging policy has been largely unchanged for years, and we review it regularly. We take out forward exchange contracts on currencies we have key exposures to in 6-month tranches over 2 years weighted toward the first 12 months. We disclosed the contracts held for the next 12 months in our annual report each year. These are summarized in the table at the bottom of this slide. At current rates, this would provide about $25 million to $30 million in gains to help offset the FX impact of a currently stronger Aussie dollar versus the FY '26 average rates. The FY '27 guidance that Dig will take you through next is based on the U.S. dollar at $0.70 and the euro at $0.61 versus the Aussie dollar, a stronger Australian dollar than the FY '26 average. Net of the foreign exchange contract gains just discussed, this is expected to reduce FY '27 underlying net profit by about 10%, and it's factored into our guidance. We have a net profit sensitivity of around 2% for every $0.01 change in the U.S. dollar or the euro. All right. Back to Dig for the outlook.

Thanks, Sarah. Okay. Before I get into the outlook, we obviously remain confident of our long-term opportunity to grow the cochlear implant market, and we look at F '27 in that context. So in FY '27, we expect to see low single-digit constant currency revenue growth and an underlying net profit of between $330 million and $350 million. We expect modest revenue growth in developed markets supported by DTC programs and referral pathway activity. We have assumed that underlying market growth does not rebound in FY '27. And in emerging markets, we expect low growth with a decline in the Middle East as a result of ongoing instability, and we expect China sales to be in line with FY '26. Services growth will be slightly lower than FY '26, reflecting that we are later in the cycle with Nucleus 8. And Acoustics, we expect growth to be driven by market expansion and the launch of the new Osia 3 Sound Processor that I mentioned earlier. As Sarah said, gross margin will be between 70% and 71% with improvements in manufacturing costs and overhead recovery offset by FX and the annualization of lower China pricing. There will be a small decline in operating expenses, and this includes a lower level of restructuring costs in FY '27, the benefit of cost reduction activities and enables investment in growth and margin expansion and increasing the STI pool to 100%. Sarah mentioned the impact of FX on profit in FY '27. And over the next few years, we expect to see developed market growth rates lift, tight management of OpEx, along with continued investment in R&D and in growth programs. All of this is expected to result in profits growing faster than revenue and should see us return to our 18% net profit margin target over the medium term. Thanks for listening. And now let's open up to Q&A.

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

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

Yes, David, good questions. So medicalization of hearing loss does take some time. That's for sure. We've been working on it for nearly 10 years now, and we expect it to continue to take longer. But it's not -- it's also -- it's a gradual improvement. It's not something that we just work on and all of a sudden, it's done and then you see a sort of a rapid increase in the growth rate. So the work that we do year-on-year will improve referrals, but also conscious that given our market penetration for adults and seniors is under 5%, we've got a long way to go before we get there. So it is a long-run program, but it has year-on-year benefits. We haven't mentioned the hearing aid channel. Hearing aid channel referrals remain important for us. Our referrals from the hearing aid channel in the U.S., for example, were flat year-on-year when we look at '26 versus '25. And I think that reflects some of the headwinds we've seen. But very importantly, what we're doing with the work in what we're calling that self-navigatEBITDA channel is to expand beyond just hearing aids and actually get into the medical channel, where we're already seeing referrals come through. And -- but that's without us directly intervening. And the examples I gave show that when we do intervene in that medical channel, and we do educate, we do see an increase in referrals. And it's the right time in terms of our development and the execution of our strategy to be expanding that presence in the medical channel and getting those more medicalized referrals, which again is a step on the path to medicalization.

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

Yes. So as I said, we -- in the U.S., where we are working through our direct-to-consumer activities or the work we're doing at cycle, we're seeing growth in referrals. We're seeing growth in surgeries. Clinics that have established referral networks continue to grow. Where the growth didn't come was in the other parts of the -- in that self-navigated channel where there's always been an underlying level of market growth. That didn't occur this year, actually declined slightly, as I said. What we see going on there is a couple of things. One is that the insurance pre-authorization denials, which are leading to delays in surgery. And we continue to hear, as I talked about in the trading update, we continue to hear from clinics that sort of sentiment broadly macroeconomic conditions is having some people more hesitant to go through to surgery. Clearly, not all because there's lots of surgery still happening, but it's been enough to take the edge off that growth. And perhaps, David, just the last point on that is what we see is when -- it's one of the reasons that our -- where we intervene grows faster is because we're able to provide people with information on will this be covered by insurance, what will the level of out-of-pockets be? And I think what we see in that self-navigated pathway is people used to -- particularly in the U.S., used to paying $5,000 for a pair of high-powered hearing aids, assume this is going to cost more. And without getting a strong referral and getting that information, they're more likely to pull out along the way. Again, got to medicalization, getting clarity on the treatment, the treatment pathway and the cost will help people move through that pathway in a more seamless manner.

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

Yes. And we've obviously been aware of this for quite a while. We have spoken about DTC. What we have been talking about the last 2 years now is research we did into these surgeries that happen where we don't have any impact -- any contact with the people before. And we've talked about that in these calls before to say that there are about 70% of surgery depending on the market where the first thing we know about this person is when we get the implant registry. 2 years ago, that led us to go and do research into where are these people coming from? How are they finding their way. And out of that, we learned a lot about the ad hoc nature of many of those people's journeys, and we hear that directly when we talk to recipients. And we also learned there was a significant number of medical channel referrals occurring despite us actually never going into that channel to stimulate those referrals. So that led us to build this program in the U.S. where we've now got 4 cities up and running, and we're going to take that to 12 cities over the next 6 months, where we've got people on the ground working in that medical channel. So we haven't talked about it for a while, but we've certainly been aware of it, and we've been working on both the research and in the programs to drive growth for a while. And I'll come back to the Australian example. And Australia being our home market, it's an easier one for us -- an easy one for us to experiment in. We've been working for a while in Australia on expanding the referral network and working out what is it that drives referrals and what's the education that helps make a difference.

Your next question comes from Andrew Goodsall from MST Marquee.

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

Yes, Andrew, thanks for your question. So we did get -- first of all, we did get average price increase of about 3% with Nexa, which was good to see. As we said before, one of the things we were doing with Nexa is testing our ability to get a price increase. We hadn't gone to put a price increase through at this level for quite a long time and cognizant of TICI coming. We wanted to understand how the market worked when we put a price increase through and improve our ability. So as we -- all of that said, as we look forward with TICI, we are thinking very carefully about the commercial strategy, about the pricing that we'd like to achieve, about how we realize growth with TICI. We're certainly seeing from our market research and the clinical studies, there's a lot of interest in TICI. And interestingly, from our market research, we're seeing it's potentially a different patient cohort to we're getting now. It's an extra patient cohort. So we've got -- we're building a commercial strategy. I'm not going to go into the detail of that today that looks at how do we drive growth, how do we work within the reimbursement parameters that they have around the world, what's the right level of pricing and lifetime value that we can get.

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

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

Your next question comes from Davin Thillainathan from Goldman Sachs.

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

Yes. So we're certainly seeing that pushback. As we've talked about before, so when -- where someone is getting an upgrade, we're often managing the insurance processing part for them. Where they're getting an implant, the vast majority of those authorization -- pre-authorizations are sought by the hospital. So it's actually then up to the hospital to -- if they get a denial to appeal because most times when there's an appeal, that denial gets overturned. So we don't have a direct role in that. If we -- if it's a candidate we're working with, like through our DTC and we see that, then we can help -- we can talk to the clinic about getting the clinic to appeal. If it's from the other side, then we don't get that visibility. But I think what we've seen is these denials are not just cochlear implants, obviously, it's across a whole range of surgery areas. The primary impact of these denials actually on hospitals and on hospital revenue. And that's where we think the hospitals are actually going to take the lead here and lift their work in terms of challenging, appealing the denial and seeing that overturn. So I think we will see that change over time, the work that the hospitals do to get those denials through. It's exactly the response we had when 2 years ago, we saw insurers pushing back harder on replacement processors. We lifted our game on the documentation we provided to insurers. We appealed when there were denials in place, and you saw the result with stronger growth in services that while there's still plenty of tension there, we've improved our ability to get insurance. We think hospitals will do the same with respect to surgeries overall.

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

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

Your next question comes from Saul Hadassin from Barrenjoey.

I'll stick to 2. The first one, there's [ constant ] talks to the developed market implant growth and says revenue is expected to grow modestly. From the release, it looks like you've got a price increase on average of 3% from Nexa, most implants, if not all, being implanted to Nexa. And you've also talking to share gains on the back of the Nexa. So my question is, is this set, therefore, just a function of market growth effectively being soft in those developing -- developed regions, sorry? And I guess in that same comment, it says current trading conditions remain mixed and the measures being taken now or the actions being taken now will take time to translate to more consistent growth. So regarding the outlook for '27, how much line of sight do you have as to unit sales growth through those developed markets considering when we had the downgrade in April or May, it seemed to come very suddenly. I guess, how much confidence do you have that the trends that you saw, say, in June can be extrapolated into the current fiscal year?

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

Sure. I mean, look, when we think about that outlook, we consider not only the historical trends that we've seen, but more importantly, what we're seeing in the market. And so working closely with the sales teams because that's actually one of our best sources of intel, seeing where those outlooks look like from a customer perspective, understanding quite deeply where there are capacity constraints at kind of the micro level or where there are bigger trends that we're hearing from our customers. We also look at the data that we have available to us is proprietary data. So what's going on with our DTC, our direct-to-consumer data, where that's available to us and also the broader market trends, whether that's information about the hearing aid channel that we can get through our cycle data or broader, more publicly available data sets. So we look across all of those things when we combine together what we think those forecasts are. Of course, we've got a range for different subsegments, but then overall, combine that into the outlook we've given for our developed markets.

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

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

Your next question comes from David Stanton from Jefferies.

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

Yes. So first of all, on scheduled surgeries, that sort of typically looks out a couple of months. It does vary by clinic, but it is only a few months into the future. When we look at our pipeline of candidates through the areas where we have visibility, that gives us -- can give us a 12-month view, but it is a mix of candidates who move with quite different velocities. So we can run some averages over that, and that gives us an indicator. And as I said, that's about 1/3 of our sales. But again, that pipeline is typically more concentrated in the next 6 months and less concentrated sort of in the 6 to 12 months. So it helps give visibility, but it's certainly not perfect visibility.

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

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

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

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

Your next question comes from Steve Wheen from Jarden.

Dig, I wonder if we could touch on the Nexa and if you could provide any sort of guidance as to when we could expect some of these new features to be announced or launched with that Nexa. I mean the overwhelming sentiment from surgeons and audiologists is they're looking forward to it, but nobody needs -- nobody seems to know where -- when that is coming. And you don't need to say what it is, but just some timing so we can sort of get some feel for it because that will be when your price increases might resonate a little bit more? And then the second part of the question is there's been -- associated with the launch, there were some problems around the map transfer. Just wondering what time frame you've been able to get that reduced to and the SmartNav changes, when would they be sort of able to be relaunched to bring those surgeons back to the tools that they were used to when implanting an implant?

Yes, that's a good question. So on the -- I'll do the software first. In the next few months, we'll have a software release that will improve the range of programming parameters that some audiologists talk about that will reduce the time for the map transfer to the implant plus a range of other improvements. So that's a few months away. SmartNav, I think there there are some people who would like access to some of the research tools that we have developed over 20 years with the previous systems. We're working on those research tools. They are not too far away, but I don't want to give an exact date on them. And then on the Nexa features, that's one we are working. We have plans on what we're going to do, but I'm not going to put a date publicly on that for a whole range of reasons, including competitive ones. But I know as you talk to surgeons and as we talk to them, they eagerly await as an audiologist to get some insight into what Nexa can do. The one -- the people who've been involved in the clinical studies have already seen some of that and are excited by the opportunity to do more. But we're not going to publicly put out -- put a date on when that will be available, but we do have a multistep plan of improvements and access to new features.

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

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

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

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

Great. $15 million, 1-5?