Cochlear Limited (COH) Earnings Call Transcript

Good morning, and welcome to the 2026 Annual General Meeting of Cochlear Limited. I'm Alison Deans, Chair of Cochlear, and it's my great pleasure to welcome all shareholders to today's meeting. We have shareholders attending in person here at Cochlear's Global headquarters in Sydney and shareholders attending online. For those who may find them helpful, a hearing loop is available and closed captions will be displayed on screen throughout the meeting. I'd like to formally declare the meeting open. And on behalf of Cochlear, I acknowledge the Wallumattagal people of the Darra Nation who are the custodians of this land. I'd like to pay respects to elders, both past and present, and to leaders emerging. I'd also like to acknowledge the traditional custodians of the various lands in which we meet virtually. Today, I'm joined on stage by my fellow directors, our CEO and President and Managing Director, Dig Howitt. Also joining us on stage is our Group General Counsel and Company Secretary, Rob McGrory. Sir Michael Daniell, who is standing for reelection today. Professor Bruce Robinson, who is also standing for reelection today. Caroline Clarke, Michael del Prado, Richard Freudenstein, Christine McLoughlin, and Karen Penrose. In the front row is Rachel Gatt from our KPMG, our external auditor. Rachel will be available to answer questions about the audit later in the meeting. Rachel steps down as our lead audit partner this year, and I would like to thank Rachel for her valuable contribution to Cochlear. Stephen Isaac will replace Rachel as our new lead audit partner, and he is here today and available to meet with shareholders after the meeting. We're also joined today both in person and via the online platform by a number of our executives. I'll now invite Rob McGrory, our General Counsel and Company Secretary, to run through the meeting procedures.

Thank you, Alison, and good morning, everyone. To begin, could you please ensure that your mobile phone is switched to silence. I'd like to remind you that filming on today's meeting is not permitted, but there is a live webcast and a recording will be available on our website. In the very unlikely event it becomes necessary to evacuate the building, we'll be exiting through the doors that you entered through. Please ensure that you follow the directions from a Cochlear team member in the event of an evacuation. This is a shareholders' meeting, and only shareholders or their appropriately appointed representatives are entitled to vote and to ask questions today. Questions submitted prior to the meeting will be addressed either as part of the Chair or CEO's addresses, or as part of the relevant items of business. For those in the room today holding a blue or yellow card, to ask a question, please approach the microphone in the center of the room when prompted at the relevant item of business. Wait to be introduced before asking your question. Anyone who requires assistance moving to the microphone, please let a member of our team know. For shareholders attending the meeting online, you can submit a written question at any time via the online meeting platform by selecting the Q&A icon and then select the topic your question relates to. Simply type your question into the chat box and press send. You can also submit your questions verbally via the telephone line by following the instructions under the broadcast window. Your question will then be transcribed by the operator and submitted as a written question. All questions that are submitted online will be moderated to avoid repetition and may be summarized in the interest of time. All questions from shareholders online will be read by our Cochlear staff member. Our Chair, Alison Deans, will answer all questions initially or may refer to another person for a response if appropriate. For each item of business, we will take questions from shareholders physically present at the meeting first, followed by questions from shareholders online. We want to give as many shareholders as possible the opportunity to ask questions at the AGM. To do this, we ask that you speak briefly, ask questions of the relevant item of business, and limit yourself to no more than 2 questions at a time, and then allow others to ask a question. Moving now to voting procedures. Polling is open now, and shareholders are encouraged to vote early. The poll will remain open for 5 minutes after the close of the meeting to allow you to finalize your votes. Our representative from Computershare, our share registry, will act as the returning officer for the purpose of the poll. If you are here in person, please complete the voting card that was issued to you at registration. You may complete your card and cast your vote at any time from now until when the poll closes. To cast your vote, place your voting card in the designated boxes beside the meeting room door. If you need assistance, please ask 1 of the representatives from Computershare. If you are attending online and eligible to vote at this meeting, select the vote icon and the meeting resolutions will appear on your screen. To vote, select your voting choice. A tech will appear to confirm receipt of your vote. There is no need to press a submit or send button as the vote is automatically recorded. You can, however, change your vote up until the poll closes. If you experience any difficulties with the online meeting platform, please call the number on the screen behind me. During the AGM, the Chair intends to display the number of direct votes and proxies currently held for and against each resolution on the screen. This will be done before any discussion on each resolution. The directors' voting recommendations are set out in the notice of meeting. I confirm that the Chair of the AGM intends to vote all available proxies in favor of each resolution. The final voting results will be released to the ASX after the meeting. I now welcome back our Chair, Alison Deans.

Thanks, Rob. I'd now like to move to my address. Ladies and gentlemen, we are all aware that FY '26 brought challenges for Cochlear, but it also brought clarity. It reinforced what remains strong in Cochlear, our purpose, our market opportunity and our strategy, and it sharpened our focus on execution. Our financial performance for the year fell below expectations, as did shareholder returns, and we are acutely aware of the impact this has had on you, our shareholders. The year was shaped by a more difficult operating environment, including health care capacity constraints and industrial action in Europe, insurance delays in the U.S., reimbursement changes in China, disruption in the Middle East and foreign exchange headwinds. But the team have reflected diligently on how we learn from these challenges and move forward with clarity and resolve. It's important to note that the fundamentals of Cochlear have not changed. Cochlear implants are a cost-effective therapy for severe to profound hearing loss, and there is still a significant unmet need. We remain the global leaders in implantable hearing. And the strategy needed to capture the opportunity has not fundamentally changed. Our mission is simple, to help more people hear and be heard. In FY '26, we helped more than 55,000 people hear with a hearing implant, generating an estimated net benefit to society over the lifetime of these recipients of more than $9 billion. That impact is why we exist, and the scale of the opportunity ahead is even larger, particularly among adults in developed markets. Clinical need is high, yet penetration remains low at around 5%. Too many people live with severe hearing loss for too long, and the consequences of not addressing it are significant, including increased risk of falls and cognitive decline as well as loss of independence and social connection. The benefits of a cochlear implant are proven but the pathway to receiving 1 is often unnecessarily difficult. Many adults try to find their own way through a fragmented system, and many continue to rely on hearing aid long after they've stopped providing enough benefit. Our aim is to change that. Our goal is the severe hearing loss to be recognized and managed as a medical condition, which can be readily addressed cost effectively. Achieving this means clearer diagnosis, clearer referral triggers and a more direct path from hearing loss to specialist assessment and treatment. This is how other therapies have matured. And we've seen the transformation that occurred as cochlear implantation became the standard of care for children with severe to profound hearing loss. Today, the majority of children in developed markets who need a cochlear implant, get on before they are 12 months old, providing them with a lifetime of hearing. We want to support the same evolution in adult care. The goal is not simply to compete for people already considering an implant, but to expand the market and in doing so, help many more people to hear. FY '26 reinforced the need to medicalize the treatment pathway for adults. Over the last year, in channels where we had greater visibility and involvement in the path to surgery, growth remained strong. This included candidates who came through our direct-to-consumer programs, via established professional networks, or through targeted referral support. But where patients were left to navigate the system themselves, referrals and growth were less consistent and showed low to no growth. This reinforces the need for consistent, clinically led pathways that help patients receive the care they need more often. Over many years, we have built the foundations for this. Compelling evidence of the broader health impact of untreated severe hearing loss have been established, including the impact on cognition and fall. From this, we've supported the development of clinician-led consensus on the appropriate standard of care. We're now entering the next phase of this strategy, putting these standards into practice. Clinical practice guidelines are now being implemented across 25 countries, including the U.S., Australia, Italy, the Nordic countries, Latin America and Saudi Arabia. We're also strengthening professional education, referral capability and digital support in our priority markets. We're expanding direct-to-professional referral capability in the U.S. Germany, the U.K. and Australia. And early results show stronger referral activity in Australian private hospitals and a significant increase in quality referrals in the U.K. The focus now is on scaling what works based on clear goals, more medical referrals, fewer patients lost along the way, and cochlear implantation becoming the standard of care for indicated adults. This has been our long-term strategy, and it remains the right strategy today. In response to the challenges of FY '26, the team have accelerated the reshaping of the business. We're lowering fixed costs and creating a more scalable operating model, building on technology and shared platforms implemented over several years. This will allow us to focus more resources on near-term growth. And at the same time, we'll continue to invest in the long-term drivers of value, the R&D needed to sustain our technology leadership and the next phase of medicalizing hearing loss. Delivering the next stage of our strategy requires the right capabilities across the organization and around the Board table, ensuring we have the experience to support the opportunities ahead. With that context, Professor Ian Meredith AM will join the Board on the 1st of December as an Independent Non-Executive Director. Ian brings more than 30 years of experience in patient care, clinical research, medical technology, and commercialization, including 9 years as Chief Medical Officer of Boston Scientific. He understands what it takes to move new therapies from innovation into clinical practice. That experience will be valuable as we advance our pipeline and establish cochlear implantation as a standard of care for more adults. Bruce Robinson stands for election today to support an orderly transition as Ian joins the board. On behalf of the board and the company, I thank Bruce for his continued contribution. The board is clear about what is needed ahead, disciplined choices and operational execution, combined with consistent delivery against the long-term drivers of value. We're confident that the Cochlear executive and wider team are clear about the path forward and motivated to deliver on the growth opportunity of Cochlear. I will now hand to Dig to explain how the actions we're taking in FY '27 will turn that strategy into stronger sustainable performance.

Thank you, Alison, and good morning, ladies and gentlemen. The core of Cochlear's business is the technology we develop. We're building products and services to attract candidates and support our recipients throughout their lives. We've invested around 12% of our annual sales in R&D for over 40 years. This investment, along with the capability and knowledge of our people has resulted in products that improve the hearing and experience of recipients. It's also expanded the number of people who would benefit from a cochlear implant. These products drive our market leadership and underpin our ability to drive growth. The launch of the Cochlear Nucleus Nexus system was a major milestone in the last financial year. Nexa is the world's first and only smart cochlear implant system. It has a programmable microprocessor, memory, and upgradeable firmware, both on the implant and the sound processor. Adoption has been strong. By June, the Nexa implant represented more than 95% of sales in developed markets, and we achieved an average 3% price increase. The system is already improving the experience today. People of all ages are spending more hours each day using their Nexa system compared to previous products. It gives us a platform for the future. The Nexa implant delivers better power efficiency, smaller external components, and Smart Sync. Right now, we're actively researching further improvements to support simpler activation, richer measures of neural health, and ultimately, more personalized stimulation. The Nexa system is also the foundation for 2 important pipeline opportunities, our drug-eluting electrode and our totally implantable cochlear implant or TICI. Both are designed to improve care, and both can strengthen our leadership. TICI, in particular, can expand the market. This year, we completed pivotal studies for the drug-eluting electrode. This electrode slowly releases dexamethasone to reduce inflammation and fibrosis after surgery. Our goal is to better protect the cochlea and potentially improve hearing preservation. We're analyzing the results and planning the next regulatory study. We also completed the recruitment for pivotal studies of AI. Powered by the Nexa platform, TICI is designed to enable hearing without an external processor. And we're excited because TICI could open the door to people who would not consider a cochlear implant today. Fewer than 5% of eligible adults receive one. And for some, lifestyle, identity or cosmetic concerns are real barriers to getting a hearing implant. Invisible hearing could remove one of those barriers. And certainly, the early signal is patient interest. Our studies recruited significantly faster than previous implant studies, reinforcing the potential for TICI to bring new people into the cochlear implant category. We have worked on a fully implantable hearing technology since 2005. And our TICI is now in its third generation. Collectively, our TICI recipients have over 1 million hours of experience with their implant. This experience has demonstrated that a successful TICI system must deliver very good hearing outcomes, provide access to 24/7 hearing, manage body noise, be reliable, be simple to implant and be capable of being manufactured at scale. And it almost must offer connectivity and upgradability that recipients expect. And we're confident our TICI system will deliver market-leading performance. Beyond cochlear implants, we launched Cochlear's Osia 3 sound processor, an important addition to our acoustic portfolio. Osia 3 combines rechargeable technology with improved hearing performance and connectivity, making it easier for people with conductive hearing loss, mixed hearing loss, or single-sided deafness to hear and connect in everyday life. Our innovation and commitment to recipients have also received external recognition. Our Nucleus Nexa System was named one of Time's best inventions for 2026, recognizing its upgradable implant technology. Cochlear also ranked first in healthcare and life sciences in Newsweek's World's Most Trustworthy Companies for 2026. It is the second time in 3 years that we have received that award. Our global team supports customers, recipients, and clinical partners in more than 180 countries. In a year of change, Cochlear people stayed focused and continued to improve and develop the business. Employee engagement remained above 80%. Our people are committed to our mission and to delivering better results for shareholders. And that brings me to performance. In FY '26, sales revenue increased 2% in constant currency to $2.3 billion. Underlying net profit was $322 million. This result was below the expectations we set at the start of the year. although it was at the upper end of the revised guidance provided in April. And revenue growth improved in the second half. Performance was affected by slower market growth in several developed markets. These external pressures were more pronounced and persisted for longer than we expected. However, the opportunity remains compelling and the core of our strategy remains sound. Our focus is on executing with greater discipline in the areas we can control. We have lowered fixed costs as a share of revenue, we have sharpened investment priorities, and we have strengthened operating discipline, and we will keep building demand. We will keep strengthening referral pathways and the medical channel, and we will keep investing in innovation that improves outcomes and expands the market. For FY '27, we continue to expect underlying net profit of between $330 million to $350 million, in line with the guidance we provided in August. We know FY '26 was challenging. We also know what we need to do. Our strategy is clear.The opportunity is significant, and our focus is execution to grow the market, improve performance, and deliver stronger long-term value for shareholders. Thank you, and I will pass back to Alison.

Thank you, Dig. I'd now like to move to consider the items of business for today's meeting. Item 1 deals with the receipt and consideration of Cochlear's financial report, the sustainability report, directors' report, and auditors' report for the financial year ended June 30, 2026. These are incorporated in the 2026 annual report, which has been made available to all shareholders. There is no requirement for a formal resolution on this item. However, this item provides shareholders as a whole with an opportunity to ask questions on the reports, as well as the company's financial and business performance. Any shareholder who has a question or comment on the financial and business performance or on the management of the company should raise them now. This is also the appropriate time to raise any questions you may have of the company's auditor. Shareholders have already raised a number of questions in advance of the meeting today. We'll start by answering those questions not addressed as part of my or the CEO's address. First, we received a question from shareholder Mr. Timothy Michael Clifton on why we do not offer a dividend reinvestment plan and if we intend to introduce a DRP in the future. We review our capital and cash requirements on a regular basis, but currently, we have sufficient cash to fund the business needs. As a result, we don't currently intend to implement a dividend reinvestment plan. The next question is also from Mr. Clifton about our FY '26 final dividend and whether our dividends will be fully franked in the near or distant future. The dividend paid to shareholders earlier this month was franked at 85%. That's the same level as the FY '25 final dividend. We continue to monitor the availability of franking credits and anticipate that the level of franking will remain broadly consistent. Mr. Clifton also asks about the extent to which Cochlear intends to defend the class action. Mr. Clifton is referring to our ASX release on 29th of September 2026, where we announced that a class action had been filed against us in the Victorian Supreme Court. Cochlear denies the allegations and will defend the proceedings. As you will appreciate, we can't comment further on proceedings currently before the court. The next question is from Mr. Robin and Miss Yvonne [ Amey ], who ask, Cochlear reported sales have shown a 5% increase and a 1% fall, yet net profit has fallen 22% and dividends 20% in the same year. Can you explain the disparity? There are a few factors reflected in these differences. sales in constant currency increased by 2%, reported sales were lower due to foreign exchange impacts resulting from strengthening of the Australian dollar. Below the revenue line, profit was affected by a decline in gross margin from 74% to 71%. This was driven by lower manufacturing volumes and fixed cost recovery and an unfavorable shift in sales mix, including lower pricing in China. In addition, operating expenses were impacted by disruption in the Middle East and also by our decision to accelerate restructuring costs. The dividend broadly declined in line with the underlying earnings, consistent with Cochlear's dividend payout policy. Mr. Andrew Robinson submitted multiple questions which have been summarized for brevity as follows. Can the board explain why the promised Bluetooth LE Audio and Auracast functionality for the Nucleus 8 has not yet been delivered, including whether there are any hardware compatibility or Bluetooth SIG issues preventing the upgrade? When it is expected to be released, and whether this will occur before the Nucleus 9, and finally, what exposure Cochlear may face if the functionality is not delivered. Cochlear continues to develop support for Bluetooth LE Audio technologies for the Nucleus 8 sound processor, and this includes Auracast. Currently, there are no known hardware constraints or Bluetooth SIG-related limitations preventing implementation on the Nucleus 8 platform. As with many emerging technologies, the value delivered to recipients depends not only on Cochlear's implementation, but also on the availability and maturity of the broader ecosystem, including compatible smartphones, operating systems, and third-party devices. Cochlear is working to ensure that any implementation delivers a high-quality, reliable, and clinically appropriate user experience across this ecosystem. Release timing remains under consideration as part of Cochlear's normal product development, testing, and validation processes, and we will communicate availability through standard customer channels when it's appropriate. The next question is from Ms. Elizabeth [Cometto] on how the company intends to retain market share and develop further on the biotech area with the high cost of ROA and extreme difficulties of manufacturing in Australia due to cost and small population. We think that when referencing biotech and ROA, Ms. [Cometto] is referring to our tech innovation and to R&D. We continue to invest and develop market-leading implant innovation across our R&D sites, not just within Australia, and there is an exciting pipeline of implant products like the drug-eluting electrode and the totally implantable cochlear implant coming to the market over the next few years. Similarly, we have a diverse manufacturing network which optimizes our supply chain economics while also leveraging the benefits of co-location with R&D in Australia in accelerating innovation. We also have a question from Ms. Julie Matheson, who asks if the board can disclose the annual cost to shareholders of measuring, managing, and reporting Cochlear's net zero ambition, including carbon accounting, supplier emissions data, and external assurance, and if the board believes net zero will change Australia's climate, and if so, by when. We don't separately disclose an annual cost for climate measurement, management, and reporting because the work is integrated across our sustainability, finance, procurement, and risk management functions. External assurance is part of our broader reporting obligations. Most of this activity is required under Australia's mandatory climate reporting regime and aims to support better management of energy, supply chains, and regulatory risks. Cochlear doesn't suggest that its action alone will change Australia's climate. Our responsibility is to manage our own impacts and risks and meet our reporting requirements. The next pre-submitted question comes from Mr. John Lui, who has asked a number of questions, which again, we have summarized for brevity. Mr. Lui asks what Cochlear is doing to address the stigma around deafness and hearing loss in wider society, including promoting accessibility inside and outside of the workplace. Reducing the stigma associated with hearing loss starts with greater awareness and understanding. Cochlear works globally to raise awareness of hearing health, support advocacy efforts, and promote earlier diagnosis and treatment of hearing loss. We work with healthcare professionals, researchers, governments, and organizations such as the WHO World Hearing Forum to encourage hearing to be recognized as an important public health issue. We also support initiatives that help people with hearing loss participate fully in education, employment, and community life, consistent with our purpose of helping people hear and be heard. Accessibility should be built in wherever possible, rather than leaving individuals to carry the burden of advocating for what they need. Within Cochlear, we're committed to listening to employees and recipients with lived experience and continuing to improve our workplace communication practices and facilities. Mr. Lui also had constructive feedback on our facility tours, and we will review how we can make that experience more accessible while recognizing that different people may require different forms of support. Our final pre-submitted question is from Mr. Ronald West. He notes that the annual report states that the company is reducing fixed cost to invest in growth and margins. However, the financials do not reflect any reduction in fixed cost. The actions being taken are focused on changing the shape of our cost base, not simply reducing the expenditure. Also, many of these actions were implemented late in FY '26, so the financial statements include only a limited in-year benefit. FY '26 also includes significant restructuring costs. The reshaping is aimed at reducing fixed cost in order to increase the variable expenses, which can be focused on near-term growth initiatives. The team are also focusing on improving the efficiency and effectiveness of this variable expense. Over time, this more flexible and scalable cost base is intended to create room to invest in growth while delivering improved margins as revenue strengthens. Are there any questions in the room on this item of business?

Chair, I would like to introduce shareholder [ Ray Tolleson ].

Thanks, Alison. A couple of questions. Firstly, on what are Cochlear's plans for continued investment in Epiminder, which by the way I understand was one of the reasons for the downgrade, I should say, in profit because of the marked market. That's not the concern. I'm just curious about whether Cochlear intends to retain its interest in Epiminder.

Right. If we think about the why we invested in Epiminder, it's part of our long-term strategy for investing in innovative technologies. Over the last 10 years, we've invested in a number of innovative technologies, and the idea there is to focus on technologies which will either provide value to our core product or will enable us to leverage our core technology into adjacent therapies. We think of our core capabilities as being implantable neurostimulation in the head. Epiminder is very much consistent with that focus. Should also say that the investment in Epiminder was made. We started investing in Epiminder nearly 8 years ago when it was a very early-stage company. Consistent with our strategy, we made modest cash investments in the company, and alongside that, we provided in-kind technology support and input. As a result, the Epiminder technology is closely related to the Cochlear one. The Epiminder business has progressed over those years. It went through an IPO about 12 months ago, and then over the period following its IPO, it experienced significant decline in its value. The number that you...

In its value or the share price...

In its share price. Thank you. In its share price. Good point. The number that we reflect in our annual report is the decline in that share price while it's listed. Should also say that because our investment was made at a relatively early stage, starting 8 years ago, the amount that we invested in Epiminder in a cash sense was relatively modest, which is consistent with the strategy. I think if we think about Epiminder, we're disappointed in the share price, but we're not surprised. You often see fluctuations in the valuation of early-stage technology companies, particularly when they're publicly listed. Consistent with our strategy, what we are focused on is adjacent therapies that may, over long periods of time, have strategic value to Cochlear. Epiminder remains consistent with that strategy, and so our involvement with them continues. I do also want to be clear, it's relatively modest investments of cash. R&D in-kind collaboration, which then gets reflected in shares. We do it in a way which does not distract from our core focus on hearing.

Thanks for that very comprehensive response.

Of course.

I've forgotten the name of this company that a number of years ago we bought a part of a company, just the cochlear implant part. As I said, it is a bit embarrassing I've forgotten the name of it. How is that going? Because it was loss-making at the time, but it was increasing the number of actual patients, clients. I just haven't heard anything since.

Yes. I think you are talking about the Oticon acquisition.

Yes.

At the time, Oticon had both an acoustic business and a CI business. We initially were interested in acquiring both of those, but the acquisition of the CI business was blocked. Excuse me. Did I say it the wrong way around? Sorry. The acoustic business. Acoustic business is blocked, the CI business was acquired. Our reason for doing that was to ensure that the CI recipients who had an Oticon implant would continue to receive good care, because that's important for them as individuals, but also for the therapy as a whole, and credibility in the market. We continue to support those CI recipients with an Oticon implant. We also have, I think I would say that through that, we also have a team of R&D people from that acquisition who have some interesting technologies that have also been brought into the broader R&D activity.

Can you tell yet whether that is now a profitable bit of the overall thing?

It's very much integrated into the whole business, and the idea was about credibility and confidence in cochlear implantation as a therapy. It is a relatively small number of individuals who are involved, and so it's not significant on its own. It was important for credibility and confidence in CI implantation.

Chair, I would like to introduce [ Steve Mabb ].

Madam Chair, my son has a cochlear. He was one of the first children in Australia with single-sided deafness to get a cochlear, so very familiar with the technology and the patient journey. We have a wonderful product. I have just got a question around capital allocation here for you. The job of any good CEO is to allocate capital really well, in my view, and drive levels of performance higher than its industry. Dig has been with the company for a long time. He has been in the CEO role for 8 years now. Effectively, he has been responsible for deploying all of the capital that we have at work today in the business collectively over that time. During his tenure, earnings per share and sales per share have grown at about 3% a year. If I add back in the Epiminder impairment from last year, it is 6% or 7%. It is only just a little above inflation if we add that back in. During the COVID period, we sold shares in a capital raise at a really high discount, as was evidenced by the size of the oversubscription in the capital raise. The last couple of years we have been buying back shares between $260 and $300, close to all-time highs. During that entire tenure, shareholders have lost about 20% of their money. Today I have heard from both of you that we have got the right strategy. It is our long-term strategy, and we are sticking with it. My question is, what hard evidence does the board have that we do have the right strategy, given all of that? What am I missing?

Yes. It's a good question. Over FY '26, and particularly towards the end of FY '26, I think we all went through a process of reviewing the assumptions underpinning the strategy and the way that we were executing that strategy. For the board, that included engaging with a variety of external shareholders to validate what we're hearing. That included engaging with clinicians, including surgeons and audiologists. It included engaging with operators in the healthcare system, so from hearing aid referrers through to hospital operators, payers, providers, et cetera, and government. We did that both face-to-face in the U.S. as well as in Europe. Based on that, we have taken that insight back to the boardroom and to challenge the assumptions that are underpinning it and to make sure that we do have the right strategy. I think that's the basis on which we do think the underlying, I've said it before, but the underlying thesis remains. It is a valued therapeutic intervention, which is proven and has great health economics and reimbursement. What we saw during FY '26 were some headwinds, but particularly in the case of the navigation of the care pathway for adults in developed markets, and that's where the focus of effort is going to be.

Chair, I'd like to introduce [ Vikram Malhotra ].

Chair, My name is Vikram, as I said. I'm interested in knowing whether Cochlear would like to diversify into bionic eye implants. I've been reading about it and wondering if it is a good fit into the strategy. Thank you.

Okay. The first thing I'd say is that we are very focused on realizing the opportunity in hearing. We have a great therapy, and it has a lot of growth opportunity in attractive markets. That is our #1 focus, is doing that. Alongside, we do have modest investments and amount of time spent on adjacent therapies. What we focus on are things where we can use our technology. That really is about implantable neuromodulation, and at the moment that doesn't include any therapies in eyes.

Chair, I would like to introduce [ Anton Yopp ].

I have written this one down just to follow up. It is a great product, so good work on that. KPMG has audited Cochlear for decades without the firm itself ever being put to a competitive tender. In the past 12 months alone, KPMG's Australia CEO, Chairman, and Head of Audit have all resigned after an investigation confirmed KPMG staff misused confidential client board papers, including Lendlease's to win audit contracts. ASIC is investigating partners over it, and Dexus has already dumped them. That is not a foreign problem. It is KPMG's Australian audit practice. My question is simple, and I would ask the board to answer it directly. Will Cochlear commit to a competitive tender for the external audit? Yes or no? If the answer is no, please explain specifically why decades of unbroken tenure with one firm, whose Australian leadership just collapsed over the exact type of integrity failure an auditor exists to prevent, is better governance than simply testing the market.

Okay. Thank you for the question. I might unpack a few things and then get to the yes, no.

Sure.

I will get to the yes/no answer. The first thing I would say is that we are confident in the audit quality that we currently have with KPMG, and that is a result of both the professional standards, audit partner rotation, as well as the quality control processes of KPMG and also the oversight by the board. We are comfortable with that, the audit quality. Sorry. Then in light of the external events, we did meet with KPMG's leadership, both here and globally, and they have confirmed that Cochlear's information was not used for any purposes other than the intended purposes and under the right confidentiality protocols. Secondly, that none of the Cochlear team are being investigated with ASIC. That said, the question you ask around audit tenure is a different one. First of all, in terms of independence with audit tenure, you are right. We go through auditor rotation and that is overseen by the Audit Committee. But we have said for some time that we recognize the long tenure of KPMG, and we also recognize the value of fresh eyes, but also recognize the challenge of transitions. While we were going through some transitions, we said it wasn't the right time to tender for the audit. That included the transitions in audit chair, transition in CFO, and also the transition of our finance platforms. Those transitions are completing in FY '27, and that is the right time for a tender, and we have decided that we will go for a tender in 2027. But I do really want to be clear that, that is not a reflection of the quality of the audit services we have had from KPMG, and it is not a reflection of our confidence in the integrity of the audit process and also the value of the rotation that has happened so far. Hopefully that answers your question.

Yes, it does.

Chair, I would like to introduce [ Dan Steiner ].

Chair, thank you. To the CEO, thank you. Both very good quality presentations. However, I want to go back to Epiminder, and the answers I have received are good, but what I have read is that Cochlear are now a 39% shareholder in Epiminder. Is that correct?

It is around there. I can't remember the exact number, but that is about right.

With that high proportion of investment, is there an intention for Cochlear to have a member or a representative on the Epiminder Board because it is now a public company?

Okay. First thing I would say is that the investment made was over a period of years starting 8 years ago, and that shareholding is also a reflection of the contribution made in terms of R&D. Not in any way the cash contribution. I think we currently don't have a member of the Cochlear executive on that board, and that's actually a conscious choice that we want our executives focused on the core business and on their roles inside Cochlear and providing support to Epiminder.

I want to find out whether the information I read is correct, and that is at the IPO, what was the amount of cash that Cochlear paid to receive the 39% or the 30+% shareholder? Was it $100 million?

No. No, it was not. No. The amount invested was significantly lower than that, and it was because we invested the cash at an early stage, and also that we provided in-kind contribution which was through our technology partnership, which was reflected into that number. It was very much lower than $100 million.

If I could move to a second question. Government support for implants and upgrades has changed. Because of my accent, you will recognize why I focused on this. The United States has a Secretary of Health, which is anything but responsible. But the Health Department also has influence over the amount of government investment in hearing and hearing devices. Has the U.S. support for hearing devices, whether they are implants or upgrades, had any significant change in the last year or two?

No. If we look at the U.S. in particular, there has been no change in the government support for Cochlear implants and upgrades in the current administration. The headwinds in the last year were really around the delays in insurer approvals and also friction in that self-managed pathway, not a change in government support.

Going back in history, Cochlear, and I'm certain Dig would understand this, there was a commitment by a Chinese individual, not in mainland China, but in Taiwan, to provide a very substantial amount of compensation for Cochlear implants, particularly in young people. Did that get concluded? Had all of that promise been fulfilled?

I'm actually going to ask Dig to answer that. It might predate me.

Yes, Dan, you do have good memories. That goes back, I think, to about, it might have been 2009 or 2010. But yes, there was a very significant donation from a business in Taiwan to provide implants into China. At that point in China, the only way to get implants was private pay. There was no government support. Implants were provided under that donation just about every year, up until about the last year. So, the donation continues. It has not finished yet, or had not been completely fulfilled. But at the same time, the local support in China, government support for implants, has increased significantly. So that need for that donation has declined, and we've seen the volume that goes through there.

The more recent increase in Chinese support for that, I'm assuming, was influenced by the decision of Cochlear to establish a significant facility in China, and that facility is involved in the manufacture of hardware and has limited impact on the formulation and installation of firmware. I hope I'm dancing around this carefully, Dig.

Let me answer where I think you're heading. China remains a strategically important market for us. Over the last 10 years, we've increased our presence in terms of direct marketing and sales, product availability, and we've also built the factory in Chengdu for about $100 million. And now, I think over 60,000 people in China rely on Cochlear for their ongoing hearing. So it's an important market for us. We also see strong support from the government and their health officials in terms of the importance of hearing in a variety of ways. The changes in reimbursement in the special zone will affect the sales of high-tier products manufactured elsewhere to China. And we are conscious everywhere in the world of where we conduct our research, where we conduct our manufacturing, and where we invest in distribution.

Chair, I'd like to introduce [ Raja Rajagopal ] from the ASA.

My question is a follow-up to the comment you made on the way you locate your R&D and manufacturing facilities. This is not to make a case for India, but I think I brought this up last year as well. There have been quite a few changes around the world, and one thing that's happened in India is the growth of what they call global capability centers. These are company-owned facilities or groups in India, which serve the global needs of their parent companies. It's not restricted to IT alone. I do believe that Cochlear has an opportunity to build one such center at very low cost because of the availability and the possibility of siting such places in India, where you already have some kind of operation. That is one thing that I was hoping that the company would look carefully into. The other reason I'm saying it's worth doing that, given the pressure on your margins, if you notice someone like, this year, Apple announced a 31% increase in their sales in India. This is for the Apple phones. There were long queues. Even if the market is not very big, it's going to grow very rapidly, and it won't be a reimbursed market. I think for the long haul, it may be well worth the company revisiting this issue.

Lots of things in there. But I will start by saying that in all of these issues, we take a very long-term view. And you are right, we look at the long-term potential of, say, India, China, all these markets. And if I think about that in terms of R&D, we also take a very long-term view in terms of the technologies that we are bringing into a pipeline over many years. We have a concentration of R&D in Australia and in Belgium, but we have collaborations with universities, I think over 100 collaborations with universities. I do not know if you have met Jan Janssen, who is the Head of R&D, but I'm sure he would be happy to talk to you during the break about India specifically, and how he thinks about the R&D opportunities there.

Okay. Thank you. My second question relates not directly to Epiminder, but indirectly to the company's strategy regarding R&D. And you said you spend 12% and have been doing so consistently, and that's laudable. It's just that I feel that the risk and the way the company managed its investment in Epiminder gave the company a sudden need to write off a huge number, relative to its P&L of close to $100 million. So my question is not the fact that it happened, but pharma companies, the ones I used to work in, or in Unilever, we used to manage this quite carefully. And when you accumulate what happened in Epiminder, that's why you had a loss. Whether it was in kind or in cash, it really doesn't matter. It just built up till the IPO, and then you had to knock it down and take the write-off. So my question really is, what impact this will have in the way you manage your innovation fund and portfolio? There must be some, because you can't have this happen again, surely. Okay.

Let me try again at explaining with Epiminder. The total cash and in-kind contribution was significantly less than the number that was being held. The valuation that we record at the end of each year is based on an assessment of the value of the business, not our contribution to it. And so back to the, if you look at the total, the number we do talk about is the total amount spent on the innovation fund over a 10-year period is about $200 million, and a significant amount of that was concentrated in one other investment. So it really is these relatively modest cash amounts, but the valuations going through our accounts each year reflect the increase in value of that company as seen by the auditors. I think what it means is that consciously, we look at the underlying net profit, excluding the increases in those valuations and excluding the decreases in those valuations. We want to see it as long-term investments, small amounts of cash and in-kind in each one for long-term strategic value.

That is a good explanation, but still, when it happens, when you take a bath like you did this year. It's very hard on the investor or the community to understand that. It's just that I thought it might be worth reflecting on how you manage your investment fund, and your investments in R&D in the future. Maybe worth looking at, just so that you don't have these sudden surprises.

Okay. We will take that on notice. Thank you.

Chair, I would like to introduce [ Kerry Bible ].

I've been a shareholder in Cochlear since the early days and have been very happy with it because it is a very good company and it is good quality and you are doing something good. However, I am a bit disappointed this year. Not only has the share price gone down, but your net profit has gone down 22%, yet your sales revenues was 1% higher, which means you seem to be working harder for less profit. You said in your report that the China reimbursement is down. The first part of the question is, are you doing anything to try and improve that? Have you made something to the government to try and do anything about it? Have you been given any positive feedback with it? With the TICI expansion, which looks really good and I think that is going to be excellent for most people, is there a further reimbursement for that? Because I would imagine it's going to be more expensive and governments would need to increase their reimbursement, and that may be a negative for people adopting it.

Okay. I think there are 3 thoughts in there. The first one around the growth in revenue and working harder for lower profit. I hope that I explained previously the impact on gross margin, which comes from the lower volume, and also the impact on operating expenses, which was primarily due to our choice to restructure the business. It is one-off choices around restructuring the business to set us up for that longer term, not even longer term, set us up with a lower fixed cost and more scalable and efficient business. I hope that explains the gap between revenue and earnings growth. In terms of China, we have a team in China who are always in contact with the relevant authorities in China and regulators and putting forward the case for reimbursement. We will see how that plays out in the special zone, but we've made our plans according to the current reimbursement for the special zone, which has now been taken away for the high-tier products. In terms of TICI, we do see TICI, as Dig said, as a real opportunity to grow the market. It addresses some of the barriers to adoption of TICI. We are also conscious that it will only be a valuable product in growing the market and reaching more people if we do have a number of characteristics to the product. Among them is having a cost-effective way of manufacturing that and being able to do it at scale. Greg and his team with Jan are working very hard on how to make sure that what we end up with is a cost-effective product.

Chair, I would like to introduce [ Miklesh Sharma ].

Good morning, Chair and all the board. I've been a great fan of Cochlear for a very long time, when you were in Lane Cove. In fact, I missed a job. I was a preferred 2 candidates. I was one of them but I was working at Sydney Uni at that time. But the technology that you had in those days was quite basic. The way it grew, it set up my mind that, yes, this is going to grow. That's why eventually I became a shareholder. It is going more than 40 years now. I think you used to be on Lane Cove.

That's right.

Yes. So that's where I went for the interview. Now I'm just a shareholder, not following the technology, but, as some of the investors have said, that this impact we have had recently, how long will it take the company to recover from that? Whether it was investment in Epiminder or are there other competitors who are also working in parallel that you are aware of, who can actually challenge us with the new technology that Nexa or the TICI are going to offer in the marketplace? That's my question.

Great. There's a lot in that one too. I would start by saying, repeating the thought that we are still confident in that long-term opportunity. The 5% current penetration of adults in developed markets means that there is significant opportunity just in those developed markets. We're also confident in the market leadership in terms of the technology. We still have around 70% market share in developed markets. And the launch of Nexa has had 95% adoption of the new technology, as well as a price increase and retained market share in most markets. So those fundamentals of the business are still strong, and we're also confident in the product pipeline that Dig has been talking about around TICI and DE, as well as the adoption of Nexa. So those fundamentals are there. That said, the return to those growth paths depends on building more consistent pathways for adults in developed markets to reach a Cochlear implant, where I think we are quite clear that, that is the biggest challenge ahead. The 2 ways we do that, one is around the mechanisms we already have for engaging with potential recipients to help them on that pathway to receiving the right care. We're clearer about the need to double down on those, and at the same time, we're clear about the need to move towards the medicalization because that is the one which will have the biggest long-term driver on growth in the market. How long it will take to return to those growth paths is harder to determine. We are also conscious that we need to deliver on the forecasts that we set for the year. We have been very thoughtful about the fluctuations that we see in demand and not assuming any strong rebound in that self-navigated pathway, and instead thinking about what we see in the supported pathways. It's interesting that when we talk to most shareholders, it is that growth in developed markets which they see as the biggest driver of long-term growth. I think Epiminder is seen in the context of those small investments for long-term value and the fluctuations in value that'll happen along the way. The main focus is about restoring growth in developed markets.

Are there any other players or competitors who are working on that? I just wanted to comment on one anecdote. I went to another show, Techno, some other show, and there are small companies like Nuheara. You must have heard about that. These people say, "Cochlear is not required anymore. They are so expensive," and this and that. We are offering very competitive products. Although they are only working on partial hearing rather than the total hearing products or devices that we provide. But there are so many other companies, which I'm not sure why they think that they are sort of trying to compete with Cochlear. But when you hear these things, as an investor or even shareholder, or even in technology from technical perspective, it shakes you that, what's the reason? And how this technology is unique and implemented for total loss of hearing. What other competitors are coming up?

How do we look at competitors?

Yes.

Can I summarize how we think about the competitive landscape? We have 2 strong competitors. We have 70% market share in developed markets, but 30% belongs to those other two. We treat those competitors seriously. We look carefully at what they do, and we make sure that we are going to have more competitive products over time, and also that we build the relationships in the market and with the clinicians that lead to long-term trust and sustainable growth. That's in the traditional. The other thing, we do look at emerging technologies, and Jan has a team that focuses specifically on what are the emerging technologies that will either create a threat to the existing Cochlear environment or equally might be an opportunity for us to bring in. As a board, we review that once a year. We look through that lens of the broader landscape of technologies, as well as more specific near-side technologies. We take all of those competitors seriously. We look at the long-term threats and opportunities, but we are comfortable with the current products and the pipeline, and I think that is best demonstrated by the current market share as well as the couple of awards that were granted recently.

Chair, I would like to introduce [ Antoinette Emmanuel ].

Good morning. My question relates very closely to the previous question that was just asked. But as TICI has already been launched in Europe by a competitor, what is the expected impact on Cochlear's global market share now that TICI is already available in Europe?

Yes, so if I talk about the competitor MED-EL's approach to TICI is quite different to ours. We're focused on developing a product which will grow the market. To do that, we're conscious of having a product which has a familiar surgery, which means that it doesn't increase surgery time. We're also conscious of having one which does have noise canceling, and we're also conscious of making sure that the product's scalable and cost-effective. So that's the product that we are focused on bringing to market. In the meantime, MED-EL have announced their product in Europe, and there are 2 different countervailing factors that will go on. One is that it raises awareness of the therapy, but the other is that it might shift towards MED-EL's product, noting that the MED-EL product has limited availability and a high price and a long theater time. We'll be monitoring that carefully.

Could I just add to that a little bit? I have heard about the MED-EL product, and I've heard people speaking about it, and are our health professionals in Australia up to date with how to answer a question about TICI?

Yes, we have communicated carefully with all our clinicians to understand what we think makes a successful, a good TICI implant, and what we are focused on delivering. And they will make their own choices, but we have definitely communicated with them our approach.

Chair, I would like to introduce [ Ray Trenerry ].

Good morning. It has been answered, I guess, just previously to when I came up here about the TICI product. I think it's a tremendous idea. Now I was going to ask, I just heard in passing that there was a competitor doing similar sort of things, which has come to light as being MED-EL. Since it is fully internal, like a pacemaker or something, when you come to do upgrades and replacements and that means you have got to go in for surgery again. Whereas, if it was the external one, just plug in, plug out.

It's a great question, and the answer is no. Because the idea of our internals and Nexa is that it is upgradable.

Well, how do you upgrade if it's already stuck in there?

What I don't know how much we want to get into the specifics, but it will be upgradable. If you think, we will need to have a way of charging that device. Along with that charging comes an opportunity for upgrading as well.

Okay. Yes, because it has come to light, in Europe especially, elective surgeries, waiting times have gone through the roof. This is like an elective surgery, as is all Cochlear implant type stuff. So it is okay identifying people who need the product and also cases of upgrades and that, but the doctors just are not there to do it anymore because it has been put on the back burner in terms of priorities.

What I would say is that as we work on increasing the consistency of referral, we are also conscious of working with the clinicians in terms of their capacity, and that includes audiologists as well as surgeons. So ensuring that they have capacity, and that also relates to the priority that Cochlear has in terms of surgical capacity. So we're very conscious of working on all of those.

Okay. Another question. We've got a great product, and we have got an obvious market, and it is growing, and it is a big market. Most of it has not been served yet. Then we say, the service chain here of people identifying themselves as being necessary, then going to a practitioner who then says, "Yes, you need a Cochlear implant" or something like that. Yes, so that whole going through the steps to actually acquiring a Cochlear implant or something similar. I was thinking, and I guess you have already thought about it, too, but say with macular degeneration, have a simple test. You put up a grid, and you put that on your fridge. If that grid looks like it is all mishmash, well, then you better go get yourself checked out for macular, right? Can we have one or 2 simple tests that the public can do themselves and say, I do not know, if a bomb went off next to you, would you hear it?

Yes.

They are very simple, straightforward tests.

Yes.

Even if the recipient, even the person who could be a recipient is not aware of it, my member in their family might say, "Well, that's you. Go and get yourself checked out." When we get to the practitioner, who may not be a specialist in audiology or whatever, he also has a couple of maybe more nuanced tests, which again, will pick up the worst cases. It will not pick up everybody, but it will pick up the worst cases. You grow your market, and at least that way you progress the steps up. Just simple tests, which, yes or no.

Yes.

Then you get there because, well, you follow the worst-case-scenario type tests.

We like the way you think. It is also the way we think. Dean, our Head of Global Marketing, is sitting in the front row and smiling and nodding, and that is very much part of the approach to creating this standard of care is having simple tests that people can use for their own self-referral. Then particularly when people get to a clinician, what's the simple test that indicates you should do a referral to a CI clinic? It's not a diagnosis. It's a referral trigger, and it's exactly that. The work that is going on in direct to professionals, so working with professionals, particularly in the U.S., is around exactly that idea of what are the referral triggers and where do you send that person?

You do not have to pick up everybody.

No.

If you pick up 10% of the people you want to pick up.

You don't.

That is the market.

It's not a diagnosis. They might not all need a CI. But making sure that they go on for further assessment. Yes.

Yes. To me, it is a sales job, okay? Between having people who need the product and having a product, how do you sell it to the people in between to push that product at them?

Very much that. Thank you.

Just one comment.

Of course.