Cochlear Limited

Thank you for standing by and welcome to the Cochlear FY26 Results Analyst and Media Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Digg Howitt, CEO and President. Please go ahead.

Good morning, everyone. Thank you for joining us. Let's get underway. So in FY26, 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 FY26 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 Nexus system which I'll cover in more detail later. and when market growth slowed we acted quickly to optimise our cost base lowering fixed costs to fund investment in growth programs and Sarah will talk to this later. We accelerated work to medicalise 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 products are very good and adult penetration remains low. In FY26, overall cochlear implant systems were up 5% and revenue was flat in constant currency. This was due to a high mix of lower price sales in emerging markets, especially in China. We'll talk a bit more to that. The first two developed markets where cochlear implant revenue was up 1%. The launch of the Nucleus Nexus system, the world's first and only smart cochlear implant system with upgradable firmware, was very well received. Adoption has been strong, with the Nexus 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 US, revenue increased 4%. Markets here 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 healthcare 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. There's a number of examples I could give, but I'm only going to give a few. This includes the UK, 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 theatres. And we lost some markets here in Germany, largely the result of implementing a price increase with Nexa shortly before reimbursement rates were lowered. Asia Pacific grew 7%, a strong performance across the region, particularly in Australia and Korea. In Australia, where we've built our referral pathways, surgeries grew 15% in private hospitals where we helped candidates navigate around public system waiting lists. 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 Nexen and in Korea we also expanded our professional customer base which added to growth. Now onto 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 the detail of adult growth. with a focus on the US to illustrate the sources of growth and how our strategy addresses those. There are broadly two ways in which candidates get to surgery. There's growth driven by actions we take to lead people to surgery, primarily through our direct consumer activity. And there's an underlying level of market growth driven by the ageing 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 one-third of surgeries in the US. These cochlear-supported surgeries grew 10% in FY26, below our historical average, but still strong growth in a more challenging environment. In what we might call the self-navigator pathway, The referral path is inconsistent and the majority of people who get surgery find their own way to a cochlear implant clinic. A small number get a direct referral to a CI clinic. Self-Navigator Pathway has historically provided mid to high single digit growth and it actually declined in FY26. So our experience in the US tells us three things. 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-navigator 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-navigator 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-navigator pathway. In the UK, educating referring audiologists through direct engagement has doubled high quality referrals to cochlear implant clinics 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 US, clinics with established referral networks continued their strong growth in FY26, while those without them didn't. So to improve referrals in the self-navigator pathway, we now have pilot programs in four US 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-navigator pathway, building sustainable referral networks. We have evidence these interventions work from Australia, UK and the US and we're now implementing them systematically across major developed markets. So turning this self-navigated pathway into a professionally supported pathway is a critical outcome of medicalising hearing loss. So let's go on to look briefly at the process of medicalising hearing loss. Our objective is to build a professionally supported referral program. We've seen medicalisation fundamentally transform treatment patterns in other conditions. As an example, obesity shifted from being viewed as a lifestyle issue to a recognised medical condition with clear treatment pathways and therapeutic interventions. Closer to home, paediatric cochlear implants became medicalised nearly 20 years ago. In the 1990s, parents of children born with hearing loss only had a self-navigator pathway to get access to cochlear implants. Today, they are the standard of care. Over 80% of children in most developed countries will get one or two 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. The 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 We're working with partners to have hearing loss defined as a medical condition and establishing a vital sign for hearing loss in a simple, standardised 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, EMT 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 policy makers and payers to ensure appropriate reimbursement as hearing loss becomes recognised as a treatable medical condition rather than an inevitable part of ageing. So this medicalization 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 Nexa. Fi26 was the successful launch of the Nexa system, our next generation implant platform. Nexa offers benefits today. Improved 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're actually 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. SmartSync provides both recipients and audiologists with a better experience. And SmartNav R3 reduces surgery time and provides more information to surgeons. So there are benefits for all of the stakeholders from the Nexus system up front. And Nexus builds on our long-standing advantage in electrode design. Our slim audiola electrodes sit closer to the auditory nerve with more electrode contact points than competitors' devices. Clinical evidence demonstrates that this gives better hearing outcomes faster than other electrode designs. Nexa has the potential to take this further in two ways. First, it can measure the health of an individual's auditory nerve and second, it can use that measurement to customise stimulation patterns to each patient. In clinical studies, recipients using new coding strategies show significant preference for music quality This combination of neural health measurement and flexible stimulation has the potential to enable personalised outcomes for every recipient, extending our competitive advantage. And next is the platform for two very important implant developments that will drive growth. Drug-eluting electrodes aimed to preserve residual hearing, removing a barrier to surgery, and totally implantable devices address cosmetic concerns and more importantly an able 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 US 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 Ossia processor in FY27 will enable us to regain that share and drive market growth. The new processor has FDA approval and CE mark and 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 OSSE recipients to buy replacement processors. It's the first upgrade opportunity for OSSE recipients building our services revenue for acoustics. And now I'll hand over to Sarah to go through the financial results.

Alright, thanks Dick. Good afternoon everyone. Let's go through the financial statements, starting with the P&L. Sales revenue was up 2% in constant currency. Now, Digg's taking 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 FY27. At the start of FY26, our gross margin assumptions incorporated three 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 next 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 FY27. These three factors were all built into our original budget and guidance assumptions of 74% first March. But a couple 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's special zone reimbursement. These changes affected our gross margin in two 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 FY27 plan. In addition, the stronger Australian dollar reduced gross margin by 0.6 percentage points. Based on FX rates at the start of FY26, 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, FY27 guidance has gross margin staying flat. Now there's two reasons for that. First, we assume the FY26 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 FY26 manufacturing variance and we're moving further up the next in 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 FY25 and the partial payout in FY26. R&D expenses increased 15% to $323 million which is 14% of sales revenue up from 12% in FY25. This reflects our commitment to key R&D projects and to development of our promise and service pipeline, which underpins our competitive position and growth opportunities. This investment this year supported the progress that Digg 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 with 66 million post-tax taken below the line in FY26. 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 FY27 to complete the program, which remains on track for FY27 completion. Total cost for completing the six-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 non-cash write-down of our investment in EpiMinder. Underlying net profit of $322 million reflects a net profit margin of 14%. The lower 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 capabilities. These changes are permanent, not once off. As a result, we've cut fixed costs two 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 FY27. We have work ongoing in FY27 and FY28, 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 Digg 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 FY25, and we're committed to keeping R&D at 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 on wines will continue over this year, although we expect to see an increase at the half before decreasing over half to. That's so we support readiness for the remaining go-lives of our manufacturing and ERP systems. We also made sure our refills normalized following the next launch that was at the end of FY25, 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'll also see the change to investments and other financial assets, which reflects changes in the value of our innovation fund investments, with the write-down on 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 McQuarrie manufacturing plants. Now, let's talk about FX a little bit and the impact on net profit. In FY26, foreign exchange contract gains gave an after-tax benefit of $9 million versus a $12 million after-tax loss in FY25. Taken together, that makes the $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 FY25. 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 six-month tranches over two years, weighted toward the first 12 months. We disclose 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 to $30 million in gains to help offset the FX impact of a currently stronger Aussie dollar versus the FY26 average rates. The FY27 guidance that Digg will take you through next is based on the US dollar at $0.70 and the euro at $0.61 versus the Aussie dollar. Stronger Australian dollar than the FY26 average. Net of the foreign exchange contract gains just discussed. This is expected to reduce FY27 underlying net profit by about 10% and it's factored into our guidance. We have a net profit sensitivity of around 2% for every one cent change in the US dollar or the euro. All right, back to Dave for the outlook.