Cochlear Limited (COH) Earnings Call Transcript & Summary

Good morning, and welcome to the 2022 Annual General Meeting of Cochlear Limited. I'm Alison Deans, Chair of Cochlear, and it's my pleasure to welcome shareholders attending today's meeting in person here at Cochlear headquarters in Sydney and also those attending online. Thank you to Jack Barnes for sharing his experience as a Cochlear recipient. I'm advised by the Company Secretary that we have a quorum of members present, and accordingly, I now declare the meeting open. On behalf of the Board, I'd like to acknowledge the traditional custodians of the lands on which we meet physically today, the Wallumattagal Peoples of the Darug Nation. I'd like to pay respects to all 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 and acknowledge today's aboriginal communities who are the custodians of these lands. Today, I'm joined by our CEO and President, Dig Howitt; our Group General Counsel and Company Secretary, Ray Jarman; Director, Yasmin Allen, who is standing for reelection today and will address the meeting later; Glen Boreham, AM; Sir Michael Daniell; Andy Denver; newly appointed Director, Michael del Prado, who is standing for election today, and will address the meeting later; Christine McLoughlin, AM; newly appointed Director, Karen Penrose, who is standing for election today, and will also address the meeting later; and Professor Bruce Robinson, AC. Also attending today is Julian McPherson from KPMG, our external auditor. Julian will be available to answer questions about the audit of the financial statements later in the meeting. The notice of meeting has been sent to all shareholders. You can also find our notice of meeting together with our annual report and online meeting guide on our website and at the top of the online AGM platform. The prepared AGM speeches from the Chair and the CEO have been released to the market. Before moving to these addresses, I'll run through the question and voting procedures for the meeting. Firstly, could I ask that all those in physical attendance today ensure your mobile phone is switched off. As is usual, we are only taking questions from shareholders today or their properly appointed representatives. Questions submitted prior to the meeting will be addressed as part of my address or otherwise at the relevant item of business. Any shareholder present in person wishing to ask a question, please approach the microphone in the center of the room when prompted at the relevant item of business and wait to be introduced before asking your question. To afford as many shareholders as possible the opportunity to speak, we ask each shareholder to speak briefly and ask all their questions on the relevant item of business at that time. Anyone in attendance who requires assistance moving to the microphone, please let us know. Shareholders attending the meeting online can submit written questions at any time and do not need to wait until we reach the relevant item of business. We encourage you to submit your written questions as soon as possible, noting the resolution it relates to. To ask a written question, select the Q&A icon, then select the topic your question relates to, type your question into the chat box and press send. I should read my own instructions. Written questions sent via the online meeting platform will be moderated to avoid repetition. And if questions are particularly lengthy, we may need to summarize them in the best in the interest of time. Only questions relevant to this meeting will be answered, and we will not answer any inappropriate questions. Shareholders attending via the online meeting platform will also have the opportunity to ask questions via the telephone line. Shareholders on our telephone line may notify their intent to ask a question by pressing star 1. Written questions from shareholders online will be read aloud by a Cochlear staff member, and all written and verbal questions will be addressed by me in the first instance. I may refer a question to another person for response, if I consider it appropriate. We will address questions from shareholders physically present first, followed by questions from shareholders online and questions -- and then any questions from the telephone line. I also advise that there may be a slight delay between the broadcast and what you're watching. So please remember this, if you want to ask a question, over the telephone or online. I will call for a poll on each item of business set out in the notice of meeting. The directors' voting recommendations are set out in the notice. The poll will remain open for 5 minutes after the close of the meeting to allow you to finalize your votes. In order to provide enough time to vote, polling is open now, and I encourage voters -- shareholders to vote early. If you're attending in person and you need assistance completing your voting card, then please ask one of the representatives of Computershare present. There will be time to complete voting cards towards the end of the meeting. However, you may complete your voting card and cast your vote at any time from now until the poll closes. If you're 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 direction, a tick will appear to confirm receipt of your vote. There's no need to press a submit or send button as the vote is automatically recorded. You can change your vote up until the time I declare that voting closes. If you experience any difficulties with the online platform, the helpline number to contact Computershare is +61 39 415 42 024. Any properly appointed proxy who has been given discretion on how to vote should vote in the same manner. Any appointed proxy who has been directed to vote in a certain manner and has no discretionary votes to cast does not need to vote as these votes will be automatically counted in accordance with those directions. The results of the poll will be released to the ASX after the meeting, and we will also post the results on our dedicated AGM web page on the Cochlear website. A representative from Computershare will act as the returning officer for the purposes of conducting and determining the results of the poll. I'd now like to move to my address. Ladies and gentlemen, over the past year, we continue to make great progress towards our goal of helping more people to hear. We delivered record sales revenue and growing profits. We continue to invest to drive growth over the short, medium and long term with our focus centered on three areas: investing in research and development; building awareness and access to hearing solutions; and developing our people. Importantly, we made excellent progress across all aspects of our value creation model. As you know, our mission drives the organization and focuses the strategy. In everything we do, we aim to support and empower our customers to connect with others and live a full life. We invest in building awareness of implantable hearing solutions and transforming the way people understand and treat hearing loss. And we innovate to create products and services that deliver a lifetime of hearing outcomes. We achieved these outcomes by building on our key strategic strengths, market-leading innovation capabilities, which work in conjunction with a global network of experts and collaborators. The strong and trusted relationships we've built with our candidates, recipients, professional customers and payers and our employees who are central to how we deliver our strategy and create value. I'll now touch on some of the many highlights of the year. At our core, we create value by contributing to a healthier and more productive society. We do this by building societal awareness of the importance of hearing health and advocating for improved access to implantable hearing solutions. This year we helped 40,000 people hear with one of our Cochlear or Acoustic implants. We've been able, for the first time, to attribute value to the societal benefit this creates. Independent economic research published in 2021 estimated the cost benefit of cochlear implants from improved health outcomes, educational cost savings and productivity gains. From this research, we're able to determine that for recipients in planted this year alone, our business provided an estimated net societal benefit of more than $6 billion over the lifetime of these recipients. We're very proud of the contribution we've made. We also recognize the importance of quantifying this benefit in convincing payers to expand funding for implants. Over recent years, we've talked about our long-term goal to support the development of a consistent process for diagnosing, referring and treating adults who are eligible for cochlear implants. This goal is supported by the growing recognition that hearing is an essential part of healthy aging. And the treating age-related hearing loss is economically valuable. Over the past few years, there have been some important developments towards this goal. In 2020, a global consensus statement was published defining the minimum standard of care for treating hearing loss with a cochlear implant. In 2021, the World Health Organization built on this, providing guidance for establishing evidence-based programs for hearing screening aimed at improving the identification and treatment of hearing loss. And in 2022, we were excited to see establishment of the Living Guidelines initiative, an international task force of over 50 leading cochlear implant professionals, academics and cochlear implant users tasked with delivering clinical guidelines. These guidelines should enable early identification and referral for cochlear implant candidates. In September this year, the U.S. public payer, the Center for Medicare and Medicaid Services, expanded its payment coverage to fund cochlear implants for people with severe hearing loss. As a result, this funding will now be better aligned to the FDA indication criteria. These steps are individually small but important, and combined, these initiatives continue to improve awareness and access for adult candidates over the coming years. Moving now to our people. Building a strong organization with thriving people is essential to our value creation model. We have an engaged, capable and high-performing team. It's a diverse workforce with close to 400 -- 4,500 people in over 30 countries. Their knowledge, expertise, passion and focus on excellence is key to achieving future success. We're pleased to report overall engagement remained strong this year at 80%, which is well above the global engagement benchmark of 68%. We're particularly pleased to see that 94% of our people understand how they personally contribute to the satisfaction of Cochlear's customers. And over 90% feel proud to tell people they work at Cochlear. During the past 12 months, we've implemented our first global share purchase plan, and we're pleased to report that it had an uptake of 51% from eligible employees. As our workforce continues to expand, we work hard to intentionally shape the culture that will enable us to grow and deliver for our customers in the future. By the end of June, all senior leaders and culture champions had participated in our Culture Conversations Learning Series. This series is designed to support our leaders in achieving our desired culture and the program is now being cascaded through the organization. Achieving gender equality is an important element of our diversity and inclusion strategy. By year-end, we achieved 41% female representation among our senior leaders. And at Board level, we reached 33% female directors by year-end. These improvements in female representation have been supported by focused activities in the areas of recruitment, personal development and succession planning, all with the aim of strengthening our pipeline of female leaders. And finally, I'd like to highlight changes to the Board. Over recent years, we've continued our process of Board renewal, adding new directors with diverse perspectives and relevant experience while maintaining continuity and corporate knowledge. Michael del Prado joined the Board in January and brings valuable perspectives from 30 years' experience in leadership roles in the medical device industry. And as a purpose-led individual, he's a strong cultural fit with Cochlear. Yasmin Allen is standing for reelection today for what will be her final term on Cochlear's Board, having been an invaluable Director for over 12 years. Karen Penrose, who joined the Board in July, will be working closely with Yasmin over the coming months to transition into the role of Audit Committee Chair. Karen is a highly respected company director at an experienced Audit and Risk Committee Chair, having served on the boards of a number of ASX 100 companies. She brings valuable financial expertise to the Board. I'll now hand over to our CEO and President, Dig Howitt, who will talk to progress on our other value drivers.

Thank you, Alison, and good morning, ladies and gentlemen. It's good to be here today. And as Alison said I will talk through the other three value drivers and our progress. So we do create value for our recipients by innovating to build a market-leading portfolio of products and services that support a lifetime of hearing outcomes for recipients. We've achieved this through a multi-decade philosophy of investing to grow and an unwavering commitment to innovation. And our commitment to innovation stems from Professor Graeme Clark's work in developing the first multichannel cochlear implant in the 1970s. Our market-leading technology underpins our global market share of over 60%. And in financial year '22, we invested over $200 million in R&D, representing 13% of sales revenue. And I'll now touch on a few of our new products. The Cochlear Nucleus 8 Sound Processor seen on screen here, achieved CE mark approval in August 2022. It's a very, very exciting new offering, building on the market-leading features of the Nucleus 7 Sound Processor. And with our sound processors, we aim to make our devices smaller, smarter and better connected. With Nucleus 8, we have achieved this. Nucleus 8 is 15% smaller and 13% lighter than its predecessor Nucleus 7. It's smarter, designed to help recipients hear conversations more clearly and easily, particularly in noisy situations, and it's better connected, ready for the next-generation Bluetooth LE audio. So recipients will be able to experience the proven benefits of streaming audio directly to the sound processor, as we heard from Jack earlier, but be able to do this in more places and from more devices than ever before. Moving on to Cochlear Bahar 6 Max Sound Processor for our acoustic portfolio. This has experienced strong demand since it was launched. It provides a fitting range of up to 55-decibel sensorineural hearing loss in the same small size as the current 45 BB devices. With longer battery life, and direct streaming from both Android and Apple devices continues our theme of connectivity. And in late 2021, we launched the Cochlear Nucleus 7 and Nucleus 7 SE sound processor across emerging markets. These products provide many of the benefits of the Nucleus 7 technology platform for more people around the world. And very importantly, looking forward to coming years, we continue to invest in our product pipeline, and we're very excited about the development pipeline. We have a full suite of new products and services being developed that aim to improve sharing outcomes even further and to integrate even more seamlessly into the lives of our recipients. And we also create value by empowering our customers. We aim to improve the well-being of recipients by providing them with the latest sound processor technology, such as Nucleus 8 and easy-to-use aftercare to support a lifetime of hearing outcomes. And we invest in education and clinical support tools to ensure our professional customers have convenience and confidence in caring for implant candidates and recipients. We're the first company to offer app-based remote care solutions for both acoustic and cochlear implant recipients. And the cochlear remote check is a great example of this. Cochlear remote check with cochlear implant recipients can complete hearing health check through the Nucleus smart app without visiting a clinic, and with Cochlear Remote Assist, enables live video appointments for recipients with their acousticians. When we look to the future of care, we believe app-based remote care solutions have the potential to make care more convenient for recipients while improving clinic efficiency for our professional customers. These products will, however, take time to roll out as they need to be incorporated into clinical workplace. And finally, we aim to deliver sustained value. To deliver consistent revenue and earnings growth over time, we balance maximizing spending to grow the market with our investment to maintain our competitive position. We must also ensure that we have agile, efficient and environmentally responsible business processes. This year we have outlined our net zero emissions targets, targeting net zero emissions from our operations by financial year '30 and across our entire value chain by financial year '50. We have already transitioned all of our manufacturing facilities to 100% renewable energy. Now moving to our financial results for '22. We did deliver strong financial results in financial '22. Sales revenue increased 10% to a record $1.6 billion, driven by strong demand for acoustic implants and sound processor upgrades. And importantly, with all regions and product segments tracking above pre-COVID levels. As a result, our financial position continues to be strong. Underlying net profit increased 18% with operating cash flow sufficient to fund investing activities and capital expenditure whilst delivering dividends to shareholders. And in April, we agreed to acquire Oticon Medical for an Australian dollar equivalent of around $170 million. This followed Demant's decision to exit its hearing implants business. And very importantly, as part of this transaction, we have committed to providing ongoing support for Oticon Medical's base of approximately 75,000 hearing implant recipients, which includes both cochlear and acoustic implants. This acquisition will enable us -- will provide us with greater scale and enable us to increase our investments in R&D and market growth activities. It is subject to regulatory approvals, and we are targeting completion at the end of this calendar year. As we look forward to the future, we remain confident of the opportunity to grow our markets. There remains a significant unmet addressable clinical need for cochlear and acoustic implants that we expect to continue to underpin long-term sustainable growth of the business. Our clear growth opportunity and strategy, combined with a strong balance sheet, mean we are well placed to create value for our stakeholders now and over the long term. And we have provided earnings guidance for this financial year, FY '23 at the release of our results in August, outlining how we expect to increase underlying net profit by between 5% and 10%, and that's an increase of 8% to 13% when adjusted for the increase in cloud computing related expenses, and this continues to be the case. We expect to deliver strong sales -- some growth in sales revenue and around 18% underlying net profit margin before cloud computing expenses. Net profit is expected to be weighted to the second half of the year. We expect trading conditions to progressively improve across the year with intermittent COVID-related hospital or region-specific elective surgery restrictions likely to continue. The release of Cochlear Nucleus 8 Sound Processor is expected to contribute from the second quarter -- from this quarter as commercial availability starts in both Australia and European countries. The new processor is expected to be launched across other markets by the end of December, obviously, subject to the timing of regulatory approvals. Our launch costs are expected to be primarily in the second half with -- sorry, in the first half with sales revenue weighted to the second half, and we'll continue our investment in our growth -- in R&D and market growth activities to support the long-term growth of the market. As has been the case in the past few years, a more material disruption from COVID or hospital capacity restrictions that significantly impact sales remains a risk factor that does not form part of our guidance. Also, the proposed acquisition of Oticon Medical does also not form part of our guidance. And finally, the Board maintains a dividend policy that targets a $0.70 payout of underlying net profit. Thank you. And with that, I'll pass back to Alison.

Thank you, Dig. I'd now like to move to consider the formal motions of the meeting. Resolution 1.1 deals with the receipt and consideration of Cochlear's financial report, directors report and the auditor's report for the financial year ended 30th of June 2022. They are incorporated in the 2022 annual report, which has been sent or made available to all shareholders. It's also on our AGM website and available today at the top of the online platform. There is no requirement for a formal resolution on this item. However, it is the company's practice to do so. The resolution is now displayed on the screen. The company has received direct votes and proxies in relation to the resolutions before the meeting today. I intend to display the number of direct votes and proxy votes held for and against each resolution on the screen before any discussion on each resolution. I intend to vote all available proxies for the Chair's discretion in favor of the motions. I now ask the direct and proxy votes be displayed on the screen. Thank you. This item provides shareholders with an opportunity to ask questions on the company's financial and general performance. Shareholders have already raised a number of questions directly with the company, and I'll answer these shortly. Any shareholder who has another question or comment on these reports or on our business in general 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 auditor, including questions on the conduct of the audit and the preparation and content of the audit report. We'll start by addressing questions that have been submitted by shareholders prior to the meeting. We've collated similar questions together to enable me to respond to the key themes.

Firstly, we have some questions regarding Cochlear's exposure to China given political tensions with Australia. We have recipients in over 180 countries and we are committed to their long-term support. We've been working in China for over 25 years. And today, there are more than 40,000 people in China, predominantly children that depend on Cochlear for their hearing, and there are many more who would benefit from a cochlear implant. Our experience is that China recognizes the importance of treating hearing losses in supporting a healthy, productive and equitable society. In recent years, we've continued to invest in this fast-growing and significant market, building stronger direct presence in sales and marketing and expanding our available product range. We've also invested around $90 million in a manufacturing facility in Chengdu. To date, we've experienced very good local support in getting building approvals and licenses as well as product approvals. With respect to the current political tensions between Australia and China, we have a good relationship with our various partners in China, and we have not seen any impact on our business. That said, as in all our activities, we consider different scenarios and we build resilience into our operations. We've also received some questions related to COVID and surgeries, with some questions about whether older implant candidates are now hesitant to have cochlear implant surgery. There was some concern that older people in particular, might be more hesitant to have surgery following the shutdowns but this doesn't seem to have been the case. We've seen the mix of surgeries has quickly returned to the same composition that we've seen before COVID. Following the recent Optus hacking incident, we've been asked about what cybersecurity precautions Cochlear has made. We're very conscious that the cyber landscape is evolving rapidly and we're conscious of the potential threats this presents. In response, we continue to invest in strengthening our cyber defenses in a systematic manner. We know that the cybersecurity of our product is essential to the reliability, safety and integrity of our devices. To support this, we have a range of security measures embedded in our R&D, manufacturing and servicing processes. At the same time, our regulators are also aware of the cyber issues related to medical devices. And as a result, cybersecurity testing has become an increasingly important part of our product approval process. Cybersecurity is also a priority in defending the integrity of our business operations. We have an integrated program of cyber defense, led by our Chief Information Security Officer and his team of professionals. This program continues to strengthen our defenses across a range of measures and importantly, we rigorously and regularly test our defense against cyber attack. We also partner with external organizations and this allows us access to the specialist expertise needed to keep pace with the evolving cyber landscape. We've been asked where the Cochlear makes any political donations. In compliance with our global code of conduct, Cochlear does not make political donations. We do engage with political and government stakeholders when legitimate and reasonable opportunities arise, and this includes paying fees for attendance at events such as conferences, policy workshops and roundtable discussions. Further information on our public policy engagement is set out in our sustainability report which is available on our website. And finally, there were some questions about sustainability and why we would be pursuing net zero emissions targets. Starting in broad terms, we're cognizant of the need to meet expectations of our stakeholders across a range of issues, particularly where our activities have an impact on society and the environment. We continue to invest in understanding and managing these issues as well as improving our communication on them. In 2022, we undertook a materiality assessment to confirm Cochlear's most relevant ESG topics. This process included a market scan of key sustainability trends and assessment of regulatory and other risks, benchmarking against industry peers and stakeholder engagement. This process confirmed that carbon emission reduction is a priority topic for Cochlear. Our carbon footprint is relatively small, but decarbonization is an important topic for all companies and we need to confirm and communicate that we will play our part. Our net zero strategy is a proportionate response given the level of importance of this issue to our stakeholders. It's consistent with peer initiatives, and importantly, it's aligned with our long-term objective to deliver sustainable value creation. We will continue to evolve our approach to ESG more broadly, prioritizing our most material sustainability issues and those that are most important to our stakeholders, and we'll aim to strengthen our actions as well as our reporting in these areas. Are there any questions from shareholders physically present in relation to the motion?

Chair, may I introduce from the ASA, Patricia Beal.

Good morning, Alison. I represent today -- I'm a shareholder myself, and I represent the ASA, which has honored me with the number of proxies, which is about equivalent to the fifth largest in the table at the rear end of shareholders. So we do have many long-term shareholders who regard Cochlear with great -- as a desirable company to invest in. And also, obviously, they follow their investments moderately closely. This question basically maybe through you, might be directed to the auditor, just on the new cloud computing costs. I know there's being a new international financial standards interpreting committee and with the new ruling, and it seems to coincide with new and extra large cloud computing or computing in general type expenditure in Cochlear. Will this have a significant effect on reported profits as to how they're audited and therefore, on net margin targets on the STI targets over the next few years?

Yes. Thank you for your question. I might answer that in the first instance, and then if the auditor wants to make comments after that, I'll give him the opportunity to do that, but I think I can cover it. So you're absolutely correct. We have recently embarked on a transformation program that will enable us to scale the organization more efficiently. And that program includes an investment of [ $100 million to $150 million ] in cloud-based technology solutions over the next 4 to 5 years. And as you point out, there has also been a change in the accounting treatment for cloud-based technology expense. Previously, it would have been recognized as an operating expense. And this year and going forward, it must be recognized as a capital expense. So this change in accounting treatment, it does have an impact on reported net profit and achieving our net margin target of 18%. But importantly, the accounting treatment doesn't have an impact on cash flow, and our long-term margin continues to be 18%. And as this investment program completes, we expect to return to that level. Is there anything you want to add to that? Or is that?

Thank you very much for the question. It's a great question, I think, and it's -- this change in accounting standards is one which a lot of ASX companies have spent a lot of time digesting and reviewing. And from an audit perspective, it's been a key focus for us through the June '22 audit of Cochlear. In terms of just addressing your question around the audit approach, we spent a lot of time looking at all the IT contracts through the Cochlear business, interviewing the IT teams, reviewing the nature of the costs that are capitalized and in particular, the customization and configuration costs, which previously, as Alison said, would have been capitalized on balance sheet amortized and now are required to be expensed straight through the P&L. So it has been a big area of focus will continue to be a big area of focus for us. I thought it might be worth just highlighting as well that on the Page 134 of the annual report, note 7.6 is quite a detailed description of the impact of the change in the accounting policy. If you'd like to spend some time looking at that, and I'm happy to spend some time after the meeting talking to you a bit more if you need some more detail on that. Thank you.

Thanks, Julian.

Chair, I would like to introduce Ray Tollefsen, a shareholder. Thank you.

Thanks, Alison, and the rest of the Board. And it's good to see real humans again face-to-face. I look forward to meeting some of you after the meeting. I'm a long-term shareholder and also a member of Teaminvest. And as with the ASA, Cochlear is pretty well widely held by our members around Australia. And I'm not speaking on behalf of Teaminvest. However, I'm sure our members really interested in the answer to a couple of questions, and I'll ask some more of Board members and others off for me. First up, I recently came across an item regarding the French National Research Institute, making a grant to develop a new class of Cochlear implant technology with the aim to manufacture small high-density photo stimulation implants with a removable LED. Although I expect any positive outcomes are likely to be many years away if they didn't work. If successful, such a technology appears to be a direct threat to Cochlear's business. Can you provide any comment on that? That's the first question. And the second one, I've got something to three. In France, in June, there was a genetic medicines symposium, where Sensorion took part in a fireside chat about its work in the development of novel therapies to restore, treat and prevent hearing loss disorders. Cochlear was mentioned as being a partner in the study of SENS-401 in patient schedule for cochlear implants. Can you provide some more information on Sensorion's work and Cochlear's involvement with it? And also, is the relationship with Sensorion exclusive to Cochlear or Arbor manufacturers also able to become involved? Thanks.

Terrific. I think I'll perhaps try to answer that at a high level and then ask Dig to cover the specifics of those two examples. At a high level, we invest over $200 million in R&D each year, and a good portion of that is spent on what we call Advanced Innovation, which is looking at the innovations that lie beyond the 5, 5-plus year time horizon. And in doing that, we build relationships with over 100 different research institutions around the world and look broadly at areas which either might enhance our existing technology or potentially disrupt our existing technology. At the moment, we see plenty of opportunities for these types of technologies to work in combination with cochlear implants. But perhaps for those two specifics, I'll ask Dig to give a little more detail.

Thanks, Alison, and thanks, Ray, for the question. A very good question and a topical area. I think important context for this is that hearing loss is one of the most prevalent medical conditions in the world and one of the least treated. And what we're seeing over the last 10 years and saying in the last 5 years, as people are realizing that, and there is more and more research money going into hearing loss overall. And that -- this is a terrific thing for all of us. And it's also very good for Cochlear because it's in part, raising awareness of hearing loss and the importance of treating hearing loss, which is our biggest strategic challenge. So as part of -- so as we -- given the increase in research spending, we are monitoring this research very closely. We have, as Alison said, the advanced innovation team, they are aware and quite close to nearly all of the research projects around the world. And most of these teams, like Sensorion, did actually approached us because of the extent of our knowledge and our clinical connections and experience. So we're certainly aware of other top 2 implants being developed like an optical one. These things are very early-stage technology. There's a lot -- we know there is an awful lot to do to take early-stage technology to market and there's clearly a number of feasibility steps. But we monitor these things so that we are positioned if we need to adapt and change and modify our technology in the future given the extent of our spending on R&D. With respect to Sensorion, we do have some agreements with Sensorion and I won't go into the details of exactly the exclusivity and not because the bound by confidentiality there. But Sensorion is a very interesting early-stage company doing some research on pharma and on genetics for hearing loss. We believe that there is potential for pharmacological compounds to be -- to help improve hearing with the cochlear implant, and that's the nature of the research that we are doing with Sensorion.

Chair, I'd like to introduce [ Joy Llewellyn Smith ], a shareholder.

First of all, I'd like to say that it's an absolute delight to come to a meeting at the university where I started and came back as a mature student. I became aware of Cochlear because of researchers doing with science and technology counsel on the New South Wales Department of Health. And for whatever reason, my ethic was that I wouldn't invest in Cochlear. But as the years went by, I thought, no, I need to follow and have a small parcel. So I've been through the ups and downs. And even though I have economics mixed in with my human geography, I always timed the exit incorrectly when there was a recall or something like that. So I'm saying I've come back onboard, and I'm extremely interested in the sorts of questions being asked. Perhaps the advantage as was alluded to by CEO, President, there's a lot of history of the ups and downs of this sort of business, and also when you're dealing with the well-being of human beings. So it's -- that's a very delicate balance between the economics. But I'd just like to make some points that came out of the presentation to both yourself, Chair and CEO, President. I like that you're taking on diverse perspectives and ongoing renewal. These are the points that I just put before the meeting and if there's any appropriate responses. How do you expect the global economic uncertainties may impact the 2022-2023 results? I'm not going to ask you to look further than that. The next point was, increased R&D was mentioned by what sort of percentage and does that include the questions that went before about technology and clouds and all the rest of it? The third one, it's an equity issue. And as a socio-economic researcher, I just ask whether there is such a thing or has it ever been considered that for recipients who are not financially able to afford the technologies that could be beneficial. Is there something like a foundation or whatever? And I'm seeing some reactions. And that's the wonderful thing about being here in person. We can have the body language as well as the words. And the other point was, what emphasis both directors and staff have when making decisions that that balance between the financial outcome, what's the risk analysis of it could end up as a recall and reducing our credibility in the marketplace? Thank you.

What a great set of questions. They are all questions that exercise our minds on a regular basis. Let me try to address a combination of them with the overarching thought. As an organization, we are -- many organization say this, but we are deeply focused on that purpose of helping people to hear and recognizing the long-term potential of that. Two sides to it. One is we realize that of the people who would currently benefit from having a cochlear implant, less than 5% currently do. So that's a lot of people who would benefit from having that implant. And then the second is that we're very conscious that we are implanting a device into child or adult now that needs to be reliable for the rest of their lives, for a lifetime of hearing. So that gives us a very clear focus on the recipient, the long term -- the lifetime hearing of that recipient and the long-term access and availability of implants to that broader population. And I think that is the context for all of the decisions that we make. When we look at it, we have -- we also have a commitment to being a sustainable business, and that means sustainable in terms of our environmental and social footprint but also in terms of our financial viability. And that's why we continue to target an 18% net profit margin and a growing and focus on growth in the top line. And it's that combination of factors that allows us to be sustainable and have the highest chance of achieving that long-term potential. I think -- and then -- and part of that is obviously taking the cash flow from any particular year and reinvesting it into R&D that will continue to improve our products and also investing it into market growth, which will increase access and affordability in different markets. In terms of the specific question around equity and the availability of implants to those who can't afford it, it's an area which is addressed by external organizations, and I'll ask Dig to maybe cover some of the specifics on that. It's not one that we've looked at doing ourselves, but we support organizations who do that on behalf of other constituents.

Yes. So I can just add to that, Alison is quite right that we support organizations who do -- a number of shareable organizations who do provide implants for people. We have a few small partnership programs of our own. But I think we're also going to be -- as Alison said, we've got to make sure that we remain profitable, and we've got to be very careful not to step into the role of government, and governments in most countries do fund health care. So there is always a balance there, as Alison said, our long-term profitability is essential to the hearing of all of those people who have one of our implants around the world now hitting for now around 700,000 people. And obviously, that grows each year. So we've got to make sure that we are financially sustainable to support people throughout their lives.

Chair, I would like to introduce Dan Steiner, a shareholder.

I am so glad that this is not a virtual meeting. I missed you for the last few years.

We've missed you too.

And I hope all of you actually were able to get together. This is much more meaningful as a shareholder. I've got several questions, Alison. I think at least Dig would remember me, I was here a few times. They relate to employment -- and I congratulate you on being the first female Chair of this organization. I became interested to involve when the previous Chair said, there aren't any women who are capable of serving on the board. Congratulations to all of you. My questions relate to employee ease on several levels. One, in the popular press, there's been repeated mentions of people who have left employment, difficulty of companies, recruiting people for a variety of reasons. And I don't want to go into them. All I want to know is has that happened in this organization? Secondly, congratulations on revamping and coming up with an employee incentives program that is an improvement apparently on the previous one. And if I understood the presentation correctly, 51% of your global employment have taken up the opportunity to acquire shares. I think that's remarkable and probably quite unusual. And finally, I want to ask about R&D. The $200 million amount has been increasing every year. The percentage of revenue that goes into R&D is commendable and getting so big. What part of that $200 million is actually undertaken by Australians either here, your partners in this country? And I do want to mention, I know that the Global Hearing Center is just across the street, if I remember correctly. I've got other questions, but I'll hold them for the moment.

Okay. Let me hope that I can remember all those questions. But first of all, in terms of employment, Cochlear has always been -- has always recognized that it's our people that will deliver on that lifetime of hearing and on expanding the number of people who do have implants and have that hearing. So certainly since I've been involved, Cochlear has invested heavily in recruiting, retaining, motivating a really high-quality and incredibly dedicated group of individuals. In the early days of the COVID lockdown, we made a very conscious decision that we wanted to retain those people because we recognized -- that we focus on the long term and in the long term, retaining all those people was really important to the long-term value, sustainable value of the business. I think as a result of that as well as the other efforts that have gone on, we continue to have very high engagement. I think we talked about the 80-plus percent employee engagement. We haven't seen a significant increase in attrition. And that varies by -- there are certain pockets of disciplines that might be harder than others to recruit. But generally, we've been really pleased with both the retention and commitment of our employees. I've forgotten the R&D -- you want to ask the R&D one.

How much -- approximately how much of the R&D we do in Australia? It's around about 2/3 of our R&D.

Chair, I would like to introduce Lindsey Sherman, a shareholder.

Good morning. I'm also a member of Teaminvest. My question is about the Oticon acquisition. So you paid $170 million. Integration is going to be $30 million to $60 million. The business has negative earnings. I just wanted to know the thinking around return on investment. Where do you see the returns coming from this acquisition?

Yes. Very happy to answer that. So for us -- so demand has made the decision to exit their business, Oticon Medical. For us, there were two sides to the opportunity. The first is around increasing the scale of our business, particularly the Acoustics business. And then the second is around serving those 70,000 recipients. So in terms of scale, we're very conscious that hearing implants is a scale business. If we have a larger revenue base, we can invest more in R&D. We can invest more in growing the market. And we know that, as we discussed, it's currently a highly underpenetrated -- severely underpenetrated market with less than 5% of severe hearing being treated with implants. So we would welcome the opportunity to invest in those -- in that scale. And then in terms of the opportunity to support their existing customers, they currently have around 70,000 recipients. And we will welcome them into the Cochlear family and serve them for the lifetime of their hearing needs. And at first, that will be with Demand and Oticon's products. And then over time, we will develop our own speech processors, so we'll be compatible with those -- with their implants but leverage our existing technologies and platforms. And again, that will give us scale advantages. So you're right. At the moment, it's a loss-making business. And so one of the first priorities if we are successful in acquiring it is to work on a plan that brings it to profitability as soon as possible. And we expect -- we will still target our 18% NPAT margin over the short to medium term.

Chair, I'd like to reintroduce Patricia Beal from the ASA.

Thanks again. There's another question I had, which I didn't think about introducing at this stage thinking more of the auditors. But this one concerns the Cochlear family, which I thoroughly support as being a good way of keeping continuity with all your -- our recipients and keeping them involved and keeping them up to date and helping them with making use of the latest advances. And I was surprised to read in the annual report that only got 60% of new recipients actually joined this scheme and wondered a, why? And b, what you could do to increase that?

Yes. Thank you. Well, we absolutely agree that the Cochlear family and Cochlear support is a really important part of our lifetime commitment to customers and ensuring that they get the most out of those implants, the highest performance, the highest connectivity, et cetera. The majority of new recipients come to us through their audiologist or their surgeon. So that audiologists or surgeon is the primary point of contact for their ongoing hearing. Increasingly, those health care professionals are understanding the value of the Cochlear family and referring their customers through to us. So you'll see that, that 60% has grown significantly in the last few years. And we expect and hope that it will continue to grow going forward as more clinicians understand and refer through their customers.

Chair, I'd like to reintroduce Dan Steiner.

I have been interested in Asia and in the China initiative. And I noticed that global sales are 48% Americas, 35% EMEA, which is Europe and Middle East, et cetera, 17% in Asia Pacific. There's been a $90 million investment in a new plant, which I take to be a manufacturing facility, not a research and development facility. So the first question is, is that facility now manufacturing? And if so, what? But more importantly, if the bulk of the world population is in the Asia region, and I include Indonesia and India as well as China, Japan, what particular marketing initiatives or other initiatives is the company intending to take to realize a greater proportion of that as recipients, whether it's recipients of the implant or recipients of the sound processing? That's one question. I don't know whether I read this correctly because I'm not an accountant. But I noticed that in 2021, something like -- I'm going to just put this page over, and I can't find that in the 2022 annual report. Now this is quite unusual for a company, particularly a successful one, to have little or no debt. But you have very generous cash flow, which has been said repeatedly covers expenditure, pays the Chief Executive salary and maybe the Board as well. So I'm interested in China, what's happening, what's planned and what's going to -- how is the company going to expand the revenue receipt from there and the debt question.

Right. I'll start with the China question and speak to the facility and then perhaps if you want to speak to any of the specifics around China development. So yes, it is a manufacturing facility, not an R&D facility. It's currently going through the regulatory approval processes. And I think that is -- it's expected to come online in 18, 24 months. It will primarily be serving the Chinese market, but we'll also be serving other emerging markets as well. And then in terms of the development of the China market, as I said, we've invested in growing our direct presence in that market, and it is one of our most significant growth markets. But do you want to talk specifically to any of the initiatives in China?

Yes, but China and across Asia Pacific too, Dan, because as you said, there is a large proportion of the world's population there. The implants that we do through Asia Pacific region at the moment are largely in children. And so our focus is certainly across China or Southeast Asia, India is largely on children. And there, it is about demonstrating how good the outcomes are for children born with severe profound hearing loss with a cochlear implant -- implanted early, there's a very high probability that they'll be able to go to normal school and have normal speech and language by the age of 5. So it's demonstrating that to governments, demonstrating the economic benefits of therefore providing implants and the educational outcomes that result from that. And the great thing of being in China for 25 years now is we have a number of recipients who got their implants 15, 20 years ago, who are now graduated from university. And so being able to demonstrate that the economics of that is a very important part of it. So it's that broader government awareness and then also we work very hard on surgical and audiological training to make sure that the skills and infrastructure are there and available to meet that demand. Then obviously, over time in these markets, there's adults and adults being our focus through the U.S. and Western Europe, Australia, Japan and Korea, there is clearly that equivalent opportunity through all of those other countries and that will come over time. And that's what underpins the thinking behind that factory. This is built with a 30- and 40-year view into the future.

And then in terms of the net cash position, if we look at what the net cash position will be, if the Oticon acquisition is successful in taking into account integration costs, those will come to around $200 million to $230 million in total, which will leave -- we've always maintained a conservative balance sheet, and we're comfortable with that position at the moment, given the ongoing uncertainties, but it's something we continue to look at in terms of the ideal net cash position going forward. Okay. I'll now check whether we've received any questions from shareholders online.

The first question via the online platform is from [indiscernible] who ask, on Page 52, about intellectual property, are you able to educate shareholders on how you approach infringements or allegations of infringement, especially if Oticon, hypothetically has a legal battle in relation to patients would Cochlear still invest in the company?

Let me talk about our approach to intellectual property and patents more generally. As we've said, we invest over $200 million a year in R&D. And we do that to strengthen our products, and that is that -- plus their future use really does underpin our competitive advantage. So in tandem with that investment in R&D, we have a systematic approach to identifying intellectual property, creating patents and then protecting those patents as well as making sure that we respect other people's IP and navigate that appropriately. In terms of our own IP, we scan the markets in which we operate on a regular basis to understand whether people have infringed and where we have, we take appropriate action.

Our next question on the online platform is also from [indiscernible]. Wish I was there in person to ask you this. With the Oticon Medical acquisition, how come you haven't listed that acquisition as part of growth opportunity, on Page 30 to 32, where Oticon Medical is expected to add $75 million to $80 million to annual revenues? And why isn't there products and services not found in the annual report?

Yes. Well, at the moment, that acquisition isn't complete. It's subject to regulatory approval, which we're working through at the moment. And so while that's the case, we can't integrate it into our accounts, our reports or our business, but we look forward to resolution of that in the coming months.

We've received the following question from Mr. Stephen Mayne. On Page 144 of the annual report, our former CEO, Chris Roberts, is listed as the 12th largest shareholder with 172,387 shares or 0.26%. Truth be told, he's not even in the top 50. Why don't you publish a top 20 list of beneficial holders as opposed to all these inaccurate custody and nominee holdings, which aggregate institutional holdings? And speaking of major shareholders who and what is ABP, which has more than 5%? And why isn't Vanguard in there as a substantial holder along with the two other index giants, BlackRock and State Street?

Well, I'm sure that our disclosure is as per the ASX listing rules. I will have a look at the specifics of Chris Roberts' shareholding. The large shareholder is actually APG, which is disclosed. It's a large European pension fund. BlackRock and State Street are large index funds managers, and they are listed in the annual report. I don't know why Vanguard isn't on there. That's our shareholding as per our understanding of the shareholding and as per the listing rules.

We have also received the following question from Mr. Stephen Mayne. A question for the KPMG audit signing partner, Julian McPherson. Has he ever been involved with a public company that claimed its net assets of $1.685 billion were so much below its market capitalization of $12.73 billion? That's only 13.2%. Can Julian explain this discrepancy and also clarify if we would suffer a tax bill if we wrote up the value of our brands? Also, it must have been difficult for Julian finding key audit matters to integrate. Why did Julian choose both warranties and trade receivables and do the accounting rules require that there be at least two key audit matters explored in the annual report of ASX-listed companies, even when the accounts are so obviously clean and conservative?

Okay. On the first question, I'm not sure what that refers to, and I don't -- I'm not sure why that would be relevant to the Cochlear meeting, but I'll let Julian choose whether he wants to address that. And perhaps Julian would like to address the question of the key audit matters that are raised and your selection of -- your process of selecting those.

Thank you for the questions. Taking the first one first. Look, I wouldn't speculate on how the market values Cochlear. My job is to make sure that the numbers presented in the disclosures presented [ are true there ], and you can see there's an unqualified audit report contained in the accounts. In terms of the question around the revaluation of intangibles, accounting standards don't permit the revaluation upwards of intangible assets. So Cochlear is fully complied with the accounting standards in stating the intangible assets at cost. And the third question around key audit matters. There's no minimum or maximum rules around the key audit matters that are applied through the auditing standards. Purpose of the key audit matters is to provide extra transparency to disclosure -- to shareholders rather to explain the areas that we've really focused on through the audit process, particularly where senior members of the audit team, including myself, we spend a lot of time making sure that the balances have been correctly stated. And the warranty provision and the receivables are those two key areas where we spent a lot of time not just here in Australia but also overseas as well.

Chair, that concludes the questions received via the online platform. I can also confirm that there are no shareholders who wish to ask a question on the telephone line.

Okay. Thank you for those questions. As I mentioned earlier, voting is already open, and I'll give you a warning before I close voting. Please cast your vote now on this item. [Voting]

The next item of business is to vote on the adoption of the remuneration report set out on Pages 70 to 89 of the 2022 annual report, which is available on our AGM website and at the top of the online platform. The resolution is now displayed on screen. This resolution is advisory only and doesn't bind the company or the directors. Voting exclusions apply to this resolution as set out in the notice of meeting. I now ask that the direct and proxy votes be displayed on the screen. I intend to vote all available proxies in favor of the resolution. Thank you. Are there any questions from shareholders physically present in relation to the motion? Okay. I'll now ask whether we received any questions from shareholders online.

Chair. We've received the following question from [indiscernible] who asked, with regards to strategic measures, how come that's not also a performance hurdle for long-term incentive because I believe it would take a number of years to see if management's decision today was the right call? And if it was the right call, then happy to reward the management who made the right call. Why not make it both STI and LTI?

What we try to do is balance across STI and LTI metrics. You're absolutely right that the LTI metrics really measure the long-term success of the decisions that are made and whether those turn into shareholder value and earnings per share. What we try to do in the STI scorecard is create a balanced program of reward for what happens this year. So that includes both short-term financial results and that's the revenue metric that comprises 60% of the STI. And then it's also 40% on the milestones completed in that year that relate to long-term programs so that we have a balance in the annual incentive of both immediate financial returns as well as investing for the longer term.

That concludes the questions received by the online platform, and I can also confirm there are no shareholders who wish to ask a question on the telephone line.

Thank you for the question. Please cast your vote now on this item. [Voting]

The next item of business is the election and reelection of directors. As I mentioned earlier, in accordance with Cochlear's constitution, Yasmin Allen is retiring at this AGM and standing for reelection. And our recently appointed directors, Michael del Prado and Karen Penrose are retiring at this AGM and standing for election. Firstly, Yasmin. Yasmin Allen is standing for reelection. Before Yasmin speaks to her election, some shareholders have noted the length of Yasmin's tenure, and I'd like to address that issue upfront. When thinking about its composition, among other considerations, the Board is conscious of the importance of balancing renewals with continuity and experience in the company. We appreciate the importance of director renewal in Board performance, and we recognized 10 years as an appropriate guideline. However, we also recognize the need to make choices in the best interest of Cochlear recognizing the specific circumstances of the business, including the long-time horizons and the complexity of the business. Over the last 3 years, three directors have retired from the Board, and we've gained four new directors. These directors bring valuable new perspectives and deep experience and we're very fortunate to have their contribution to the Board. However, that is a significant renewal and during the pandemic, it has been more challenging to transfer knowledge of the business particularly as two new directors are based overseas and unable to travel to Australia for much of this time. In addition, Yasmin has been the Chairman of our Audit and Risk Committee for the last 12 years. Karen Penrose has joined the Board with the expectation of taking over in that role, and we're fortunate to have her on board as an experienced ASX Audit Chair. As a result, the Board has asked Yasmin to stand for reelection in order to manage a smooth transition of the Audit Chair role and the transfer of her broader strategic company knowledge now that we are able to travel and meet face-to-face and have our future Chair of Audit on Board. Yasmin is a strong advocate for renewal of boards, but has agreed to stand and stay on the Board until that transition is complete, and she is excited and committed to do so. We hope you agree with this approach and support Yasmin's reelection. Yasmin's background has been set out in the notice of meeting. The resolution appears on screen, and I'll now ask Yasmin to speak to her reelection.

Thank you, Chair. Good morning, ladies and gentlemen, and thank you for giving me an opportunity to address your meeting. I have enjoyed my time on the Cochlear Board working on behalf of you, the shareholder. When I was reelected 3 years ago, I could not have foreseen the COVID health crisis and subsequent economic fallout that has impacted us all globally. Working alongside management and your Board, we have faced into these challenges. Not only do we address the growing employee health and supply chain risks brought on by the pandemic, but also the critical dislocation of the entire global health care system. And as you've heard today from our CEO and Chair, Cochlear has done well. I was able to bring my deep experience on this and other listed boards, together with my executive background to help work through these challenges. We raised capital and we protected our people. I would like to think that as a result, Cochlear is a more resilient company today. As Chair of our Audit and Risk Committee, I ensure prudent financial and risk management to enable Cochlear to continue to navigate these uncertain times, and to capitalize on the opportunities that will deliver us growth. I'm also a member of Cochlear's People and Culture Committee and our Technology Committee. From a corporate governance perspective, this provides the Board with a link between risk and reward. I have more than 20 years' experience as a company director, serving on major listed boards. I currently serve on the boards of Santos Limited, ASX Limited and QBE. I Chair a small technology platform company, and I'm also Chair of the Federal government's digital skills organization. These roles keep me up to date in the fast-paced digital environment and also bring insights into cyber risk. I'm also a Director at the George Institute for Global Health, a top 20 globally ranked Medical Research Institute. Through my Board roles, I have become a firm believer in informed debate, independent evaluation and robust decision-making among members of the Board. I bring a deep understanding of the elements of corporate success, and I'm focused on maximizing shareholder returns over the long term. It has been rewarding to see the hard work and dedication of our CEO and executive team. And I take this opportunity to thank them for their contribution to your company. I am very proud of Cochlear's role in the community with its exceptional products, as you've heard today, in the world of hearing that deliver important societal outcomes. But we do not rest on our laurels. We spend, as you've also heard, around 12% of our revenue each year on R&D. And we're investing in global manufacturing, expanding into new markets and digitizing our business and customer-facing technology. I firmly believe it's both a privilege and a responsibility of the Board to think for the long term. During my past 3 terms on this Board, I have worked through a global recall, COVID and now a period of high inflation and geopolitical uncertainty. And I have seen our business recover and grow. Your Board has encouraged management to remain customer-focused and to invest in products and capability for the future. Always understanding that Cochlear's value resides in its ability to perform over the long term. While I am busy each of my Board roles adds to my perspective, skills and experience as a Non-Executive Director. I have the time to fulfill my duties as a Non-Executive Director of Cochlear, and I have a real commitment to Cochlear. If reelected today, this will be my final term on your Board. I will ensure an orderly transition to your new Chair of Audit and Risk, and I will seek to impart my knowledge more broadly to this impressive Board. Thank you.

Thank you. I'll now ask that the direct and proxy votes be displayed on screen and note that I intend to vote all available proxies in favor of the resolution. Are there any questions from shareholders physically present in relation to the motion?