Cochlear Limited (COH) Earnings Call Transcript & Summary

Good morning, and welcome to the 2023 Annual General Meeting of Cochlear Limited. I'm Alison Deans, and it's my pleasure to welcome all shareholders to today's meeting, including those attending in person here at Cochlear's Global headquarters in Sydney, and also those attending online. Thank you to Bernie Cohen for sharing his experience as a Cochlear recipient. You may have also noticed that Bernie featured on the cover of our annual report this year. 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 land on which we meet physically today, the Wallumattagal peoples of the Darug nation. I'd like to pay respect 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 company's Secretary, Ray Jarman; Directors Yasmin Allen, AM; Glen Boreham, AM; Sir Michael Daniell, who is standing for reelection today and will address the meeting later; Andy Denver, who is retiring as a director at the end of the meeting as previously announced, and we'll acknowledge and thank Andy for his contribution later in the meeting; Christine McLoughlin, AM; Karen Penrose; Professor Bruce Robinson, AC, who is also standing for reelection today, and will address the meeting later; and attending the meeting virtually from his base in the United States is Director, Michael del Prado. Also attending today's meeting is Julian McPherson from KPMG, our external auditor. Julian will be available to answer questions about the audit of the FY '23 financial statements later in the meeting. Julian is joined by Rachel Gatt, who has taken over from Julian as lead audit partner from 1 July 2023. 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'd like to acknowledge our company's Secretary, Ray Jarman, who has expressed an intention to retire. He will stay on until a new company Secretary has been appointed. Ray has been with Cochlear since 2008 when he joined as our first group General Counsel and has also been Company Secretary since February 2017. Over the past 15 years with Cochlear, Ray has helped us to navigate through many business highlights and challenges and always demonstrated a combination of commerciality and maturity. On behalf of the Board, I'd like to thank Ray for his substantial contribution to Cochlear over the many years and wish him all the very best for his retirement. Thanks, Ray. I will now run through the question and voting procedures for the meeting. Firstly, could I please ask all those in attendance today to 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. Written questions sent via the online platform will be moderated to avoid repetition. And if questions are particularly lengthy, we may need to summarize them in the interest of time. Only questions relevant to this meeting will be answered, and we will not answer any inappropriate questions. Shareholders attending the meeting on the online meeting platform -- using the online meeting platform will also have the opportunity to ask questions verbally via the telephone line. Shareholders on our telephone line may notify their intent to ask a question by pressing star 1. Questions will be transcribed by the telephone line operator onto the online meeting platform as a written question. 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. I also advise that there may be a slight delay between proceedings in the room and what you're watching online. So please remember this if you want to ask a question 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 do encourage you 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. There will be time to complete the voting card towards the end of the meeting. However, you may complete your 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 is no need to press a submit or send button as the vote is automatically recorded. You can also change your vote up until the time that voting closes. If you experience any difficulties with the online platform, the help number to contact Computershare is +61-394-154-024. 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 automatically be counted in accordance with these directions. The results of the poll will be released to the ASX after the meeting, and we will also post the results on the AGM web page of 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, at Cochlear, we're strongly connected to our mission to help people hear and be heard. It's the passion that drives the organization and focuses the strategy. With every hearing implant, we begin a lifelong journey with our recipients. We have a responsibility to be here to support that lifetime of hearing, which means we need to deliver sustainable growth, benefiting all our stakeholders. Over the past year, we've made great progress delivering record sales revenue and growing profits. At the same time, we've continued to invest to drive growth over the short, medium and long term. And importantly, we've made excellent progress in creating value for all our key stakeholders. We achieved these outcomes by building on our key strengths. Our 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 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, advocating for improved access to implantable hearing solutions and providing implantable solutions that deliver a lifetime of hearing. This year, we helped over 44,000 people hear with 1 or 2 of our cochlear or acoustic implants. In doing so, we provide an estimated net societal benefit of more than $7 billion over the lifetime of this year's new recipients. This value comes from improved health outcomes, educational cost savings and productivity gains. An important long-term goal for Cochlear is to support the development of a consistent process by which all health care professionals diagnose, refer and treat adults 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 cost effective. The evidence linking hearing loss to cognitive decline also continues to build. A multiyear study in the U.S. has been investigating where the treatment of hearing loss could delay cognitive decline and dementia in older adults. In July, the study reported that for a group of older adults with mild to moderate hearing loss and who are at higher risk of cognitive decline, wearing hearing aids for 3 years slowed cognitive decline by 48%. These findings are a major step forward in understanding the broader impact of hearing loss and the need for adults, policymakers and health providers to prioritize treatment of hearing loss. Treatment not only helps people to hear, but also has the potential to reduce cognitive decline for adults at higher risk. Moving now to our people. Building a strong organization with thriving people is essential to our long-term success. We have an engaged, capable and high-performing team. It's a diverse workforce with around 4,800 people across the globe. 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 our customers and over 93% understand their contribution to our strategy. 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. This year, we focused on strengthening our enterprise mindset with a focus on inclusive leadership, building critical skills and capabilities at both an individual and organizational level. We also take steps to invest in our talent and made strong progress towards building the strategic capabilities, which will provide us with sustainable competitive advantage over the long term. A diverse, equitable and inclusive organization improves employee engagement and performance as well as improving our customer engagement. Achieving gender equality is 1 important element of our diversity and inclusion strategy. Across the business, 53% of our people are female, and we've achieved 43% female representation among our senior leaders. At Board level, 40% of directors are female. Finally, I'd like to highlight changes to the Board. Over recent years, we've continued our process of Board renewal, having new directors with diverse perspectives and relevant experience while maintaining continuity and corporate knowledge. As part of that renewal process, long-serving Director, Andrew Denver, will retire from the Board at the end of this meeting. Over his 16 years of service to the Cochlear Board, Andy has provided invaluable counsel. His extensive experience in the medical device and health care industries, along with significant management experience in these industries have greatly contributed to Cochlear's strategic direction and assisted in the delivery of long-term value to shareholders. His tenure has enabled for an orderly renewal and transition of critical board skills and experience. The board and management sincerely thank Andy for his significant contribution to Cochlear and wish him well for the future. 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. Ladies and gentlemen, good morning, and thank you for joining us today. Before I start, I too, just want to acknowledge and thank Ray and Andy for the very significant contribution they've made to Cochlear to our customers and to helping us achieve our mission over the last 16 years. It's been fantastic to work with you both over that time. Now we create value for our recipients by building a market-leading portfolio of high-quality products and services that supports of lifetime of hearing outcomes for recipients. 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. And we've achieved this through a multi-decade philosophy of investing to grow and an unwavering commitment to innovation. Our commitment to innovation stems from Professor Graham Clark's work to develop the first multichannel cochlear implant in the 1970s. And our market-leading technology underpins our global market share of over 60% and in financial year '23, we invested over $240 million in research and development, representing 13% of sales revenue. I'll touch now on a few of our new products. And the first of these is the Cochlear Nucleus 8 Sound Processor to achieve regulatory approval across major markets during the first half and has driven strong growth in sales revenue since launch. It is smaller and smarter than its predecessor, designed to help recipients hear conversations more clearly and easily, particularly in noisy situations. And it is better connected building on direct streaming capabilities and connectivity features available in our latest sound processes. The new Nucleus 8 Sound Processor has driven strong growth in the Services segment. By delivering our latest sound processor upgrade technology to our recipient base, we've helped over 48,000 of our prior generation cochlear implant recipients to hear better, improving their hearing and quality of life. We also launched bimodal control in the Nucleus Smart App to help patients quickly and easily manage their compatible ReSound hearing aid and cochlear sound processor in one app. Recipients can access commonly used features such as volume adjustment and program selection to help achieve their best possible hearing experience. And in August, we introduced our next-generation Cochlear Osia System, the first and only active bone conduction system that allows patients to undergo MRI scans at both 1.5 and 3 tesla without the need for surgery. It has been launched in the U.S. and will roll out to other markets as regulatory approvals are attained. Looking to the coming years, we're excited about the development pipeline. We have a full suite of new products and services being developed that aim to improve hearing outcomes and integrate even more seamlessly into the lives of our recipients. We also create value by being environmentally responsible, implementing initiatives to promote the sustainable use of natural resources and reducing our environmental footprint. We made significant progress in financial year '23, reducing Scope 1 and 2 emissions by 68% from our F '19 baseline by increasing renewable energy usage at our manufacturing sites. We reached 96% renewable energy at our manufacturing facilities using 100% renewable energy at 5 of our 6 facilities. And we are making steady progress in reducing business flight-related emissions. Our target is to reduce flight-related emissions by 50% by financial year '25 from our financial '19 base. In Financial '23, we reduced these emissions by 91%. And we achieved this by reducing business flights per full-time equivalent employee by 47% from our financial '19 baseline, and purchasing offsets for approximately 80% of our remaining business flights. In May, we initiated a complete Scope 3 emissions inventory, and we expect to complete this during the current financial year. We're also identifying ways to improve resource efficiency, reduce waste and drive greater circularity in our operations. In the U.S., we work with the regulator to achieve changes in our labeling allowing us to implement electronic labeling for the Nucleus 8 Sound Processor. As a result, we have saved over 9.4 million paper pages of manual labeling since November, as well as over 45,000 plastic sleeves. We hope that other regulators around the world will also take a pragmatic approach to reducing the need for paper manuals, reducing usage of paper and emissions from freight. And finally, we aim to deliver sustained value through financial discipline and commitment to high standards of corporate governance and transparency. We delivered strong financial results for the financial year '23. Sales revenue increased 16% in constant currency to a record $1.96 billion, driven by strong growth across all business units. Underlying net profit also increased by 14% in constant currency to $305 million, with operating cash flow sufficient to fund investing activities and capital expenditure whilst delivering dividends to shareholders. We also commenced a progressive on-market share buyback program in March, with the aim of reducing the cash balance to around $200 million over a number of years. This buyback program aligns with the interest of our shareholders by reducing shares on issue, providing gradual accretion in earnings per share and dividends per share over the long term. And in February, we achieved certification for the manufacture of our Nucleus CP802 sound processor at our new Chengdu facility in China, and we have commenced supplying our Chinese operations. We expect to achieve implant approval from this facility within 18 months. As we look forward to the future, we remain confident of the opportunity to grow our markets. There remains a significant unmet and addressable clinical need for cochlear and acoustic implants that we expect to continue to underpin sustainable long-term growth. Our clear growth opportunity and strategy combined with a strong balance sheet, mean that we are well placed to create value for our shareholders and over the -- now and over the long term. We provided earnings guidance for this financial year at the release of our results in August, outlining our expectations of an increase in underlying net profit of between 16% and 23%. We continue to expect this level of increase based on the foreign currency spot rates that were prevailing at the time of our result. Cochlear implant trading conditions continue to be strong across most markets with an improving trend in adult referral rates in many developed countries. At this stage, we expect solid market growth rates to drive high single-digit growth in Cochlear implant units for this financial year. We expect market share gains that we achieved last year to stabilize and for there to be fewer COVID-related backlog surgeries during the year. The services segment is expected to perform strongly, with continuing strong demand for upgrades for the Nucleus 8 Sound Processor. Acoustics growth rates are expected to be lower than last year with continuing growth from the rollout of the Osia 2 System to be moderated by a smaller contribution from upgrades of the Baha 6 Max Sound Processor. We also note that guidance does not factor in any impact from the proposed acquisition of Oticon Medical cochlear implant business. And finally, the Board maintains a dividend policy that targets a 70% payout of underlying net profit. Thank you, and I'll now 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 auditor's report for the financial year ended 30 June 2023. They're incorporated in the 2023 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's 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 screen. The company has received direct votes and proxies in relation to the resolution before the meeting today. I intend to display the number of direct votes and proxies 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 all the resolutions. I now ask that 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 business 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 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 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 to shareholders prior to the meeting. We've collated similar questions together to enable me to respond to the key themes.

First, we received a question on what else can be done to reduce the company's carbon footprint. Firstly, I should say that we recognize the need to meet our expectations -- the expectations of our shareholders -- stakeholders across a range of issues where our activities have an impact on society and the environment. In this context, reducing our footprint is a priority for the company. Our Net Zero strategy is a proportionate response to the level of importance of this issue to our stakeholders and its impact on our business. It's consistent with peers. And importantly, it's aligned with our long-term objective to deliver sustainable value creation. As you will see in our annual report, to date, we've made the following commitments: a 50% reduction in emissions related to our business flights by 2025, transition of all our manufacturing facilities to renewable energy sources, net 0 emissions in our operations by FY '30 and target of net 0 across our value chain by FY 50. By June 30, 2023, we achieved the following: we reached 96% renewable energy in our manufacturing facilities; we reduced Scope 1 and 2 emissions by 68% from our F '19 baseline; we reduced the number of flights taken per full-time employee by 47% from our FY '19 baseline; and we've initiated an inventory of Scope 3 emissions and expect to report back on this by the end of FY '24. We'll continue to evolve our approach to this and other material sustainability issues in terms of both our actions and our reporting. I do encourage you to read the annual report, where we've outlined our targets and progress in more detail. And in summary, we believe these targets and actions are appropriate for Cochlear. We've been asked what is being done to support reconciliation with First Nations people. Cochlear supports the spirit of the Uluru statement of the heart. This support is grounded in our commitment to reconciliation and broader commitment to diversity and inclusion. Reconciliation doesn't begin or end with the referendum. We remain committed to achieving in Australia in which First Nations people are heard, valued and empowered. We're committed to supporting efforts to improve the health of First Nations people, particularly in hearing health. More than 40% of First Nations people aged 7 and over have hearing loss in 1 or both ears. That's a key focus of our reconciliation action plan. Other priority areas in our wrap include improving employment opportunities for First Nations people with Cochlear, increasing support for First Nations suppliers and working towards a culturally safe and welcoming workplace for First Nations people. We've been asked about what steps are being taken to protect data gathered by cochlear. This is also an important issue. We continue to evolve our products and services to give greater convenience, hearing performance and connectivity for our customers. And increasingly, our solutions are enhanced by customer data. As the role of data in our solutions develops, we're always cognizant of the need to protect customers' data and also to use that data responsibly. To do this, we've implemented comprehensive global privacy and information security programs. Our products and services are developed with a privacy and security by design approach, ensuring that data is identified and protected from the beginning of our product development process. We then protect key customer data by taking a defense in-depth approach to securing the information. This involves layers of controls and countermeasures, which are rigorously tested and are also under constant review. These privacy and information security programs are led by our Chief Privacy Officer and our Chief Information Security Officer. They both report regularly to the executive team, the Board Audit and Risk Committee and to the Board on the status of our privacy and information security programs. And finally, we've been asked how long until Cochlear pays a fully franked dividend again. As you probably know, the franking account was depleted by losses in FY '20 and has been replenished by profits generated since then. For FY '23, the interim dividend was franked at 35% and the final dividend at 70%. We expect to be able to offer -- to fully frank the dividend again over the next year or 2. Are there any questions from shareholders physically present in relation to the motion?

Chair, may I introduce Ray Tollefsen.

Good morning. I'm also a member of Teaminvest. There's a number of us here today. My question is picking up on -- sorry, Dig's reference to the buyback. The buyback doesn't seem to be a good use of shareholder funds, given the very high PE that has been paid for these shares, Cochlear is never a long PE company. But at present, it is very close to the highest it's been for 10 years if the 20 -- FY '20 outlier is excluded. What other alternatives were considered before in margin on the buyback? Will the Board consider suspending the buyback until the PE returns to close to the lower end of this quartile range, thus providing better value for shareholders with the buyback?

Okay. Thank you for the question. We did consider many alternatives when -- before embarking on a buyback. As you probably know, we have always maintained a conservative balance sheet, but we were conscious that there was an opportunity to return some funds by buying back. The amount of the buyback is relatively modest, and it's deliberately designed so that we don't end up -- we don't create any pressure on the share price and it's also designed so that we maintain that conservative balance sheet. Considering the different options at that time, which is now 12 months ago, this was considered the best way -- the best use of those funds. Do you want to add anything to that, Dig?

I think just the only other thing to add is said the amount is quite modest, and we intend to run the buyback over several years and not to, therefore, buy all the shares at once, given that the share price may move around.

Chair, allow me to introduce Patricia Beal from the ASA.

My name is Patricia Beal, and I'm a personal shareholder and I also represent by proxies 116 people who hold over 86,000 shares, which puts us in about the top 20 -- the bottom of the top 20 shareholders, as noted in your and -- in the annual report. Firstly, congratulations on a good year for our company. You've certainly done well and carried on the traditions as I -- we all expect and as we all enjoy hearing about. My questions basically revolve around the issue of ESG which is receiving more and more attention over the years as it comes to prominence. And we recognize that you're reporting quite a few things in this regard. One thing that perturbs us slightly is the fact that in the Board's skills matrix, there's only 6 out of the 10 Board directors currently who profess proficiency in this measurement, in this skill. And we would have that you might consider increasing that slowly as the Board changes or quickly by education, whatever comes to mind and to achieve a better knowledge amongst all directors. One question in that issue of ESG generally was a hitting about the safety of the staff. And we have noted that over the last few years, you have got statistics for 5 years, which recommend, but the trend seems to be slightly upwards rather than downwards over those 5 years, and we wonder what you might have to say about that, please.

Great. Thanks for both questions. Firstly, in terms of ESG skills and the Board, I think we all recognize the growing importance of ESG and more explicitly managing that, both within the organization in terms of the programs that we have for managing those important issues and also for the Board in terms of overseeing those programs. I think at the moment, we have 6 of 10 directors who have ESG experience. And this is the first year that we've specifically pulled that out in the skills matrix as an area that we are very conscious of. So I think the way I read that is that we are conscious of the importance of that skill set and that we do have 6 out of 10, which is a -- which we're comfortable with at the moment, but we're also keen to continue to build that skill within the Board, both -- as you say, both by education of existing Board members and as we bring on new board members looking for that, among many other skills that we look for. And then in terms of the safety, Yes, we have -- as you will have seen in the annual report, we pull out some very specific safety metrics. I should say that there are 3 metrics in there. One of them has a downward trend, which is the severity rate and that's the 1 that's the total number of hours lost due to some form of injuries. So that's probably the 1 we look at as the overarching metric. There are 2 other metrics in there, which are -- which have moved up slightly over the last year. These are relatively low numbers compared to other industries, but still ones that we take very seriously. And we have a program for identifying those risks and working out how to systematically work to address them. And that's a program that reports back to the Board regularly.

Chair, may I introduce Dan Steiner.

A very good report. There's 2 things I wanted to raise. The first is congratulations on the wonderful service that Andrew Denver has given in this company over a stated period of time. Greatly appreciated. And the second question relates to your retirement. Will the Board consider and appoint someone to fulfill that vacancy within the next 6 to 12 months? And will you in doing that, bear in mind your focus on bringing more women onto the board?

Right. So yes, I think we are all very grateful for Andy's service, and we'll miss him. But we have been planning for this ahead of time. So in lots of ways, we have already prepared for Andy's retirement and the skills brought on to the Board recently. Certainly, backfill for many of the skills that Andy brought. We can't backfill for him completely, but for many of the skills that he brought. And I think that's particularly true with Mike Daniell, who has experience leading R&D and manufacturing in a global medical device company as along with Michael Del Prado, who comes with that medical device experience. So in terms of the specific skill sets of Mike -- Andy, we have planned ahead and already incorporated those into the Board. In terms of women on the board, and in fact, I would take it as we're committed to diversity and inclusion broadly in the organization and certainly within the Board. At the moment, we have 4 out of 10 female directors on the Board. And we remain committed to diversity and inclusion, but we also will be looking for specific skill sets and making sure that we find the very best directors to fill those roles.

My second question relates to what the Chief Executive raised, and that is the importance of innovation in terms of continuing the growth of the company. I recall several years ago that the decision to locate your headquarters here was also related to the establishment of core University's Global Hearing Hub, which I've had the privilege to actually visit at the encouragement of Cochlear. In terms of continued innovation, how important is that association, not just physically located, but the association to the research that is done within the Macquarie University to the innovation that is developed and ultimately commercialized by Cochlear.

Sure. I might cover that at a high level, and then you talk specifically to the Macquarie partnership. So innovation is absolutely fundamental to Cochlear. It's the bedrock of our competitive advantage in terms of technology, but it's also important in terms of how do we grow the market and develop the markets in which we operate. So we are committed to innovation in all its forms throughout the organization. In terms of specifically the relationship with Macquarie University, we value being co-located, but perhaps I'll ask Dig to talk to the specifics of the partnership?

Yes. So the setup of the Australian Hearing Hub is unique in the world. There is nowhere else in the world where on 1 university campus, we have teaching in audiology, we have research in audiology. We've got cochlear doing our own research and development. We have manufacturing. The university also owns a private hospital. So cochlear implant surgeries are done on campus and a number of our partners like Nextsense and the Sheppard Centre provide services to people after they get implant here on campus. So there is the full ecosystem of hearing research, product research, surgery and hearing care here in one place, which is absolutely unique in the world. That's incredibly valuable for us in terms of understanding that ecosystem as well as specific pieces of knowledge and research that are generated. With Macquarie University, we jointly fund a chair and some of the work that's being done there is looking at immunological studies of hearing health and hearing health implications more broadly for health over time, particularly as we age and clearly that's central to our strategy. So it's a very strong partnership we have with Macquarie University and the hearing health. It's a very important part our knowledge base and our innovation, but it's not the only source. We have collaborations with 100 -- over 100 universities around the world. So we look very broadly for new knowledge, but we are very fortunate to be part of a unique environment in the world for hearing research.

Chair, I'd like to reintroduce Ray Tollefsen.

I thought that initially, it was [indiscernible] questions. Talking about collaboration. Just the collaboration with Sensorion expected to generate any additional market share, and therefore, profit if the trials ultimately demonstrate a positive outcome. Do you want the second question as well?

I'll go to that one first and then come back. So look, again, I think it's quite a specific partnership. So if I talk generically to our investment in small early-stage companies and then Dig can talk specifically to Sensorion. Over the last 5 to 7 years, we've made investments in small early-stage companies, and it's been small investments. The reason we do that is to find opportunities to either improve our core business, our core technologies or to leverage our capability into other areas. Sensorion is 1 where we're looking at specifically how might we use that to improve our core technology. But I might ask you, Dig to talk to how that's going to impact.

Yes. So the context for Sensorion is our implants work very effectively, but we are always looking for ways to improve hearing outcomes. We can -- we think we can get improvement through advancing our technology. We think that there is the potential for the use of drugs along with an implant to improve hearing outcomes as well. And so Sensorion has a compound that may have some benefit in working in conjunction with the implant -- cochlear implant to give a better hearing outcome. That research is very early stage. These sorts of things that we are -- we do with a 10- or 15-year view of what might be possible in the future. So at this stage, it's far too early to say if there is a hearing outcome benefit on a commercial benefit, but it is absolutely with our long-term thinking about to expand our knowledge of hearing loss and the ways in which hearing loss can be improved.

And I think that's common to all of those small investments is that they are small investments and long dated. So we don't expect them to have impact in the shorter term.

No, just specifically asked about that. it's been getting a media coverage, probably generated by that company. So that's why that was a specific question. I'm also where the other investments, which an excellent idea. Next question also relates to innovation, et cetera. I noted our announcement on the 2nd of October by Envoy Medical that it has fully implanted cochlear implant, a claim has been granted breakthrough device designation by the FDA and was currently in clinical trials. Now I recall reading some time ago that Cochlear is also working on a fully implanted device. Are you able to confirm that that's the case? And secondly, make any comment on this progress?

I think I'll let you answer that one, Dig.

Okay. And on here. So we're well aware of Envoy. They are -- they have got breakthrough device designation from the FDA. They are doing a study. They've been given approval by the FDA to do study with 3 implants. We have, as you say, we've done a feasibility study of a totally implantable cochlear implant with 11 implants. We did a study with 3 implants back, I think, in 2005. This is a long journey, and it requires deep technology -- it's exciting technology, as is all our technology. We're well aware of Envoy, and we have our own program that is advancing very well.

Chair, may I introduce Dudy Jack.

Okay. Thanks for letting me ask your question there, Chair and the Board. First question is in regards to brain computer interface in which Cochlear uses. Just wanting to know what threats does -- what the potential threat does Neuralink, which is another brain computer interface poses to Cochlear? And also, the second question is in regards to share buyback, now you said on Page 14 that the purpose of the share buyback is to have a cash balance of $200 million. What's wrong with having like $555.5 million, at least it can offset the risks like the pandemic?

Can I answer the second one first and then -- that is a really good question and one that we ask ourselves regularly, like what is the right amount of cash to have on balance in order to protect us against shocks in the system. And I think everyone post pandemic is really thinking what does -- what is a healthy level of cash on the balance sheet. So that is one that we can continue to consider. But at the moment -- and also we're considering that the buyback in light of -- as the way forward with Oticon becomes clearer, then again, we'll review the level of the buyback. But that absolute endpoint is a very good question, but we're comfortable with that's our answer at the moment. And in terms of -- what was the other one? Neuralink.

Neuralink, threats they pose in brain computer interface.

Possibly, if I start with the overarching response to all these questions about emerging technologies. So we have a team called the advanced innovation team, and they work specifically looking at scanning the landscape and understanding what are the potential threats and opportunities that will affect our technology over the longer term. That includes the Biosciences team who looked very specifically at pharmaceutical-related solutions and genetic type solutions and also ones that look at things closer to the Neuralink type solutions and brain interface. That team has collaborations with 100 universities as well as working with leaders across many fields. So I think we're confident that we have a good radar in terms of what those technologies are and how they might either complement our solution or potentially impact the market for our solution. But on the specific of that one, I'll again get Dig to respond.

I think start to just with -- we live in a pretty exciting time when there's some great innovations going on all around the world, and it's exciting to watch them. So where Neuralink will go, I think we don't know. I think what we do know or what we do know is that developing an implant that can -- is designed to support someone throughout their lifetime is incredibly difficult. It does require a lot of experience and knowledge to do that. We've built that up over the -- more than 40 years now. And so we look -- and we continue to build our knowledge. We look at what others like Neuralink are doing, and I think it's exciting to watch that don't see it certainly as a short-term threat to the things we're doing, who knows over the long term, how technology will continue to develop. But as Alison said, that's why we do the scanning. It's why we keep investing so much in R&D is to do everything we can to protect the competitive advantage we've got.

Chair, may I introduce Kerry Bible.

Congratulations. My husband and I are long-term shareholders. Been about 30 years, I'd say. I'm very pleased with the company. I just wanted a question on Page 16 of your annual report. The first paragraph says for FY '24, we're expecting an increase in the net profit of 16% to 23%, which is, again, very pleasing. But then the last paragraph on the same page says guidance does not factor in any impact from the proposed acquisition of the Oticon Medical. Now further along, you say that, that acquisition, you were upset because they blocked the Acoustics business, which obviously you wanted because it was going to be something that added to the business. and that it was loss making. So I assume that you think you're going to turn it around. I'm wondering how long it will be to turn around. And if it's loss-making and you also had to pay for it, obviously, then why wasn't included in the sort of the outlook?

Yes. So I think the -- so if I take a step back and talk about the Oticon Medical transaction, which is it's relatively small for Cochlear, but it's strategically important. That's why we embarked on it. And as you probably know, the acoustics -- as you said, the acoustics component of that transaction was blocked by the U.K. competition regulator, the CMA, we're still keen to come to resolution on the cochlear implant part of that business. The Oticon Medical have around 25,000 CI recipients. And our main focus is about ensuring that those recipients have a lifetime of care. We have -- so we think we are well placed to provide that care. And -- partly because of our scale, but also because we can innovate and create compatible processes. So our main focus is on those 25,000 CI recipients now. That path forward is still not certain. It's still subject to regulatory approval, and that's why it hasn't been included in any of the financial projections.

Chair, may I reintroduce Dan Steiner.

One of the important elements of Cochlear's business is flowing from support that governments around the world provide for cochlear implants. And secondly, in this country where this very large company is based there is the case of whether or not research and development assistance or recognition and therefore, tax treatment is acceptable. My question is not really interested in the dollars in the sense as more whether or not the Australian government is providing a sufficient policy position that not only supports but encourages this company to prosper. And I know that in a number of markets, the recognition by governments of the value of supporting acoustical enhancements is vital not only to the individual but to the economy. So those are broad issues. And if you could -- or you and the Chief Executive could address them, please?

Yes. So if I take out 2 separate issues in there. One is the support of cochlear implants as a medical intervention. And for that, we really rely -- we've got to build our own evidence, convince regulators, convince payers, convince clinicians and that's very much the work that we do on standard of care is how do we influence all of those external parties recognize the value of Cochlear implant. That is just a straight societal value of implanting a child, adult, senior today. And that's -- that work of the Leiden University, the NIV study was very helpful in terms of the first time that people have quantified -- scientifically quantified the value of -- the net value of a cochlear implant today. And that's how we get to the $7 billion calculation. So that was a societal study looking at the health benefits, the education benefits and the productivity benefits of cochlear implant. So that part stands on is simply us providing the evidence and working with governments to understand the value of those programs. In terms of supporting R&D, it's a competitive global world for R&D. And we are based in Sydney, and we value the support that we get locally. But we do also recognize it's a globally competitive environment. There were some changes to the R&D tax incentive a couple of years ago, that brought it closer to an equal footing with other jurisdictions. But there's still a cap on R&D tax incentive at $150 million, $150 million, and we're going to start butting up against that relatively soon as well. And I think also we were disappointed when the patent tax regime, the patent tax box -- is that right way around, yes, yes, was basically taken off the table after the last election. That's a regime which is in play in most of the countries where we could do R&D. So we would love to see Australia think of how to create a level playing field for organizations based in Australia. We don't need to reinvent the wheel. I think if we started with a default of just having the incentives that are available in other countries so that we can compete globally.

I encourage you to get success there.

Thank you. Do you want to add anything to that, Dig?

I have nothing to add.

Chair, I'd like to reintroduce Dudy Jack.

Okay. My other question is an extension to Kerry Bible's question in regards to Oticon. Now it says on the annual report that it's the cochlear implant business of Oticon is expected to add $10 million for the Cochlear sales revenue. But what about for the bone conduction in which we are prohibited to acquire, how much expected sales revenue are we going to get if that is approved? And also, I'm reading on Page 33, which I'm not understanding in regards to the 12 months, like if -- like after the disposal that Demant can't sell to any third parties. What do you mean by that? Like well, how come it's not -- how come it's not for about that, that can't compete against Cochlear or speak to any third parties that can be a potential for it to Cochlear?

Let me start with the first half when you ask about what the impact of the acoustics component would be. That has definitely been blocked. That component has been blocked by the CMA, that's their decision. We take a different view, but that's their decision, and that's final. So we are only looking at the CI. We are only looking at progressing the CI component of that transaction. I'm not clear what's the contingent. Okay. Sorry, yes. So this is the contingent liability?

This is in regards to the agreement to pay $27.5 million and 12 months after Cochlear and demand and also like I can't talk to any third parties for 12 months? How come it's not forever that can't talk to any third parties?

So let me -- this is the break fee on the transaction. And so again, when we looked at this transaction sort of 18 months ago, it was a relatively complex transaction. So what we did is we baked in contingent -- we had contingent plans for what might happen if regulators chose to block different components of the transaction. For us, it was really important that the transaction -- that we would only do the transaction contingent on approval by competition regulators. But that creates issues for demand because for them, there is a gap between announcing the sale of the business and a final regulatory decision. And during that period, they have risk to their business in terms of the uncertainty for their staff, the uncertainty for their recipients and uncertainty for their clinicians. And so recognizing that risk to them and yet us wanting to only transact if it was once approved. That's why we agreed to the break fee if that's the number that you're talking about.

Okay. So is that month going to be a competitor towards in the bone conduction business after the 12-month period? Or how come we don't have a contingent that can't compete with us for like a number of period of time?

So they are a competitor to us in bone conduction now and the finding of the competition regulators that they will continue to be a competitor to us. So whether that stays -- whether Oticon Medical acoustic business stays with Demant, or whether it's sold to another party. They will be -- they will continue to be a competitor. That's actually what the regulator wants to continue. So we can't be okay with that. Okay. So I'll now check whether we've received any questions from shareholders online.

Thank you, Chair. The first question via the online platform is from Mr. Stephen Mayne. Thank you for offering shareholders a hybrid AGM this year. And will you commit to keep doing this in future years to maximize shareholder participation? Big companies like Bank of Queensland, Bega Cheese, BHP, Boral, Brickworks, Commonwealth Bank, Flight Center, Fortis SKU Metals, Harvey Norman, Metcash, Origin Energy, Premier Investments, Ramsay Health Care, Rio Tinto, Seven Group, Soul Pattison, Super Retail, Whitehaven Coal and Walley, all banned online questions and voting in 2022. So well done for showing them up. What was the experience like from your end?

So we're a global technology company. So we were keen to continue to have a technology-enabled AGM. But I would say that it isn't without cost and complexity. So it's one where -- yes, we'll take feedback. We'll see how practice evolves, and we'll make a decision closer to next year as to how we continue, but we were keen to continue this way for now.