U.S. Markets closed

Edited Transcript of SOON.VX earnings conference call or presentation 19-Nov-19 12:00pm GMT

Half Year 2020 Sonova Holding AG Earnings Call

Staefa Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Sonova Holding AG earnings conference call or presentation Tuesday, November 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Arnd Kaldowski

Sonova Holding AG - CEO, COO & Member of Management Board

* Hartwig Grevener

Sonova Holding AG - CFO & Member of Management Board

================================================================================

Conference Call Participants

================================================================================

* Christoph Gretler

Crédit Suisse AG, Research Division - MD in Equity Research

* Daniel Jelovcan

Mirabaud Securities Limited, Research Division - Analyst

* Maja Pataki

Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector

* Michael Klaus Jungling

Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst

* Patrick Andrew Robert Wood

BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team

* Sebastian Walker

UBS Investment Bank, Research Division - Associate Analyst

* Thomas M. Jones

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Veronika Dubajova

Goldman Sachs Group Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the Sonova Holding AG Half Year Results 2019-2020 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Arnd Kaldowski, CEO. Please go ahead, sir.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [2]

--------------------------------------------------------------------------------

Sandra, thank you very much. Good afternoon, everyone. So our report out on the half year 2019/'20. I have Hartwig Grevener with me and Thomas Bernhardsgrütter, whom I think you all know. And I want to guide through the presentation at the front and Hartwig will took over the financial section.

On Page 2, the usual disclaimer, no change in words and the same meaning as before. And we'll start off on the Sonova Group results before we dive deeper into the HI business and then into the Cochlear Implant business.

Here on Page 4, the probably 6 most -- or 5 most important numbers to describe the first half year. We'll go into more detail, but on an aggregate level, very pleased with the top line growth at 12% in LC, nicely carried by all 3 businesses. And I'm sure you've taken a look already. I would say it's fair to say we win share in the first half year in all 3 segments we're operating in.

And then a solid contribution on the EBITA adjusted side with 16.1% in LC. We will have more to unpack here. But this is before restructuring costs, where we're on the journey to further optimize our footprint.

On the EPS, 14% in Swiss franc. There is a Swiss franc headwind in here. Outside of that, you see the positive result and then an effect of the share buyback.

Innovation, still critical for us. I think we're in the -- getting into the second half of the Phonak Marvel launch, but the first half year was still fully the Phonak Marvel launch relative to a year before, where we didn't have that. Also, the introduction of the 3D MRI will play a big role here in unpacking the story. And then I'll share a little bit on what the new product launches were, which will help us in the next 12 months from a growth momentum perspective.

On the back of those numbers, feeling good about the sales momentum, therefore, taking the sales outlook up to 8% to 10%. So plus 2%. Obviously, a lower number than the first half year. I think it's important to remember that last year, the phasing was the other way around due to the Marvel launch. Particularly, we had a little bit more than 4% more growth in the second half. So in reality, we look at the second half as the momentum in daily run rates continues, but not a significant step-up as we had last year out of the new products.

And then from an EBITA outlook perspective, looking at a 12% to 15% EBITA growth adjusted for the full year, expecting to pick up on basis points a little bit with regard to the first half year.

If we go to the next page. Don't want to dwell deep here. We've looked at that at the Capital Markets Day. But if you look at the growth and where the growth is coming from, you can see that the 3 first ones here all show nicely contributions on the growth side, innovation through the Marvel and the 3D MRI and above-market growth on Audiological Care due to the improvement to the network as well as the expansion. And then we'll talk more about the private label partnership in the U.S., which really is in line with our strategy to drive more reach through multi-channel partnerships.

On Page 6, I spoke about the model and the 3D MRI, clearly driving strong growth for us. Now in the second half of the wholesale launch logic, we always have the prime product in the first year, and then we start to roll the technology into the Unitrons and the Hansatons as well as into other form factors you'll see this year to help us sustain momentum on Marvel 2.0, as we shared at the Capital Markets Day, and then the aim on the Cochlear Implant side as a new tool for surgeons to monitor their insertion of the electrode. So I would say second year, always a little bit weaker. But in general, we feel good about the new introductions we made to sustain the momentum.

If you go to Page 7. I don't want to read all the words, but first line, the 12% in LC. We have an FX headwind of almost CHF 33 million on the top line. You look at the EBITA adjusted at 16% in LC. There's a headwind in here of CHF 12 million. So this year, Swiss franc, not our friend. Last year, we were going into the other direction.

If you unpack the EBITA margin and -- represented in LC, we had 70 basis points. We have used first half of the year to consciously make some more investments into R&D, where we were able to accelerate certain projects because we did see the top line going well but also more investments from a go-to-market. And I'll get in the individual businesses towards that, but that was a conscious choice because we said we want to go drive the organic growth in the second year after the Marvel launch.

You can read the lines here. 12.2% organic growth, Hearing Instruments business, especially strong in the U.S. Audiological Care stepping up to 6.9% organic, which is almost 2% better than last year. All major countries are contributing. And then on top, about a 3% on the inorganic side. And then a very strong growth rate on the Cochlear Implants carried by the 3D MRI but also strong upgrade sales, which last year were pretty low. And all of those growth in the CI side actually nicely across all different regions.

From an EBITA perspective, 6.7%. If you unpack, take out LC as well as some of you may remember, last year, in the first half, we had a -- and we shared that with you, a CHF 3.9 million provision release out of Vendor B. We did not have this, this year. So if you look in the step-up year-over-year, we're at 440 basis points. You don't see that on the as reported, but it indicates to us that we're on a good path to the 400 basis points we wanted to get structurally out of the P&L for this year.

And then on the EPS side, adjusted 14% up despite the Swiss franc. Good working capital performance, which Hartwig will voice over, and the continued share buyback activity here.

Going by the 3 businesses. The 1 million units on the Marvel side after 10 months, as we said, Belong was more than 12. So good momentum, no change to that. Currently, we see that still going very strong for us. And the incremental product sectors or form factors are helping to add to the Marvel as a unit. The U.S., particularly the VA, obviously, very strong performance. But we see strong growth across all different channels carried by the Marvel technology. We see Marvel being above 70% on the rechargeability side. This is pretty consistent here coming off about 35%, which we had around the Belong before, and then the new product introductions.

Moving to the Audiological Care business. I said growth in all major geos, particularly strong from a double-digit same-store growth. The U.S., strong still the year after we restructured the network. The U.K., Australia and the Nordics, we talked about the omni-channel strategy at the Capital Markets Day. We've done a smaller acquisition in Australia in order to learn how an omni-channel approach with store and online is received by consumers. And then a bigger one for us, we had 2 countries still where we had 2 brands. One was Belgium and the other one was Germany. And we've used the half year in order to integrate in both countries the brands under the stronger brand so that go forward, we can benefit from the marketing investment and can get to the most efficient structure for the market. This is still kind of concluding the AudioNova acquisition and the many brand moves we had to do where we have multiple entities.

On the CI side, good growth in all markets, talked about the 3D MRI. I think the upgrades, we had 2 significant upgrade launches at the end of last fiscal year. So in March, one is what's called Naída CI Connect. That is an accessory you can clip to the processor, which has the SWORD chip in there. So we're bringing the connectivity to people, and that's even backwards oriented for the ones who have that processor, which is important and has become more important than Chorus' processor for an older electrode technology. And so we see good upgrade sales driven by these opportunities here.

The last point with regard to go-to-market investments. This is actually across all 3 businesses. Hence, it's at the bottom here. We're increasing selectively in the markets where we see runway with regard to the wholesale business and the feet on the street we have in order to drive more into competitive accounts.

We're doing the same on the Cochlear Implant side in the U.S. So you can imagine when we have 20% revenue relative to somebody at 60, there's lots of runway to penetrate more accounts while we have the right products. And then the last one for the Audiological Care, 2 elements here: an increase in greenfield openings and at the same time, more investment into lead generation and call centers, which we need in order to move more consumers into our existing stores.

We voiced over at the Capital Market the structural optimizations, which we were working on. We have now concluded them in a way that they are executed to the degree that people are informed and we can take the restructuring charges. Three elements here, all in the spirit of getting stronger on the one side; on the other hand, more cost-efficient.

In the U.S., we're moving the different back offices from wholesale, which we had in 2 states, and then the retail back office into one facility in Chicago land. We, in Germany, are moving the 2 different brand headquarters into Geers in Dortmund. A couple of other things ongoing, including IT alignment here. And then on the marketing execution side, we're investing more into digital lead generation on the wholesale side and to support our independence. And we're doing that by ramping up resources in lower-cost environments and consolidating them while we're making adjustments where they were in higher-cost environments.

You can see the numbers here. We expect an impact of CHF 10 million run rate by middle of next year. And we were booking CHF 15.5 million restructuring costs. Part of that is severance. Part of that is when we're ending leases earlier.

Page 10, the P&L. A couple of points I want to spell out. Obviously, the 12% is what we were hoping for. We were aiming lower, but we were hoping and driving it to the 12%. You see on the gross profit side, a little bit above the 12%, 40 basis points here in LC -- in margin. If this is LC corrected, it's about 70 basis points.

The second one to keep in mind, with the significantly higher rechargeability we have, there is more cost on the product side. It is fairly paid for in ASP. But if you look at the margin in percent, it has a mix effect here, which was a headwind for us. We always said we need to find ways to counter and not have negative basis points. And I think we did this year, but we didn't say we -- there is not an impact somewhere if you look on a margin percentage level.

OpEx, clearly an area of, I would say, on the one side, planned investments, and I talk about R&D and go-to-market, but also a couple of headwinds, which we'll spell out to some degree later. So I would say more kind of some are good ones and some are not so good ones. And then you see the EBITA here and the currency impact as well as post the adjustments for the restructuring, getting a 5% FX headwind as well as about a 6% out of the restructuring.

There's 2 other line items to comment on. The EPS, 14%, as I showed before. Reported, you will find a significantly higher number. That's based on the Swiss tax reform and us having to account for that in a onetime effect, not something which will stay with us. And then on the operating free cash flow, a lot of good work on the working capital side but also some positives out of IFRS, which Hartwig will unpack later.

Getting to the bridge on the top line side. Not a lot of adjustments, a little bit divestment still out of last year, U.S. retail adjustments. You see the CHF 16 million coming out of M&A and then a very nice CHF 143 million in organic growth. You see the FX impact here.

If we move and compare this by business and also look a little bit on the step-up from 1 year to the other, you can clearly see on the HI side after 1.7% in LC last year, we're now at 11%. So you see the swing here out of product and the acceleration on the AC. CI, similar picture, high single-digit growth last year, now going to the 22%. And you see there's relatively little acquisition effect given the large size of the organic side.

Our next page is an interesting one. Last year, we were in a position where the U.S. was a headache. The minus 8.8% you see here was organic, minus 3.6%, I looked it up this morning. And while we like the EMEA at almost 10% on the back of the 7% and the almost 12% in Asia Pac on the back of an 8%, obviously, the U.S. used the opportunity to recover and add. And 20% is certainly a big number and is carried by all 3 businesses, as you can see in the voiceover here -- or in the detail here. Nicely done on growing in all channels from VA to independents to managed care in the U.S. and the private label there on the AC side, double-digit same-store growth, and on the CI side, taking full advantage of the 3D MRI and the upgrades.

A little weaker, the Americas. Not a big headache for us because at least we know that a big driver in there is Canada, where the market is down. So not in a territory where we lose significant market share here, but really, Canada being the biggest country in there with a difficult market environment. We think that it's more of a 1-year effect, but it is currently in the market.

On the EBITA side, organic at 38%. The FX impact and the adjustment, I think that's pretty logical here.

I want to move on to the Hearing Instruments. First point here on the AC side, the incremental acceleration. Last year, we were around 5% from an organic. We're now in the above 6% territory, and that's a pretty steady buildup from half year to half year. So we feel good about the momentum we have there. Talked around the double-digit growth investments on the R&D and the go-to-market side, which for us is pushing more momentum go forward or sustaining momentum.

And then on the new products, I think we voiced them all over at the Capital Market. The Phonak Marvel 2.0 was an expansion to the portfolio. We introduced the new myPhonak app, which gets a lot of positive responses also in VOC compared to other people's apps that was rather a weaker point for us. It includes the remote functionality, includes the remote fitting side, includes a couple of other applications, all nicely integrated into one tool.

The new private label contract with the largest U.S. hearing aid retailer. We're not in a position to share the name, but I think everybody is tracking, which helps us drive some top line here. And then the Unitron and Hansaton.

The next one, I can go pretty fast. They're just here for you to be able to dissect the growth in the level we feel comfortable sharing it. Hearing Instruments with a nice acceleration. I think important to point out that the Hearing Instruments business had an EBITA margin in LC adjusted of 90 basis points.

If I then go into the Hearing Instruments business, which means our wholesale business, obviously, the biggest swing here from a negative 1.7% growth to 12.2%. Kudos to Marvel but also the good execution of the team on the ground. We've seen higher unit volume and improved ASP on VA, returning to historic market position. And then in the managed care, which is a fast-growing segment, probably comparable or even faster than the Costco segment right now. We are benefiting from the partnership we closed with a large health insurance provider 1.5 years ago.

On the AC side, you can read the numbers. As I said, we were stepping up here on organic growth. Acquisitions stayed about the same. Clearly, for us, getting better on getting more leads on the digital side and bringing them to the right store where we have capacity is a big focus and helped us to drive the same-store growth. We also have seen increased ASPs and improved sales conversion. So I think the team is doing a good job in getting better in the way we execute in our 3,500 stores. We continue the bolt-on acquisitions. We stepped up a little bit on the greenfield openings. For us, both is important, and it depends on the market and the opportunity. But the greenfield is not to be underestimated in the relevance for us here. And then Marvel has a positive impact for our Audiological Care business.

Moving to 21. On the cochlear side, I said everything around the sales side already. Probably as a reminder to everybody, we launched the HiRes Ultra 3D in the U.S. last year in September and in Europe in October. So they're both now at a point where they annualize. EBITA side, I said, if you correct for the provision release, around the 440. We have a -- in LC, we have a significant FX headwind, which you see come through on the as-reported number. And we also invest into, particularly the U.S., into more sales and marketing capability. If you just look at our market share in the U.S. and having good product, we see the opportunity to keep taking share in the U.S. with the right investment level here.

Getting to the key financials on the cochlear side. Talked about the top line. You can see an EBITA margin improvement of 90 basis points. Again, the Vendor B release last year was in the as-reported number but was a onetimer. We said that last year. Hence, you're not seeing the 440 fall through here. But it is organically there.

And then on Page 23, the split into upgrades and systems, about the same number. But you can see that we nicely picked up, particularly on the upgrades and accessories, which last year was a rather weak performance and held us back sales. Both sides are coming well through given also the new product on the upgrade side with Chorus and the Naída CI Connect.

Before we get to the guidance, I want to hand over to Hartwig, who's sitting here, and have him go through the financials in more detail.

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Thank you, Arnd. Hello, everybody. I'm on Page 25. Arnd has already covered sales, profitability and EPS to a large degree. You see here that we are picking up on operating free cash flow, more than 80% increase year-over-year, largely driven from about CHF 75 million of improvement in trade receivables, where we have made a more consistent approach in collections, but also considering IFRS 16 implementation impact that no doubt you'll recognize in its impact structurally on how the cash flow is represented.

The share buyback program is progressing. We spent another CHF 175 million in first half of this year. And as I've mentioned at earlier occasions, we're running this under a delegated program, where we are not interfering on a month-by-month basis.

Net debt at around CHF 750 million, including IFRS 16 effect. We'll look at this in a few pages past this one.

And there is a Swiss tax reform impact on the balance sheet but also on the P&L in a magnitude of CHF 150 million, which is generally an effect that you see also with other Swiss corporates. We are -- as an effect of the Swiss tax reform, IFRS allows and requires us to book deferred tax asset that is a function of a change in tax environments but absolutely, overall, in the realm of what we had expected in regards to the Swiss tax reform.

Next page is a repetition of what you have seen already. Let me just identify that the return on capital employed is improving. It's showing here it was 160 basis points. But there is also a negative impact in this case from this additional CHF 150 million deferred tax asset related to the Swiss tax reform. Or else, this would have been another 60 basis points better.

Moving on to Page 27. Certainly a page that has caught your attention, identifying and reconfirming that we have accelerated our investment in R&D year-over-year by 12.2%. Not only what you would say traditional R&D but also at the rims of this in regards to e-solutions, apps and innovative concepts. You see that we have doubled down in sales and marketing, 10.7% up. More feet on the street and more intelligent, strong support from the marketing side.

At the same time, you're seeing that, ultimately, the largest year-over-year increase is in G&A. And we're not normalizing anything out here, but there is a lower figure on an underlying basis. And what we have here is an increase in investing in our IT platform in the AC business. You have seen us mentioning this also in the full year release in May. So there is a continuing investment that we're doing here.

In addition to that, I have booked provisions for contract obligations and increased bad debt expenses. The term of provision for contract obligations might have not appeared early on. So let me just say that in -- to a certain extent, we have multiyear customer contracts, and it can happen that in a multiyear perspective, the terms determine that you have to accrue for certain obligations that depend on how the business is going. And we were not 100% caught up on this, and we had to recognize certain amounts here in different geographies.

You see that in the prior year, we had this CHF 3.8 million Cochlear Implant product liability provision release, ultimately making up -- building up the OpEx increase of 11.9%. And within the OpEx, the cost for restructuring that we have adjusted for amounts to CHF 14 million also recognized here.

Moving on to Page 28. You see here the below EBITA reconciliation and the CHF 150 million and change impact from the tax reform. Underlying tax rate is unchanged, about 13.5%. And I want to reconfirm that also how the tax reform is turning out. We hold on to our expectation in the midterm perspective that our tax rate will remain in the mid-teens, and we have no surprises here at this point.

Page 29 is giving you the details on the operating free cash flow reconciliation, and as said, driven by better net working capital performance, in particular, collections and with some accounting help of CHF 37 million IFRS 16.

On Page 30, you see the different stats on working capital. Regarding DSO and DIO, you see the DSO is improving, but it's different reference points and time than what you see in terms of the cash flow. So this is comparing year-over-year, as you have probably noted. And also on a year-over-year perspective, we have not yet seen an improvement in DIO and actually increased by 7 count even though now in this first half year, the cash flow impact of that was more favorable.

Capital employed and return on capital employed. You see it here. It's going up, capital employed. Return on capital employed is improving. And you see that net debt is now at CHF 760 million, including CHF 270 million impact from IFRS 16. And pre-IFRS 16, you can see the number here, giving us a pre-IFRS 16 net debt-to-EBITDA ratio of 0.7 comparing to a targeted ratio of 1.0 under the share buyback program that we have -- program that we have announced.

Page 31 is just your reference for IFRS 16 impact. So I won't go through that and return back to Arnd.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [4]

--------------------------------------------------------------------------------

Thank you, Hartwig. On Page 33, you see the changed guidance for the full year here. Let me start off on the right-hand side. Midterm guidance remains the same. We're looking at this year as a strong top line contribution based on the initiatives we're driving and the products we've brought out. We feel comfortable to take the organic sales grow up by -- growth up by 2% and the bottom line to 12% to 15%, which would be 90 basis points improvement, a little higher than the 60 basis points we have in the midterm target.

If you go to Page 34, just a couple of our thoughts on how we think about first to second half while you're doing the math on the 12% we've shown and the guidance being 8 to 10-ish here. I think what's important, lots of pluses and minuses here, but the one thing I said at the outset of the call, last year was 2% in the first, 6% in the second. So clearly, a more difficult comp coming into the second half, logical with the product release cycles we have. Yes, we have expanded the Marvel portfolio and we got the Unitron and the Hansaton out. But ultimately, the RIC Phonak is the strongest contributor we have. The same is true on the Cochlear Implant side. So again, from a daily run rate perspective, not concerned but wanting to make sure we reflect appropriately the comp base.

Hartwig, anything to say on the FX side?

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [5]

--------------------------------------------------------------------------------

I mean we obviously lay out the FX dynamics as everybody is used to us doing this. If you look at what happened the last -- the first half and what we are facing in the second half, we have probably a rather similar level of impact. In the first half, the negative impact of the euro was a little stronger year-over-year than we will, at current rates, see it in the second half. At the same time, we had a mild help from the U.S. dollar. So magnitude, as of today, I would expect a similar level of impact in the second half.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [6]

--------------------------------------------------------------------------------

Okay. With that, we're through the presentation and at a place where we can open up for questions from your side. Sandra, if you open the line.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Patrick Wood from Bank of America.

--------------------------------------------------------------------------------

Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [2]

--------------------------------------------------------------------------------

Perfect. I have 2, please, if I may. The first would be on the U.S. same-store growth. I know you had a tough year the year before. But a very, very strong number. I'm just curious if you could give us a little bit more details in terms of what you're seeing in store. How much of this do you feel was Marvel? How much was footfall and execution in terms of marketing? Just a little bit of color around that will be helpful.

And then on the second side of things, obviously, flagging again the managed care business growing in the U.S. I'm just curious what your outlook is. Do you think over sort of a 5-year time horizon is -- what coverage could look like for the typical American? Should we continue to expect this to expand over time? That would be helpful.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [3]

--------------------------------------------------------------------------------

Patrick, thank you. On the same-store side, I think 2 things are coming together. And I think Christophe in the Capital Markets Day was alluding to that. I think in general, after the refinement of the footprint, we went from 300 to 200 stores. We really put a lot of emphasis on how we help the audiologists in the store to guide consumers through the sales process and close -- so better close rate in the stores, continued to go up. We also have a lower vacancy rate because we got better on the voluntary attrition. So that's really more the store side.

But then the second one, we're increasing the capacity we have with regard to lead generation digital in combination with the call center. We, since many years, had an asset called Hearing Planet. It was acquired 8 years ago. But 2 years ago, we repurposed this one towards being the front end to our stores from a lead gen perspective. And so we see more and more good-quality leads generated digital, prequalified through the call center there. And we're increasing the number of people in the call center, which allows us to drive that same-store growth, which we need to also improve the profitability.

From a managed care perspective in the U.S., I think we're, in my read, still rather early innings of people getting access to their private insurance to a hearing care plan. I don't know the exact percentage, but I think we're still below 50% from the insurances we work together with. And they are committed to drive it up.

I think the second one we're hearing, and this is a couple of years out, the discussion has started from the Congress side to put Medicare coverage in place. That's early, but I do think that we see increasingly a component of coverage coming to the people who had work or were in the Medicare environment. And I think that will help the market overall. Some of the insurance contracts give people a lot of choice and at surprisingly high values for the hearing aid, other ones at lower end. But in principle, we like that increase in coverage.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from Maja Pataki from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [5]

--------------------------------------------------------------------------------

I would like to take a look at your retail operations. Arnd, could you clarify how much like-for-like store growth was in retail or whether that is actually -- your organic growth is your like-for-like same-store growth rate? And then I'd be interested in understanding how your greenfield operations are impacting your retail margins and how we should think about that going forward.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [6]

--------------------------------------------------------------------------------

Maja, thank you. I think if you look at the organic growth rate, the vast majority of that is -- or the majority of this is same-store. We are not at such a large number of point of sales from a greenfield. We probably added bolt-on and greenfield around 100 POS. And if you assume half-half, it's not such a big number, I think. So in that regard, most of our organic we're showing here are same-store.

I think from the greenfield perspective, we're getting better to get the return faster. I think historically, we would have said you have the -- you are profitable with a new store after 2 years. The better we become on that lead generation front end side and can generate demand on a ZIP code, the more effective we will become. So with that increasing capability on the lead generation side, the greenfield openings become economically more attractive.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question comes from Michael Jungling from Morgan Stanley.

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [8]

--------------------------------------------------------------------------------

I'd like to ask 3 questions, please. Firstly, on organic sales growth, the guidance range is 7% to 9%. If you look at the bottom end, that would mean around 3.5% organic growth in the second half. Under what sort of circumstances would you actually expect to see such a low growth rate?

Question number 2 is on the following: can you comment on how much you've noticed demand -- Demant cyber attacks contributing to organic growth in September and what you've seen so far in the second half of your current fiscal year?

And thirdly, on the provision that you've created on the contract obligations. What was the amount? And will we see another hit to the earnings in the second half of this year?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [9]

--------------------------------------------------------------------------------

Michael, thank you. On the organic growth, if you go to the low end of the guidance, which scenario would you expect? I think you would expect a significant headwind from our competitors, which we know as Sivantos has brought out a new product, we know that our cochlear colleagues were not particularly happy about their numbers. We also know that Demant still has some new products, which they have launched. So I think you would need to assume a rather more competitive environment. And some of that may be competitive intensity in addition to product.

The second question, was it about the Demant IT? I wasn't sure...

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [10]

--------------------------------------------------------------------------------

No, sorry, sorry. It was about Demant or William Demant cyber attack. I'm just curious how much it benefited you in September and what you've seen in the second half of your current fiscal year, whether you've seen some benefits going into the second half.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [11]

--------------------------------------------------------------------------------

Yes. So predicting the question from someone, Thomas was doing his best to look at our growth rate over those particular days. We cannot point something in our sales numbers where we say, wow, there was an unexpected increase in the number. We would logically expect that there was some impact, but we just can't analytically find that, not in December -- September nor the October.

From a provision side, Hartwig is raising his hand.

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [12]

--------------------------------------------------------------------------------

That's my job, Michael. So we don't provide all detailed analysis on those cost categories, as you know. And we haven't normalized it out formally. But the way that we want you to think about it is a magnitude that would be a mid-single-digit impact in the growth rate for this G&A in the first half.

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [13]

--------------------------------------------------------------------------------

Okay. So can I -- without doing the math, sorry, I didn't have any time to do the math, does that imply that you'll have to book some more provisions in the second half for these contract obligations? Or are we done?

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [14]

--------------------------------------------------------------------------------

No, no, we're done.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

The next question comes from Veronika Dubajova from Goldman Sachs.

--------------------------------------------------------------------------------

Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

--------------------------------------------------------------------------------

I will keep it to 2, please. The first one is on gross margin. I'm just trying to understand a little bit what the different pulls and pushes were. I mean obviously, you do generally have a lower contribution from retail in the first half. Back of the envelope, I think that maybe explains 70, 80 basis points of the decline versus 2H of last year. What's the balance been driven by? Are you seeing more pricing competition in the market? Is this purely rechargeability? If you can give us a little bit of a bridge on that, that would be helpful.

And then my second question is a bigger picture industry question. If I look at your performance, the top line is absolutely impressive. But I'm a little surprised to see you growing double digits and yet only improving margins by 70 basis points. And I think we've seen similar trends. There's a lack of operating leverage at some of your peers as well. Do you think this is a new feature of the industry? And I guess does that change in any way how you're thinking about how you run the business on a medium-term basis?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [17]

--------------------------------------------------------------------------------

So on the gross margin side, I think the biggest single headwind for us if you look at margin in percent is the change with regard to the rechargeability side because of that significant step-up here by doubling the rechargeability on the Marvel. I'm looking to Hartwig if he has anything else to add out of the bridges he has run.

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [18]

--------------------------------------------------------------------------------

No. I mean there is also an FX impact that is working against us, which ultimately takes away on the bottom line, 30 basis points, as we said. But generally, yes, it is the mix trend that determines that by now, we have about 70% share of rechargeable or more than 70% within the model.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [19]

--------------------------------------------------------------------------------

Veronika, if you would not have the extra cost in the devices for the battery as well as for the -- as well as for the extra charge, you would be nicely in the triple-digit basis points on the gross margin side.

With regard to the industry, I don't see a change in the industry, you may see us operating differently. And I think we were trying to say that when we laid out strategy last year. We shared some of that from a Capital Markets Day perspective. But I think as Hartwig has pointed out, there are some elements in the G&A, which I would call rather not something we would have liked to have. But when they do occur, we have to recognize it and put it in the numbers. Therefore, we don't expect that to happen go forward. We did what we had to do.

But if you look at the R&D, my read is -- and you can go back. We've been very meager in our R&D increases over the years, especially if you compare to some of our competitors. And we said, look, while we want to get into a place where we lead more with regard to new technologies coming to the hearing aid, where now we're at the place that we know what we want to do based on strategy, where now we're at the place that we can afford to do a bigger step, and we feel good about this year, also the second half on the top line, as you can see. And I think the same logic is true when you go to the sales and marketing.

And you were the one asking at the Capital Markets Day how should I think about you saying so often sales and feet on the street. We do think that no matter if this is in greenfield or in [CRE] or on wholesale, we're not reaching all the customers who would be interested in our product. So I don't see this as an industry matter. I think you're looking at a player who says, I have a lot of meaningful product, and I want to make sure I reach the people who want to buy that on the sales and marketing. The R&D is really -- I do think there's more functionality we will bring over time to hearing aid.

--------------------------------------------------------------------------------

Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

--------------------------------------------------------------------------------

That's very helpful. And can I just sneak in a quick follow-up, if that's all right, on rechargeability? And I'm just curious. So you've had a lot of success, just wondering what your appetite is to let that feature drop through to the lower-end devices. Or do the economics just not warrant that at this point in time?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [21]

--------------------------------------------------------------------------------

Yes. I think for us, we allow it to go through. That's how we launched the Marvel. And we always had the rechargeability across the whole product line. I think we do benefit if we have a broad number of consumers buying the same type of product technologically. So there's a lot of leverage in the manufacturing.

So I think we still get a price premium for rechargeability. So I think it makes all sense. It is more when we look at margin percentages where we need to be mindful that we're not getting 70% margin on the incremental price we can charge for, for a rechargeable. But I think it economically makes perfect sense.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question comes from Christoph Gretler from Crédit Suisse .

--------------------------------------------------------------------------------

Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [23]

--------------------------------------------------------------------------------

I have actually 2 questions maybe. The first is just on the guidance upgrade. Could you maybe talk about what specifically triggered that if you think about your 3 different business segment in order of magnitude?

And then the second question relates to the investments you're flagging on sales and marketing. What is actually the kind of return that you're expecting from these investments in terms of how quickly would you expect those to kind of pay off?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [24]

--------------------------------------------------------------------------------

Thanks. Christoph, on the guidance side, I think we see broad-based good performance. I think we're probably a little bit more positively surprised on the Audiological Care. We knew that Marvel is a strong product. We're obviously surprised by the strong demand on the Cochlear Implant side. I think one of the important ones for us is the Audiological Care. The more we have half year over half year a little bit of a step-up, we believe it comes more of the capability and how we're running it. So it's probably less volatile.

So in that regard, these are the 2 which helped us get more comfortable about taking up. And then the AC has the incremental benefit that it's -- we believe it's more steady than something which depends on competitive product launches.

I did not note down the second question, sorry.

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [25]

--------------------------------------------------------------------------------

The second question is about the return on investment on sales and marketing investments.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [26]

--------------------------------------------------------------------------------

Yes. From a timing perspective, I think on the sales side, it depends on what you do. If this is more accelerating your lead generation purely by doing more digital lead generation, that's more kind of a 3 to 6 months in Audiological Care. When we talk about wholesale, I think when you start doing the investment, it does take you 6 to 12 months to have a stable sales force back and have the new ones adding to the growth side. So I would say sales and marketing in AC, more 3 to 6 and on the wholesale side, more 12-ish or so months.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The next question comes from Sebastian Walker from UBS.

--------------------------------------------------------------------------------

Sebastian Walker, UBS Investment Bank, Research Division - Associate Analyst [28]

--------------------------------------------------------------------------------

I had 2 as well, if I could. So I just wanted to maybe understand the phasing of OpEx. If you could talk as to whether we should expect to see stable absolute spend across the different OpEx lines in the second half?

And then the second question is I'm going to try and kind of get an idea of new launch time line. So how are you thinking about a new product for 2020? Is there a chance that you could get that product in before the May VA window?

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [29]

--------------------------------------------------------------------------------

So on the OpEx saving, so the second half is always a revenue-wise stronger half for us. And so there is a certain level of OpEx that is fixed, but there's also some OpEx that is flexing like commissions and to a certain degree, can also be reflected in marketing spend. And so I would say the OpEx phasing is, you could say, normal on an underlying basis if you take out particular items that we have flagged on the G&A side.

In regards to S&M and R&D, the overall guide that we have provided to you gives you an indication that we won't abruptly stop that. But we will, to a certain degree, continue investing, in particular, on R&D and where the occasion arises also on S&M. I hope that gives you a bit of a feeling on how we think about that.

Arnd, back to you to launch time.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [30]

--------------------------------------------------------------------------------

Yes. Sebastian, on the new launch side, I'm not making a declaration here. But if you follow our normal logic, we have a 2-year normal schedule for our RICs on the Phonak side. And yes, there will be some further upgrading of the Marvel into form factors where we don't have it yet. And that will be incrementally beneficial on the VA side but not a big step-up in the May time frame. That would be out of the norm for us.

--------------------------------------------------------------------------------

Sebastian Walker, UBS Investment Bank, Research Division - Associate Analyst [31]

--------------------------------------------------------------------------------

If I could just follow up with another 2, please. So just in terms of the costs, I guess, with the restructuring cost, you mentioned that there's a risk that we see further or elevated restructuring cost. So could you maybe comment on that in the second half?

And then in terms of product launch time lines, I mean, I guess, one of the things we've seen is a shortening of the product cycle across the different manufacturers. Do you think there's pressure to squeeze that down further? Or do you think the current 2-year cycle is appropriate in your view?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [32]

--------------------------------------------------------------------------------

I think on the restructuring side, we opened that discussion with you and your colleagues a year ago when I was a year into the company. And we said, look, based on the acquisitions we have done over many years and looking just at the footprint, there are places which are not cleaned up. And if you take the one in the U.S., Unitron had a back office in Plymouth, Minnesota, which was subcritical. And we had something in Chicago. So this would be a classical -- the German one is the classical one between Vitakustik and Geers.

So for us, this is a, from start last year, about 2.5- to 3-year journey because we don't want to do too many at the same time. But we picked up quite some pace here, as you can tell. It's hard to call the timing because at the end, these are pretty complex projects where we want to make sure that, first and foremost, we're not risking the top line. Because keep in mind, we've done -- once we told you in March, and we have now announced the ones in the second -- in first half, and we're still showing good organic growth, I would say that's a good achievement. So we have on our hands we're contemplating, but we're not sure if they're making the second half. Sorry for being that unspecific here. But we really need to run those projects accordingly.

On the new launch side, we don't see the world moving to a completely new RIC every year. I think we're more interested to have a meaningful step forward with a new RIC and then find ways like we did with the Marvel 2.0 that we generate incremental clinical evidence. We add certain functionality. We upgrade our application. We made some changes to functionality in Marvel with Roger Direct and all that for the second year. We think that's a far better way to run your sales force because there's a lot of work in a launch and a lot of extra cost. It is also not getting the maximum out of the product.

So I don't foresee us going to a cycle in which we have a full new platform every year. But that may change over time. I don't know. But I also understand the complexity of the R&D process and all of the regulatory consequences. So I think it would be the wrong investment to trying to just increase the frequency. I think you need to get more bang for the ones you're doing.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question comes from of Mr. Daniel Jelovcan from Mirabaud.

--------------------------------------------------------------------------------

Daniel Jelovcan, Mirabaud Securities Limited, Research Division - Analyst [34]

--------------------------------------------------------------------------------

Yes, just one question. On retail, you reported the 6.9% organic growth. I mean is it fair to assume that the unit growth was significantly lower? Because I expect that you pushed Marvel quite aggressively into your own retail like Geers. Or wasn't that the case? So just to find out the difference between unit growth and reported value growth, that would be nice.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [35]

--------------------------------------------------------------------------------

Yes. It's -- if you look at the 6.9%, it's more on the unit. There is an ASP element in there. So positive ASP, but it's actually more than 50% of the units. So we're also seeing us on the unit side being in a good place from a market share perspective.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

(Operator Instructions) We have now a follow-up question from Ms. Maja Pataki from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [37]

--------------------------------------------------------------------------------

Just to get back to the restructuring cost or to your guidance, the wording in the guidance where you said like there could be some material or significant restructuring costs coming through if you decide to do so. I was just trying to understand, if you undertake those restructuring, is it more a rationalization of the way you do business today, improved efficiencies, like you've done and announced? Or would it be a reflection of potentially changing the way you're doing business, i.e., moving more towards online from a retail perspective? That would be one question.

And the second question with regards to the rechargeability and the impact on your gross margin. It's fully clear that the impact on the gross margin is dilutive given the rechargeability cost. Is there any chance that you can increase the underlying gross margin for rechargeable products once you increase the overall volumes also in older -- or in other segments?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [38]

--------------------------------------------------------------------------------

Maja, thank you. On the restructuring, the things we have currently in mind are not making a change to our retail model on the store level. I think we're really -- and when you go through the examples we've done in the last 9 months here, this is really, if you think about Sonova as all of the different points in logistics and in warehouses and in different back offices, it's really, really getting the -- to the "optimal footprint." Yes. So don't foresee us to go down the pathway of making significant changes to the retail model, at least not in that time period here.

The second one on the gross margin side, yes, clearly, we have a lot more lithium-ion batteries we buy. We have a lot more rechargers, which we're buying. We also have dedicated projects on how to make a recharger cheaper from a design perspective and still looking good. So if you would look into the cost for the single item, this is improving. And it will improve because of the volume coming so much up, right? So there is an opportunity, as with everything else, to drive improvement of the purchase price as well as the assembly cost.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

The next question comes from Tom Jones from Berenberg.

--------------------------------------------------------------------------------

Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [40]

--------------------------------------------------------------------------------

My 2 questions, they're a little bit more balance sheet and cash flow related to be honest. The first one I wanted to come back to is on the trade receivables, which there's quite a big drop through the period. But if you actually look at it on a year-on-year basis, it was basically flat. I'm kind of interested in what exactly drove that increase and decrease. I mean was there some more favorable terms you offered to customers that you've now pulled back on? Or was it bad debt you chased down? I'd just be intrigued to know what was kind of underlying that improvement.

And then my second question is just on capital deployment. You spent, by the looks of it, the best part of around CHF 100 million on CapEx and M&A in H1, which, relative to the size of your business and your balance sheet flexibility, is, to be honest, chicken feed. How should we be thinking about your level of CapEx and M&A spend kind of on a 3- to 5-year forward view? I mean can you continue to spend decent amounts without going off-piste and pushing into adjacent areas within hearing health care? Or are there enough places within your existing businesses to deploy a meaningful amount of capital? So if the top line in the business continues to grow as it is, the current level of capital investment is going to become pretty insignificant in the not-too-distant future.

--------------------------------------------------------------------------------

Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [41]

--------------------------------------------------------------------------------

So Tom, let me just take the accounts receivable collections. It's pretty ordinary. It's ultimately where you deploy your management capacity and how well you keep up with housekeeping. And sometimes, we had different focus in that respect. And we have now been able to turn the focus on good old ways to keep overdue receivables low. And so that was an opportunity that we've now been driving harder, and honestly there's not really much behind that.

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [42]

--------------------------------------------------------------------------------

I think, Tom, on the capital deployment side, I think without going off-piste, as you called it, if you think about one of this area is the retail environment. You can also add to that alternative distribution models. No matter if they are helping your wholesale or your retail environment. And that is a focus, as you can see, from the bolt-ons. 2 years ago or 2.5 years ago, we did AudioNova. So we're not closed to expanding our retail business. I know there's a difference of opinion on the call here between us expanding the real footprint, but our declared strategy is getting closer to the consumer. And that's one direction.

I think new technologies is another potential direction. I would say for us, everything which is helping us with regard to getting stronger for our today's target customer, and target consumer is for us in the realm of clearly something we would be interested in. And we understand our balance sheet reasonably well and our cash flow development. But at the end, when we look at things, we want to make sure that they are strategically meaningful, meaning they help us accelerate our growth post the acquisition, and they're economically sensible. And that is a place where we always push every discussion on. So clearly, they have potential.

--------------------------------------------------------------------------------

Thomas M. Jones, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

--------------------------------------------------------------------------------

On the retail side, I mean there's been a lot of consolidation in the last 3 or 4 years, not just you but all of your competitors. And in fact, you've been divesting clinics in certain areas. I mean is there still a meaningful runway of retail outlets to acquire? Or are we about -- right down into the tail of what is attractive to -- for a hearing aid wholesaler to be purchasing?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [44]

--------------------------------------------------------------------------------

I think there's a couple of larger assets in the markets where everybody is already present. But then comes the other part, which is there's parts of the world which are faster-growing and where people at least who are coming out of European environment are not at present. So I would say yes, there is. I think you're not going to easily find another AudioNova from the size, but if you look at 100 stores or more, you can still find meaningful number of assets.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

The next question is a follow-up question from Mr. Michael Jungling from Morgan Stanley.

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [46]

--------------------------------------------------------------------------------

I have 2 more. Firstly, on Marvel. If I look at the organic growth rates by region, I would have expected more growth in Asia Pacific and also in Europe, where the iPhone market is not as large as the Android opportunity. But it hasn't happened. Can you talk about whether the competitive advantage that you've got on Made For All is tracking below your expectations?

And then question number 2 is, will you adopt the Android standard in your phones going forward? Or will you market, for the time being, everything on your SWORD chip, meaning on your own classical Bluetooth connection?

--------------------------------------------------------------------------------

Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [47]

--------------------------------------------------------------------------------

So on the MFA side, it's an interesting question you raised. We don't have the impression that the MFA is not a strong reason why people choose us. It's clearly half of the downloads we have. We know that in many audiologists, no matter which region, they are saying, "Well, I don't need to figure out what the cell phone of somebody is before I bring up connectivity." So I think that holds true in all regions. I think the U.S. is a place where, yes, the Marvel helps as a product. But as I was pointing out, if you go back a year ago, we would have said, wow, U.S. wasn't particularly strong, and we need to fix our operation there. So I wouldn't overread that.

I think with regard to the different protocols, if I look at ASHA, it doesn't add any functionality to our product. It actually is short in minimum with regard to direct telephony. So we're not particularly interested because we have it all in the SWORD. And we can offer it to every telephone, no matter if they are ASHA-compatible or the many phones who don't have ASHA yet on the Android side.

I think with regard to the HAP protocol, the hearing aid protocol, we are supporting this initiative together with our fellow competitors through the AHIMA because we do believe that longer term, we're benefiting all together from a more stringent protocol than what you would see in an Android/Google environment. And so ASHA, most likely not. And HAP seems to be delayed, but we're supporting the initiative.

Yes. No other questions? Okay. I get the signal that there's no other questions. If there's no other questions, we appreciate the time you spend and the questions you raised. Thanks for joining us here, and we'll close out the call at this point. Thanks, everyone.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Ladies and gentlemen, the conference call is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.