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Edited Transcript of SOON.VX earnings conference call or presentation 21-May-19 11:00am GMT

Full Year 2019 Sonova Holding AG Earnings Call

Staefa Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Sonova Holding AG earnings conference call or presentation Tuesday, May 21, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arnd Kaldowski

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

* Hartwig Grevener

Sonova Holding AG - CFO & Member of Management Board

* Thomas Bernhardsgrütter

Sonova Holding AG - Director of IR

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Conference Call Participants

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* Christoph Gretler

Crédit Suisse AG, Research Division - MD in Equity Research

* Daniel Buchta

Bank Vontobel AG, Research Division - Research Analyst

* Michael Klaus Jungling

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

* Oliver Metzger

Commerzbank AG, Research Division - Analyst

* Patrick Andrew Robert Wood

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

* Romain Zana

Exane BNP Paribas, Research Division - Research Analyst

* Veronika Dubajova

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Yi-Dan Wang

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Full Year 2018/2019 Results Presentation. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it is my pleasure to hand over to Mr. Arnd Kaldowski, CEO. Please go ahead.

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

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So good afternoon, together here in Stäfa as well as the people on the phone. I heard we're now online. Okay. Super. Thanks for joining us today to our full year result presentation. A, the ones in Stäfa who made the extra effort to be with us in person, but then also the ones on the phone. I have Hartwig with me, our CFO; and Thomas Bernhardsgrütter, our Head of IR. I'm going to guide through the highlights, Hartwig will pick up the financial section. I'll talk a little bit about the guidance, and then we have ample time for Q&A.

As always, a disclaimer on the forward-looking statement. I trust everybody to note. And then it's time to jump into the Sonova Group results.

Just a quick reminder on where we started into the fiscal year because we're going to talk about the full fiscal year here. We started off on a somewhat lower point because we were at the end of our product life cycle with the Belong platform, and so we guided for the year with 1% lower than our normal guidance on the organic side, and then divestments we have chosen to do strategically. So our overall guidance was 2% to 4% but with an acceleration in the second half of the year.

We also said that we're planning to have the Marvel at the end of the year, and so being able to deliver the Marvel 6 weeks ahead of our original plan and on content, which is the most important -- well, obviously important for us to accelerate the business in the second half year.

For the full year -- and I'll dissect the numbers as we go through the presentation, for the full year, 4.1% LC growth. It's a little step ahead of our own guidance, allowing us to produce a good adjusted EBITA. Adjusted because of the restructuring we had announced into Q4 to help us drive productivity in the years to come, with EPS growth at almost 12% in Swiss franc. And I think a strong sign of life and positive signal from an innovation perspective, obviously, the Marvel on the back of the SWORD chip. In addition, on the cochlear side, a step forward with the 3D MRI electrode. And I will talk more about those during the presentation.

This puts us at a good place on the sales momentum perspective coming out of the year and also educated us and led us to take up our guidance by 1% relative to our mid-term guidance. We still think for the mid-term, the midterm guidance is the right number but expecting 6% to 8% growth in LC this year, allowing us to drive towards an EBITA from 9% to 13%.

From a strategy perspective, no change relative to what we have discussed at the Capital Markets Day. Clearly, innovation critical but in 2 different directions in our business. By now, the one, we have to be best in audiological performance, that's why people by a hearing aid. But in addition, we need to also keep the expectations with regard to the incremental capabilities of a hearing aid with regard to application centers over time and really improving the consumer experience.

On our 3 businesses, we provide all of them with the right go-to market and the right strategic objective differentiation in audiological care, evolving our networks. I have one example on what we're trying in, one pilot right now in the presentation, and driving multichannel wholesale business in CI as well as in the hearing aid side and really getting better in serving the customers as they come in different forms, sectors, needs and expectations. And then driving over proportional investment into high-growth developing markets to participate in the underlying growth rate. So it's all about innovation, consumer access and participating in the emerging digitization.

On the innovation side, obviously, Marvel the most important, given the size and also the signal it sends to the marketplace. On the back of it, advancements to our e-solutions portfolio, both of them launched ahead of time relative to what we thought at the beginning of the year in the middle of Q3. The HiRes 3D MRI compatible electrode, which we brought out in September, so impacting the first -- the full second half year. Now 2 newer ones, not that relevant for the numbers last year but certainly important when you think through how we think about the first half of this year.

The second half of this year, we're in the process -- we launched end of last week, the Moxi Jump R, which is the SWORD technology and the capabilities we have on the Marvel side technologically also to our Unitron product platform. And then the cochlear business has launched, at the end of the year, 2 significant upgrades. One we're bringing the SWORD chip to the processor, not integrated, but as an incremental element, which you can clip on which allows people to upgrade their processors if they have the right technology towards connectivity. And then the second one, the Chorus really serves our "oldest population of people. It's the first electrode we had out, which hasn't received an upgrade on the process over a long time. So living up to our commitment to the patient base but at the same time, a good revenue contribution.

Now going back to the Marvel. Why is the Marvel so important? A, it represents -- so that product category represent 30% of our wholesale business overall. And then it's also the litmus test on are we ahead of the competition with regard to innovation. And what we hear from customers after they receive the Marvel, we now see also in the sales figures for them, this is the big step forward. Three important things they quote:

"The best hearing performance in side-by-side."

"The best rechargeability." Our second generation of lithium-ion.

And then the third one: "A clear step ahead of others on the connectivity," a, because we can connect through Bluetooth to all devices and not just the iPhone but at the same time, we can enable incremental features like picking up your phone on your hearing aid and choosing the microphone in there, which you cannot do with the MFi connectivity.

So clearly, a strong package. And if you asked your audiologist really for what makes the difference, they would say, I have to make no compromise on the most important criteria to buy a hearing aid. So really a good position to be in. If you think going forward, through our technology, certainly 2 to 3 years a unique differentiator if it comes to aid availability to users. So a good platform to continue to build our portfolio of products as well as applications.

Now you're here to talk and understand numbers too, therefore, a little a chart here on the pick-up for the Marvel in the Audéo product platform. The Audéo is what's shown here, as I said, about 30% of the total wholesale revenue. You see the different products, which we phased in over the years. You can see this nice steep pick up here on the right-hand side since the Marvel launched. You can compare visually here with the Belong launch, which we felt was a good start or a good launch, too. But you can see that the Marvel picks up more momentum in unit volume than what we have seen on the Belong side with a quite steep curve.

Incremental point here, high rechargeability. We're clearly above 50% in rechargeable volume in the Marvel world. On the Belong, it was more on the 30% to 35%, so we're really seeing the market shifting to rechargeability becoming the dominant mode, and I think that will continue over the years. But ultimately, I think rechargeable will be the way to go for all of the consumers.

Now getting to the summary of the financials. I don't want to voice over every bullet point some of the things I said already. Let me tease out the critical ones from my point of view.

Organic growth, 4.9%.

Then you see the EBITA adjusted. The adjustment we're taking here is, it is corrected for the restructuring costs we've announced around CHF 11 million because these are the things we do and don't always know the timing at the beginning of the year, so expect us to approach it that way going forward. But then we'll share what the saving expectations are out of those. You see a nice EBITA margin lift adjusted of 70 basis points, which I think, particular coming out of the first half year where we're struggling on price, a nice pick up here in the second half. On the hearing instruments, 8.1% organic growth in the second half. Keep in mind, Marvel came middle of November. So there's a phasing you have to think through.

And then the other big point for me if I think about the hearing instruments business is just a good steady execution on the audiological care side, 5.2% organic growth. We came out of about 1% in the year before and the 5% were pretty consistent throughout the year, and they were driven by many different geographies, including the ones where we made adjustments. So good, stable execution here on the audiological care after we have consumed the AudioNova integration.

Cochlear implants, 6.3% growth in LC. The one mental correction I make is really taking out the China tenders. As we know, they come at low margins. We had a lot of China tenders in the year before. And when I think about what's my real momentum, kind of adjust a little bit for those. If you adjust for China tenders in both years, it should be sitting at 8.7% growth in LC on the cochlear implants side, which I think is a fair measure of our current momentum.

Last point here on the cochlear implant side. A nice pick up from an EBITA perspective. I'll voice over more in detail, but we understand that's a critical point while we're looking at the CI business. And we're on a good path to getting into the mid-teens environment over time.

Quick comment on the cash flow side. A little shorter than we wanted it to be. Thinking through the strong shipments in the last quarter, particular on the Marvel, you could obviously imagine with the steep curve you've seen, it wasn't easy on the supply side. Electronics are hard to get by in the market right now, electronic components. So it was very back-end loaded from the execution of the demand side, and so we had unusually high accounts receivables and inventory in the system. And then share buyback is continuing on the pace we wanted to go.

Diving deeper into the businesses here. Just picking up the incremental information relative to what I said already. High single-digit volume growth in Europe and Asia Pacific throughout the year. So clearly, we're winning share unit volume-wise. The U.S. held us back in the first half year, but then a strong pickup commercial segment in the U.S. in the second half. How do we define the commercial segment? For us, it's the independents [less the] Costco environment, so not VA. But VA, as you can see, the numbers are published with the Marvel not launched in the VA yet, and other people having launched significant strong products before we showed up with the Marvel is a headwind for us at least in the numbers, second half year.

So always a lot of discussion about the cost of the rechargeability and the margin levels. We've been doing fairly well on that. The combination of the price lift we get for rechargeability, productivity gains we're driving in all of our manufacturing, together, allowed us to show good margin improvement for the business. But obviously, the rechargeability has a cost. So you need to find ways to make up for that.

And then the last one. We talked about it coming into the year. We had a good momentum in Costco in the second half because we launched in the Costco world, new products with rechargeability and with direct connectivity on the basis of B-Direct, end of the first half year.

Audiological care, as I said, strong momentum in many major markets, high single to double-digit in the one-time sharing year. Particularly important, Germany, with the 850 stores we have. The year before was softer, not just because of the AudioNova acquisition, but we also are in the process of combining all the different change and brands we have. Prior to AudioNova, we had 5 different brands in Germany, so a lot of homework ongoing. But despite that, in the last fiscal year, really a nice strong growth in the market share taking on the retail side in Germany.

The strategic repositioning, U.S. and the Netherlands, which we had initiated more than a year ago, were concluded by the end of the first half year. But for the full year, we've seen solid same-store growth, actually a pretty strong same-store growth above market for those both territories, which for me is an important measure to see that while you're adjusting your footprint, you're at the same time, you're able to drive the go-forward stores. So overall, very strong year-on-year audiological care side.

And then on the CI, at least, on this chart, I think I said most. One incremental information, high single-digit growth in U.S. and Europe. Lower sales from the China tender, but I think we know that price points are the highest in the developed markets. So certainly important to win share in those markets.

Going to Page 10. I don't want to dwell too much, most numbers I said. But if you take a look on the gross profit in adjusted, you'll see a nice lift here of 90 basis points year-over-year. You can see the EBITA adjusted here and the adjustments, CHF 19.2 million in '17, '18 came from still AudioNova integration work, CHF 11.5 million were dedicated to restructuring efforts this -- last fiscal year. You can see the EBITA reported with 8.4% growth.

EPS, depending on adjustment, are reported between 12% and 14%. The operating free cash flow is kind of the lowlight on the chart, with the commentary I made with regard to accounts receivables and inventory at the end of the period.

Return on capital employed increasing by 220 points. About 100 of that are coming from IFRS 15. So 120, I would argue, was fairly earned.

The bridge just as a visual on the growth side. So divestment is CHF 44 million. That was the hearing -- the insurance plan in the U.S., which we sold to a significant insurer but keeping the wholesale business within it. And then the chain reductions or the chain streamlining in the U.S., good organic growth at the 4.9%, and then about 1% as we normally have on the retail bolt-on side.

A quick look on the phasing on the growth side between first half and second half and a little bit of a few under the hood breaking it down into organic and acquisitions. 2.1% and 5.9% on the highest level, but then an even more pronounced step-up on the organic side in the second half to 7%, because the acquisition side was a little lower, based on phasing of larger items in the audiological care acquisitions.

Looking by geography. That requires a little bit of an explanation here. If your start off with the EMEA side, strong in the first half year, strong in the second half year. We've seen a nice pick up from the Marvel. This is all businesses, and we had double-digit growth in HI and in audiological care in EMEA.

Then the U.S, minus 3.7%. But if you correct for the year by the divestments, we're sitting at 2.3%, still not such a good number. But then if you look at the phasing here between first half and second half, and if you assume you have to add the 6%, and this is just an assumption, to both half years, you would see a, we're having a nice step up here in the U.S. with the first half, and organically, you're getting in the second half into some meaningful order of magnitude. If I add the 6% as an assumption, it would have been 7.7%. That's not the exact number but directionally, I think that's the assumption.

Americas, good start of the year. The second half more driven by a year-over-year comp situation with regard to specific tenders. For my eyes, nothing to be worried about from a macroeconomic perspective having seen the market slow down. But there were really a significant number of larger CI tenders particularly, which we participated in.

And then for Asia, while New Zealand is going well in audiological care, we still have to do homework on the Australia side in our own network. That's our own doing. And then China and Japan, ahead of the Marvel launch, a little slow. Regulation takes longer in those markets.

The only comment here, as you can see on the chart, the pick-up half year over half year is all on the HI side as you would expect from the Marvel.

From an EBITA perspective, 6.7% operationally. You'll see the restructuring costs here getting us down by CHF 11.4 million. No other comment required, I think.

On the half year view for the group, wanted to point out, if you look at the gross profit step up and if you look at the EBITA growth step-up, you can clearly see, a, the volume but probably more importantly, the ASP side coming out of the Marvel launch, which helped us accelerate significantly in the second half and get us on a better profit level from a gross margin performance here.

Going deeper into the hearing instruments segment. I talked about the 5.2% organic growth on the audiological care side. Two key things: I think on the one hand, the team has gotten better to learn from each other, deploy best practices and capabilities on how we generate leads; optimizing how we use digital for driving leads; moving some more of the leads to the digital world because that helps us to have the interested consumer at the right point of time at the right store, which is important to optimize your capacity. And then the second one really continued good work on the store execution, meaning how we train people: if they sell well, did they up-sell well, that they manage the consumer well. We see one other percent point improved conversion rate relative to what it was a year ago. So really retail execution would be my argument.

I talked about the divestment here. The important one in the EBITA bucket and Hartwig, I think, will go a little bit into the P&L. We're not just trying to favor our way to the EBIT, but we're making choices. So, one of the choices we made last year is that in the selected area for our feet the street in sales as well as the marketing capabilities we invest. And there you'll see that we invested more in OpEx on the sales and marketing than the top line growth for us, which we believe is the right thing to do because we see growth runway in our business.

Now on Hearing instruments. Just so that you see the numbers here, the one I want to voice over, because this is the integrated audiological care and hearing instruments business side for the wholesale side, is predominantly the EBITA because I'll unpeel the onion one level deeper on the top line. You can see how strong the pricing impact was to the HI business as a whole coming out of the Marvel lift.

So now on the level of hearing instruments business, so the wholesale business product and selling to channel partners. We stepped up from 0.5% growth to 8.1% growth organically. Very strong execution of the team but also very strong reception of the product. With regard to ASP versus unit volume, we got to the place we said we want to get to and delivered on that when we voiced it over after the first half year. So think about the price lift versus what we had in the first half year of the low-teen environment price improvement for the product category, Audéo, and that was what we said we want to achieve. And then, a significant unit lift as you could see on the chart before.

We have understood competitive pressure. We have every half year allowing people to come to the party, enjoying. So we're lifted with VA and selling in VA the Marvel since 2 weeks, which obviously should have a positive impact in how we sustain growth momentum.

And then one comment here on the relationship to the hearing service plan. I know other people take different choices. Strategically, we felt it's the right thing to partner closer with one health insurance. It's going very well from the growth momentum in there. We're exceeding the objective we had when we made that change from an acquisition -- or from a divestment perspective for the unit volume and the revenue we're realizing at the wholesale.

Audiological care, you can see a pretty steady organic growth. I would say a little bit of a tick up in the second half. Also, the comp level was higher in the second half. So in minimum, keeping the momentum if not building some. On the acquisition side, a little bit of different profile but overall, a good contribution in line with what we want to achieve from a bolt-on perspective. There was a slowdown in the French market because of some reimbursement changes and people waiting longer, but that's a temporary impact, but it's in the numbers. So you can see overall, we could even kind of withstand a little bit of a headwind here in France.

Last point I want to make in the progression of how we think about building our differentiated audiological network. If you think in terms of clusters, it's not that we have this in all places. But ideally, we would like to have -- put a number of 10 of stores, 15 stores who are standard stores, and then one in the middle, which has a higher level of capabilities because some consumers will need help on tinnitus. Some may move to cochlear implants. Some of them have a lower interest on whatever. And so we've built the first pilot store in Netherlands, which we call the World of Hearing. We're in progress to deciding where we put the next pilots in various countries but really getting to a higher level of sophistication on the retail and at the same time, bringing it more to an experience with regard to people really being able to see all the different technology, test the technology, get simulation about the technology, get their partner to get a simulation on their hearing loss. So, a partner is important in the sales process. So, I'm not saying that's the perfect solution. I'm just saying we're piloting different ways of getting more specialization into the store and trying different formats of our retail.

With that, I want to move to the cochlear implant side. Most of it I said. On the system sales, we already got some questions today, but we had already also on the slide, so we did anticipate them to some degree. So we're talking about the strong 3D MRI and then the system sales isn't that strong. Not to argue that we have a higher number than the 6.3% and the 8.7%, but just for us to make sense out of it, we went back and said, how much is in dedicated tenders not high-end product? And if you correct for that, we end in kind of a meaningful growth run rate for develop market, high-priced, 3D MRI. And having done that math, we're ending with the momentum on the 3D MRI driven high-end market for the developed markets in the high-teens growth year-over-year in the second half on the systems sales side.

The upgrade revenue, still very low. It comes out of a very strong year before as you'll see in the numbers later. It's relatively normal, but it also depends on when we get new processors out. But as I said earlier, we've launched the Chorus for the oldest electrodes. We also launched some upgrade to the existing processor, newest generation. So we expect some pick-up from those new product launches there.

On track with the structural and productivity improvements we talked about last year, continued work. Certainly not done. Those improvements take a while to pick the easy ones first, and then you go to the more difficult ones. But we see clearly the potential to get us over the next 2 years to the mid-teen EBITA level for this business, which, I think, has provided commitment in the right direction.

And just the numbers for the cochlear implant business. The one point -- thing to point out, I know it's low percentages as a margin, but we were able to improve the profitability by 65%. There was a provision, which we have shared in the first half of the year, on the Vendor B. We had to take some accruals for a pending patent litigation with the company, MED-EL. Those 2 balance each other out, order of magnitude. So I think the EBITA you're seeing here is a fair number. It's not one-timers.

Implant systems, I spoke about 7.7%, even with the emerging markets' tenders. We're clearly above that if you mentally correct for those.

With that, I want to ask Hartwig to come up. And then, I'll be back for the guidance.

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

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Thank you, Arnd, and good day, everybody also from my side. I'll take you through some additional information. I'll try to be -- try to not repeat what Arnd already said.

So Page 27. On the first 3 categories, Arnd already identified those matters. My chance to quickly confirm that we see the Board's proposal of a dividend of CHF 2.90, up 11.5%, and a payout ratio of 41% as we have always identified in our TSR strategy. The share buyback is progressing, 930,000 shares acquired. It's around CHF 116 million. And we have a net debt-to-EBITDA ratio of 4.4x (sic) [0.4x] at this time.

Page 28. You have seen all those numbers, so allow me to skip that and directly move into our breakout of operating expenses. You see that the total OpEx on an adjusted basis has increased of 4.7% in local currencies. And you'll note that this is just slightly ahead of the 4.1% revenue increase. The underlying OpEx increase though is slightly below the 4.1%. And as Arnd has said, we are allowing ourselves to invest in certain areas and that is, namely, the sales and marketing piece here where we are expanding in the store network. We are increasingly investing in greenfield, and we're also increasingly invest in wholesale sales capabilities. You see that the R&D costs have moved up by 3.2%, stable in a ratio to sales at 5.4%. It doesn't mean that we have any different approach to R&D. R&D can fluctuate a bit year-over-year. And we commit to continue to invest into innovation.

On the G&A side, you see a number of 6%, but it's -- to an extent, it's misleading. There's 2 elements here that should be noted as a non, let's say, ongoing run rate matter. One is that we have a patent litigation, a matter that we had to provide for in the year under review. And on the other hand side, we are investing in retail IT systems, I should say, audiological care IT systems that manifest themselves here in the G&A pocket. Underlying, this would be an increase of 2.6%, which is in a much more healthy ratio to the 4.1% top line increase.

There is other income and expenses that identify fluctuations in things like capital gains from disposals and releases in product liability provisions. You can read this here. And you see those adjustments that Arnd already broke out in regards to the OpEx part. So 2.6% of the CHF 11.5 million of restructuring cost for the '18, '19 fiscal year are categorized under operating expenditure.

Let me quickly identify the bridge from adjusted EBITA down to net profits. Here, you'll see that the year-on-year increase of 70 basis points in margin that we see on the adjusted EBITA ultimately carries through to 130 basis points on the net profit. And you'll see that there is not really big moving items here. We have found a little bit of less acquisition-related amortization giving us 10 basis points. And then there's 20 basis points from a year-over-year reduced tax rate, so down from 14.9% to 13.1%. The 14.9% is related -- in the years '17/'18 is related to temporary conditions related to the AudioNova acquisition that we had identified at the time of the acquisition. We are now back to what was a normal level in the years before the AudioNova acquisition.

Some of you would have seen that here, in Switzerland, we had a public vote on the weekend about a tax reform. So allow me to say that we are happy with the outcome. The tax reform is now coming through. It was confirmed on the federal level. There is more, let's say, confirmations to be done on the canton level. For us, the canton of Zürich is the relevant canton. And even though we should expect in the longer term, a slightly increasing tax rate, we are expecting that this will be still in the mid-teens and a very attractive tax environment altogether.

Moving on to Page 31. A bit more color on the operating free cash flow. Arnd has already identified that the year-end pattern of high, in particular, wholesale revenues, have increased net working capital. But you see a couple of other items here as well. There was fluctuations in when income taxes were paid, so that is CHF 17 million or CHF 18 million as a contributor to the cash flow structure. And there was also higher CapEx at the year before of CHF 22 million, which is in part related to brick-and-mortar that is built here in Switzerland in regards to an additional, let's say -- or actually, a replacement of a head office building in our satellite in Murten. But on the other hand side, we are also continuing in investment in the audiological care business and refurbishing or adding greenfield stores there.

Some additional metrics on the balance sheet. So DSO has gone up in the frame of what we have just discussed before. DIO has actually -- we're not really trending up by the DIO metric, but underlying in total value, it has. Capital employed is impacted, to a certain degree, by IFRS 15, but not a big change anyway. And Arnd has talked about the ROCE increasing 120 basis points underlying and 100 basis points by IFRS 15 effect.

Net debt, up by CHF 25 million, and net debt-to-EBITDA within rounding or stable. I want to reconfirm that the share buyback with the one-time leverage is absolutely on rail. We have delegated this program, and not just delegated the program for just a month or a quarter but for a longer array of time, and so the agent is free to choose when they buy. But it is in a narrow corridor, and we will see this progressing as the months go.

With that, I give back to you, Arnd, for the outlook.

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

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Thank you, Hartwig. I've voiced over the numbers already. Let me give you some rationale here on the outlook. First, let me start on the right-hand side with hold to our mid-term target of the 5% to 7% growth, including 1% on the net M&A, which would be representing a constant increase of our market share. And with it, a 7% to 11% EBITA growth in LC, which represents 60 basis points operating margin improvement every year.

Looking at the current sales momentum and the strength we have on the particular innovation side from Marvel and from the 3D MRI. We think 6% to 8% is a good guidance for this year and something we have planned and are driving for, so taking the guidance up by a 1%. And then from the EBITA side, increasing the guidance to 9% to 13%.

If you think through how the last fiscal year played out, I think it's fair to assume that the first half year is easier from the comp side. Second half will be more difficult because Marvel and 3D MRI will annualize, and so just that. We don't give specific numbers. But just making tender out of the logic here.

With that, I would like to go to Q&A. There's more material in the deck as always. Three more schedules, but we want to open it up for Q&A. We want to start in the room first, where Thomas is the traffic cop to see what's coming in from the phone call and they'll get funneled to us, too.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Unidentified Analyst, [2]

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Then I'd like to start with a financial question. In your restructuring announcement, you have stated restructuring costs and you, as also say, the annualized cost savings should be some CHF 70 million. And can you comment whether you've already seen something in the current year so we know how to do our models?

And then 2-a, please, if I may. For the cochlear implant system, you told us that you've seen high-teens system sales for the new model upgrade. But can you give us a bit of feeling how much the developed high-priced markets account for your overall CI sales?

And then the big question would be related to the margin development of the cochlear implant business. Is there anything you can give us as a help, as a thinking bridge. How should we think about the margin progression in cochlear implants over the next 2 years to get to the mid-teens? Is it going to be a small step up now? And then we have the hockey stick? Or is it more fairly -- okay, you're nodding. So fairly split. Okay.

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

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Yes. You understood. Now I'm blanking on the first question.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [4]

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The restructure.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [5]

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The restructuring costs. So these are longer projects where you announce, and then you need to negotiate with the works council at least in the -- in Germany and the U.K., you go through a certain process. So we expect the impact to start kicking in, in the second half of the year. So I think depending on how those negotiations go, 1/3 to 1/2 of the impact is what we expect to realize in the second half year. And then the remainder in the following year.

I think on the cochlear side, the -- this is a more simple one. First, on the -- how the margin progression. Not an exact number because we don't give guidance on individual lines but in principle, it should be fairly equally distributed. Because, a, it's many different initiatives and projects, and you would expect that some of them are implemented and are kicking in already. And we know those. Secondarily, I wouldn't like us to take the risk of having a hockey stick. That's not a good way of doing it.

And on the growth side, this year, on systems, between developed and developing, Hartwig, do you have an order of magnitude in your mind?

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [6]

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Yes. I would say, in revenue, it's about 3/4 developed.

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Unidentified Analyst, [7]

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(inaudible)

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [8]

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Yes.

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

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Yes, on the system side.

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Unidentified Analyst, [10]

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Just on the VA, I know it's fairly early, 2 weeks only since the May closing. But you had a nice opening since you have [brought in Savants. With new closings done,] can you already give some feed? I'm sure you have an ear in the street how the uptick of process is difficult to judge. But I'm sure you have some feedback already after 2 weeks. How do you compete? And how you can regain the market share in the VA?

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

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So it's 2 weeks, therefore, yes, some strong side, and it's hard to get to an exact number. But in general, the VA audiologists who liked the product a lot. And so directionally, I think I would expect something in a similar good response to it compared to the competitive products that you see in the commercial market.

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Unidentified Analyst, [12]

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So good feedback from the audiologists?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [13]

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Good feedback from -- and we trained them in what we're seeing in the initial pick-up.

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Unidentified Analyst, [14]

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Okay. And second question regarding, now with the roll out now with the other form factors. Can you add -- I mean, I know that probably you don't...

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [15]

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So we launched in the spring. I think in February, 2 form factors, which we didn't have. You may remember we have 5. The 2 first ones, we launched in November. Now they make up, I think, 60-plus percent of the revenue. We're now at around 90% of the revenue impacted since February. And then, there's one form factor lifting, which is still to come, which is the most complex from a realization perspective.

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Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [16]

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It's Christoph Gretler from Crédit Suisse, and I have 2 questions. First, related to the buyback. I don't really understand. Who's taking actually the risk if kind of the share price goes up? Is it you or the bank? Because if I look at kind of the speed of your share buyback relative to the original kind of assumption kind of, if you just straightened it out, you're substantially behind. So who's taking on that risk?

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

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So it's -- in the overall, a 3-year perspective. We have seen the first sort of 10 months, right? So it's not that we have -- we're kind of not even at the midpoint. Generally, it is us taking the risk, and so it's not that we have a turnkey delegation. But at the same time, there is a so-called [VIVEF] mechanism behind that. So we get a certain guarantee, let's say, margin that is accretive to equity, not through the P&L over the average daily stock prices over time.

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Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [18]

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Is there anything to reveal to that, the speed of the buyback is relatively slow? I mean your leverage is still about the same as it was a year ago.

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

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No. No, there is not. There is not. This is kind of the agent -- the bank that is known and I believe even represented in this room, that identifies their pattern there. But what's committed in the pathway, they have a certain channel to fulfill. There's a corridor, right? So they can't easily to stay at 50%. They need to move.

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Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [20]

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Okay. And the second question relates to the CI business, actually. If you look at the mix that you had last year relative to the previous year, it was I guess not substantially better. Are you happy with kind of the margin pick-up you got in the last year then?

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

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Yes. We're where we wanted to be. We weren't that explicit with the 290, if you correct in the 2 years for onetimers, which we have certain provisions, we're actually at 390 like-for-like. So it's about 100 basis points better. I think we continue to invest on the sales and marketing side, so we feel we're in the right corridor. We need another 2x 100 to get to the number.

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Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [22]

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And then just quickly to confirm the MED-EL litigation provision that was taken in the second half?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [23]

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Yes. Second half and it is in the CI number, it's one of the onetimers.

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Thomas Bernhardsgrütter, Sonova Holding AG - Director of IR [24]

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I would suggest we move to some questions from the line.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [25]

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There's one more behind you.

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Unidentified Analyst, [26]

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[Fabian Server] from [Wallace.] Could you give us some light in terms of cash flow? You had quite some impact of the network in cash flow -- capital. What are you expecting to develop this year?

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [27]

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So there's certainly a rebound of, let's say, the accumulation that we have seen on accounts receivables at the end of last year. So you would kind of have to normalize this out in a 2-year perspective.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [28]

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And the other one, we should normalize out is -- not making a prediction, but the tax for the CHF 17 million, that's really a phasing issue on when the tax comes through.

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Unidentified Analyst, [29]

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Okay. And as a follow-up on the investments. Could you also give some light whether you're expecting this maybe next year?

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

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So capital expenditure, we expect in the range of 3% to 4%. That amount hasn't really changed. It can't be that where we have, for instance, the finalization of the building in Murten that I mentioned is yet not finalized. And depending how this progresses, there can be like a CHF 5 million, CHF 10 million fluctuation in that respect.

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Thomas Bernhardsgrütter, Sonova Holding AG - Director of IR [31]

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Operator, can we get a question from the line?

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Operator [32]

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The first question from the phone comes from Daniel Buchta, Bank Vontobel.

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [33]

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The first one regarding Slide 7, where you showed the unit volumes of Phonak. It's quite interesting to see that [also the] Belong platform seems to hold up relatively well after a first drop. Can you say a bit more why that's the case because it seems the previous platform, as you are indicating was faster in this case?

The second one I'm interested a bit more about how you see demand move with Oticon Nest. They're announcing or that they have announced collaboration with Philips now first that they're saying that they'll produce a basic [-- use of --] branded product with the Philips brand. How do you expect this to impact the market as I would say the first product after Siemens, which has a real strong consumer brand that is very well-known in the market? So those will be my 2 questions.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [34]

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Sorry for re-asking. We were not loud enough with the speaker here. Can you re-ask the first question on Page 7?

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [35]

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Yes. Exactly. I mean, on Page 7, what is interesting to see is that Belong is keeping up quite well in unit terms after a first drop, and that seems to be different compared to the previous platforms and where the drop was more pronounced. Can you share a bit more like what that is holding up relatively well as it was kind of an older product already?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [36]

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Yes. I think on the Belong, 2 factors here. The one, keep in mind, we launched B-Direct, which was unusual for us to bring out a new chipset halfway through the product life cycle, and we probably had hoped for even more lift. But in general, we had the first connectivity solution with some customers' part, which you would see middle of '17, '18 kicking in. I think the other one, as we said in the first half of the year, we used technically priced in the end of the product cycle stabilized on the unit volume side.

With regard to, I think, you asked for Oticon Nest and then the Philips brand. I think the jury is out on the Oticon Nest. Certainly some product available. I think we feel good about where we stand from our product and the pick-up. As you can see from the chart we're sharing here, we're not seeing yet any kind of negative impact on this curve. So we're carefully observing. I think it's fair to say Oticon is a good company, and we have respect for them. So I think we're observing, and we're strengthening what we do.

On the Philips brand, too early to tell. I would just make a comment on the Siemens brand. I think the Siemens brand was helpful for Siemens, particularly in the Asia Pacific emerging markets world. I think if we go to our audiologist, which are the gatekeeper to the consumer, keep in mind, consumers today still trust their audiologist and I think they will in the future. For the audiologist, it's very important to have a trusted brand, which is longtime in hearing. And the other thing there, really looking under the hood from a technological perspective. So I wouldn't see a significant change to that behavior in the developed markets. I think developing, we have to see. I think the biggest impact for Siemens was in China and please accept Siemens in China is a place for itself, given all the infrastructure they have and how early they went to China with many things. So I don't think Philips has the same kind of one place where Siemens was benefiting strongly. But early interesting move, something to observe how this plays out.

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Operator [37]

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The next question comes from Patrick Wood, BAML.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [38]

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I have 2 questions, if I can, please. The first one will be it looks like, given the results from the others and correct me if you feel otherwise, that the market in terms of volumes has overall accelerated from these product launches. And it seems like there's probably been a little bit less cannibalization than I think at least probably we expected. I guess my question is, do you think that the new products have brought in real new consumers or pulled forward demand , i.e., are we going to get a dip a little bit later after this product cycle with consumers as we pull forward demand? Or is this a genuine expansion in terms of market penetration? So that will be the first question.

The second question is on the tax side. Thanks for the comments. That sort of a mid-teens number makes sense. It'd be helpful just so we're well informed, how long should we expect for that phasing to a new tax rate to take to come through? That'd be helpful.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [39]

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Thank you, Patrick. On the first question. I'm really better there. I should write them down.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [40]

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The first one was whether with the good growth rate that our industry shows, whether this was new consumers or legacy.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [41]

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So I think we see a gradual improvement of early adoption. As an industry, we do track consumer behavior, and we question every developed market every 3 years, and we just see a nice gradual improvement. We haven't seen a spike in some shape or form, but people get a little younger when they adopt hearing aids.

I think the place where we've seen more of a unit volume lift up was the U.S. over the last 2 years. I would put that mentally towards more reimbursement being available through private insurances. They have quite a run between insurances to add a hearing plan to their offering. They normally have a dental and they have an optical plan, and hearing wasn't on the menu. And we know from the partners we work with that they're really aggressively moving more and more people under coverage there. So I think that's kind of a -- not a step function for the whole world but, clearly, for me, explaining some of the U.S. penetration. But the rest is just steady improvement of product and acceptance of the product.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [42]

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On tax saving, so my comment in regards to, let's say, broad expectations of future tax environment, that would be -- it could be next calendar year. It could be also just the year after. It depends on how the new tax law is being introduced. This fiscal year of Sonova, which is 9 months under the old tax regime that will expire December 31, to our expectation and 3 months under the new one, we would rather expect more that the tax rate level that you've seen last year, plus a little bit of a 3-month impact. With the, let's say, you could say advance warnings, sometimes, when those taxation changes take place, you have certain accounting, let's say, distortions. So as we don't know yet fully how the transition will be managed by the regulators, that is yet a bit more difficult for us to foresee.

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Operator [43]

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The next question comes from Romain Zana from Exane.

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Romain Zana, Exane BNP Paribas, Research Division - Research Analyst [44]

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First question will be on retail. What will be the CapEx budget that will be allocated to the retail store network in the next couple of years, please?

And second question was just a clarification regarding the tailwind from the French reform. If you could quantify the impact that we experienced in [H2,] please?

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [45]

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So retail CapEx, you should see us broadly in the same bracket as Amplifon, and you can see the numbers there. So like a 4% to 5% CapEx over sales ratio is what you should general expect there. On the tax reform, I'm not sure if I acoustically understood you well.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [46]

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So it wasn't the tax reform. It was the French reimbursement on retail?

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [47]

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Okay. You want that?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [48]

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Yes, I can take that. So what we've seen is with the changes in the model and the consumer having to think about what they go do and what they get, we've seen about a 1- to 2-quarter shift in some demand. On a global level, I think it's worthwhile to know that it didn't have a material impact into our growth rate. So I wouldn't read too much into it. And we don't see this as an ongoing. We've already seen from recovery against that. So rather interesting for the French market, but not that relevant on a global basis.

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Romain Zana, Exane BNP Paribas, Research Division - Research Analyst [49]

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And just one if I may because I missed it. You speak about the [fair] tax rate that we should consider looking forward, and I missed the number.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [50]

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All right. It was, again -- yes. What I was saying -- sorry, for that, what I was saying, mid-teens, I was talking about the midterm tax rate. Yes.

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Operator [51]

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The next question comes from Veronika Dubajova, Goldman Sachs.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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I have 2, please. My first one is what is your expectation for your VA market share now that Marvel is in there? I think prior to R&D joining the business, I think the company had, had an ambition to get back to 50% market share. I wonder as you kind of look at your business now, what you think is realistic on a 6- or 12-month basis? That would be helpful for us to -- so that we can track how you're performing against those expectations.

And then my second question is on retail. Just curious to understand whether you think that the current run rate of growth in this 5% or so is sustainable as you look forward. Anything you can provide on what is driving that because it is noticeably better than some of your peers. And how sustainable you think that is? That would be helpful.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [53]

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Veronika, thank you. With regard to the VA side, we're not sitting here planning with a 50%, let's start off with that. I think things have changed with regard to also having more competitors on the rechargeability side. If you go back 1.5 years ago, we were only the kid in town. But I would say the majority of what we lost in market share against the run rate 1 year, 1.5 years ago should be our target here because of the strength of Marvel. And so I don't want to give an exact number, but that should help you directionally.

On the retail side, honestly, from going through the improvements we're doing and how they're going step-by-step, there's no reason for us to believe that we can continue such a growth rate. There may be things which change in markets. There may be particularly aggressive competitors with moves we don't know. But right now, if you unpack the 5%, you're probably in a 80% of that coming out of better lead generation and store execution. The other percent comes out some greenfield directionally, which we're driving and are controlling. So it's well earned. No single item, which is onetimer in there.

We will continue to get better on the lead generation side. We've got initiatives to do that. Sales execution is possible. We have enough capacity in most of the stores that we can sell incremental units. So the lead generation is the most important one, I think. But no concern there that this was a onetimer.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [54]

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That's great. And Arnd, can you comment on how the U.S. performed within retail arm, since that had been a drag in the past?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [55]

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Yes. So in the U.S., it had 300 stores, went down 100. When measuring the revenue year-over-year on the remaining 200, that's strongly double-digit growth rate same store.

Two drivers. I think we've gotten better to keep the people in this store focused on the things they do because in the years before, we made so many changes coming from the headquarter, new initiatives, and that's really hard with just one person in the store. So we really paid more attention to them getting productive and happy in what they do, and that pays off. We also have improved our voluntary attrition significantly, which also helps.

I think the second one is particular in the U.S. market, lead generation. We have driven up the digital leads for generating at a meaningful price point, and that helped to funnel more consumers to the stores.

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Operator [56]

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The next question comes from Michael Jungling, Morgan Stanley.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [57]

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Two questions, please. Firstly, when it comes to the warranty provision. If I look at your provision as a percentage of sales, it's fallen noticeably. And in my calculation, it's probably boosted earnings for the current fiscal year by around CHF 20 million. Is that correct? And why would you go from 4.7% down to 4% when it comes to warranties in general?

And secondly, a question on the U.S. region or, if you like, the Americas. Can you comment on what your growth outlook is, what your organic growth outlook is for fiscal year 2020 or your next fiscal year? Because if I look at the last 5 years, the region has pretty much averaged 1% per annum organic, and it feels a little bit like a broken region to me. And this is sort of commentary around that long-term trend. Why will that now be broken? Why should we improve from here?

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [58]

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So Michael, the underlying warranty provision principles haven't changed. I have to get back to you. What could happen is that in the course of IFRS 15 implementation, that there is re-categorizations. But I want to confirm that this was not any -- no driver of the earnings progression. I'm happy to follow up by e-mail to give that more specific.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [59]

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Michael, Arnd here. On the U.S., I think you asked U.S. Not having the benefit of all of the years on the back here, I would think the 2 biggest swing for -- or the 3 biggest swing factors we had was on the one hand, movements on the Costco side depending on what we launched and when in Costco. I think the second one was when I arrived, a declining business in the independents. And the third one is the VA we have discussed, right? I think VA talked about seeing Marvel having an impact. I think there's more operational things we're currently doing to improve how we serve the VA. Leave that for a different time.

If you look at the independents, you heard us say during the Capital Markets Day, we're putting more attention on how do we get intelligent loyalty programs in place, which we know other people are better than we are. But we clearly have built capability and capacity, and we're driving up partners in our U.S. loyalty program, which for certain services we deliver to them, they commit to higher volumes. And that is going well.

One point of reference. In the independents, we actually, last year, started to grow based on those process changes prior to Marvel. You don't see that. You heard of all the pluses and minuses, but there's really some work going on, on how we're serving them better and how we improve also the sales execution side here.

On the Costco side, again, there is swing factors in there. We had launched new Brio versions, in my eye, last year a little too late. The rechargeable came about 18 months after we launched commercially. I think that's leading to quite some swings in the Costco environment, and we just need to stay closer to making sure we have the right distance but not too much at any point of time.

Now having said all that, I think all of those are good work, too hard to measure. Having new products always is easier from the analyst side, but we spent a lot of time on refining the strategy and at the same time, making sure we're really improving the sales execution on the ground.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [60]

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So Arnd, if I may please follow up on that. Is the U.S.A. then more of a mid-single-digit grower for the new fiscal year? Is that a reasonable target for you?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [61]

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I think the U.S. should contribute a fair share to the growth we've put out from a guidance perspective. It's too big for not helping us to lift the ship.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [62]

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Okay. It's only if I look at the last 5 years, it didn't make much contribution at all. So I'm trying to work out whether 2020, is that inflection year where the U.S. finally picks up to a, let's call it, mid-single-digit number?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [63]

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I understand, and that's our intention. That's where the focus of lots of energy for many of us, including the senior management, goes. So we'll make sure we report out after the first half year and after the second half year.

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Operator [64]

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The next question comes from Yi-Dan Wang from Deutsche Bank.

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Yi-Dan Wang, Deutsche Bank AG, Research Division - Research Analyst [65]

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I have 3 questions. So the first question is on the cochlear implant business. Your competitor, Cochlear, also came out with a 3G compatible implant. Just wondering whether your experts have had the chance to look into that part? And if yes, how competitive is that versus your product? And how sustainable do you think the advantage that you have with the HiRes 3D will be?

And then the second question is on the cost of the litigation that you have with MED-EL, what -- how much cost have you provided for that in your guidance for the coming year? And then the third question is, you commented on greenfield development for your AC business. Just wondering what your plans are for the China market, which is growing very quickly in retail. You don't have -- there isn't much collateral damage associated with that market. So some commentary there will be great.

And then lastly, Hartwig, what would be the -- at current rates, what would be the impact of FX on revenues and margins?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [66]

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So on the first one on the CI from Cochlear, obviously interesting, their move from -- also interesting to see an announcement and a relatively slow rollout in my book. You may wonder what has triggered that. We have not had a product in hand yet. It's not certainly in the U.S., and there's selected places where they're working with it.

Let me first make a comment on how our 3D MRI is different than the MED-EL, and then we can speculate which route Cochlear are able to go. But we have made a different approach to the MRI, which allows the magnet to always orient with the -- make the direction of the MRI or the MRT -- the MRI in the U.S., which is not the case for MED-EL. So we're in a better place from the technical realization of the alignment of the field, which also leads to that we don't need to worry about anything around the head when people do their MRI because the system correct itself to a level that there's no pain now. I don't know exactly if Cochlear has gone the whole way or not, so that will be interesting to see. But we have not seen any drawings or a product anywhere at this point of time. I think from the litigation cost...

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [67]

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Yes, maybe I can take that. What we are able to say is that overall, the past year includes a charge of around CHF 4 million. Allow us to not to be specific of what of that is provisioned for future and what of that is already consumed because we are in an ongoing dispute here. But the number is intended to cover the future risk that we have in that dispute.

Maybe quickly also going on to the foreign exchange question. The year-over-year results from today's spot rates not as significant to be. We don't expect a significant FX impact for the new year. But at today's rate, as the euro is a little bit softer against the franc, then what we have seen on average for the last year, there is a mild negative impact from there.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [68]

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So on the China retail, certainly a big market with its own set of challenges. If you think about entering an M&A, 2 of them, you always have to be mindful on compliance in the retail environment, particularly if you're operating in markets, which may be higher on the compliance score.

The second one, I think it's still with regard to the dynamic in the marketplace of 100% clear, which model will win. Particular if you factor in that in China, many of the customers look for kind of more of a mixed model with more online lead generation and then some execution in the store. So I think there's a traditional market, which we're serving well on the wholesale side. There's a couple of questions you can ask about how do you get more consumers into the system there. Both of them keep us certainly alert. We, I think increasingly understand the Chinese market well by spending enough time there. But at this point of time, nothing to declare and nothing to announce for -- [step-wise here.]

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Operator [69]

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The next question comes from Oliver Metzger, Commerzbank.

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Oliver Metzger, Commerzbank AG, Research Division - Analyst [70]

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The first one is on the rechargeable penetration rate. So you described already an attractive pickup in the usage rate of about 50%. Potentially, deduction is higher than you had initially thought as you presented your first rechargeable device. Could you give us your views or your idea until which level you believe the market can reasonably will grow?

My second question is on your German retail business. You clearly described an improving organic momentum. First, would you describe the bottleneck of the audiologist within Geers as solved? And secondly, has the German network already a size where you really want it to have? Or do you see some further acquisition opportunities?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [71]

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So on the rechargeability, I think factually there is not a good argument why you wouldn't say the market moves completely to rechargeability. Pick a number above 90%. The question, what's the curve? I think the cost for the rechargeability, even if you pay up front a little bit more, is lower than the cost of the battery. And then you get incremental benefits in 2 forms: a, you don't need to fiddle around with the battery, which for many people with difficulties of moving their hands is very important. That's one of the challenges they have. The second one, the way we have implemented it, you don't -- can't open the hearing aid anymore, which you gives incremental reliability. So I think all of those would indicate that the world will move there. But I think it's an S curve, and we'll move from 30% to exceeding 50%. So I think eventually, we're going to arrive in the 90%. That will be my best read on it.

With regard to the Germany side, the first question was on the bottleneck on the audiologist. Two answers there. The one, we were not good in the prior years on making sure we have enough people or we have all positions filled in the store. That was more of an internal exercise to improve the voluntary attrition of people but also getting more up front in the way we recruit and potentially over-recruit in a certain region, so that we have enough capacity if somebody leaves. We've done that, which is part of the lift you've seen. We're now in the process of rolling out our own academy for audiologists in the U.S., as some other players have because it's always tight in the German market. We collaborate with the school, which is there from the industry association. It also helps us getting "some more peace" with our wholesale customers because the more we build our sales, the less we may recruit from some of our customers now. So I think we're working on that bottleneck. It is not holding us back right now from sales execution because if I look at the vacancies in the stores, we're at a level which is clearly significantly lower than before and is a good number.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [72]

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Network quantity.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [73]

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Yes, on the network quantity, if you go into the regional mapping in Germany, you would find certain areas where there's potential for our retail. Now there is areas where we clearly have a density, which is as high as you want to go and then there are other areas where we don't. So the team continues to do smaller bolt-ons. Obviously, with a very focused effort to understand how much potential there is in the catchment area, and this is a good place where we have some more stores, but we're doing smaller steps in Germany.

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Unidentified Company Representative, [74]

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Operator, if there are no more questions by phone, we will see if there are further questions here in the room.

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Operator [75]

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So far, from the phone, there are no further questions.

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Unidentified Analyst, [76]

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Two questions. One again, a bit of a financial question. When we witnessed you in meetings, you were always talking about a positive ASP impact about Marvel. You were talking about mid-teens. Now you've been talking about low teens. In the meetings, you've been referring to a 25% share of the portfolio whereas now you said already 60% of the portfolio basically was launched in November. So I'm just trying to understand how we put those lines together.

And then the second question refers to your online strategy in retail. Since you have integrated Blamey And Saunders in March, and there are more and more online stores popping up also in Germany, are you focusing on a dedicated online platform for your retail network?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [77]

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So sorry, if I'm using 2 slightly different terms. I meant the same. So if I said low teens, we use mid-teens. We achieved the price realization we wanted, as we said, in the first half year.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [78]

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It's within the mid-teens. The lower end.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [79]

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Yes, the lower end of the mid-teens. So that's -- sorry for -- we don't want to confuse you. We have not seen prices being lower than we wanted to be. That's the most relevant answer.

I think from this year, from the share of the portfolio when we came out in the -- with the Marvel, we first addressed 2 form factors. But in between, we launched the next 2, therefore, the percentages are different, yes. And we moved up to -- of the Marvel, if that was the question, 90% of what people are looking for in form factor is now available in the Marvel, which before that was more 65% when we came out in November. So 2 new product launches.

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [80]

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It is within our deal, right, was in -- we exercised -- we fully exercised the RIC form factor in all of its assets, I was...

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [81]

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No, sorry if you -- let's be careful. So if I think about the Marvel getting to all form factors we have in RIC, there's 5 main form factors, yes. And the first launch was 2 form factors were available middle of November. They make up 60% to 65% of the potential. We then launched in February, 2 more form factors, which we needed more work on, which make up, up to the 90% mark. And there's one more launch to come. You could imagine that may happen later in this year, which is 10% of the potential, which is not current, and that's a t-coil version. So that's how we got to the percentage. But no change relative to what we said at the end of first half year. The incremental information, we launched 2 more form factors in February, March.

On the -- you call it online. We're not called Blamey And Saunders online in any shape or form. Blamey And Saunders is a business, which we knew for quite a while. It's in Australia. It covers about 1% of the Australian market. And what the team has done there, they've developed a model in which they have traditional retail. Customers come to the store, everything presales and post sales gets done traditional. They have a model in which some of the customers come in the store to 50% of the interaction and 50% they call in. And then they have a model where people buy a hearing aid in a combination of online relationship, phone relationship and then fitting of the hearing aid and sending it out to the consumer.

That's the far smallest part of the business. The biggest percentage is in what I would call, if you hear me talk about omnichannel. That's a world, in which you see a hearing care professional for the most important meetings. Other ones, you do over the phone while with remote fitting, a capability Blamey And Saunders developed. They had developed their own hearing aid, which has these capabilities. And so I think about Blamey And Saunders first as an attractive retailer, 1% market channel in Australia but growing and with a good pathway to a good profitability. And then a world in which we particularly learn about the omnichannel because that was -- is a tricky one when you think about a 3,500 store network, which are running very tight and very much on the traditional sales model on whether we find opportunities to learn, what are the consumer want to have from a fitting perspective online, what interaction do they want with -- through a call center, what interaction do they want to have in person. So they are predominantly an omnichannel model.

The second largest bit is people come completely to the store. They sell at normal prices in the marketplace. They sell at comparable prices in all of the 3 different business models and clearly good prices. And so for us, it is a good addition to the audiological care, gets us some market share with some profitability or LCM in Australia. But at the same time, we have a place where we learn, particularly on the omnichannel side, which we believe we need to move to at least for a subset of the consumers in all of our retail.

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Unidentified Analyst, [82]

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And when you're looking at the learning curve, I believe they also have a self-fitting hearing device that they've launched last year with a very modern rechargeability functionality whereby you have to do.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [83]

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The product you're talking about is called Facett. It still has an interaction on the remote fit -- on the fitting side with regard to the interaction with the hearing care professional in the store. So there is a relationship between the product and the store. And there's a conversation, interaction between the store and the product. The other one product is in the store, optimized before they send it out. So I don't see that as a self-fitting in any shape or form. The first is done by the hearing care professional, and then there's a remote fitting connection in which they fully optimize the device. So for me, it's an omnichannel.

We're not seeing this -- and we had this discussion when we discussed OTC. We're not seeing, nor in the U.S. in [BOC,] nor in Australia or other places, this enormous demand for pure online. We just don't see it. Unit volumes, we don't see it in our [BOC.] What we do see is many consumers will say, look, some of the interaction, we want to handle differently. And more, they're looking for any place, any time interaction. I think it's our homework to figure out how we do that. But we do believe that the hearing care professional plays an important role in the selection of the right technology, the coaching of the consumer as well as the fitting of the device, but I think the model will change over time to a more anytime, anyplace interaction with a hearing care professional.

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Unidentified Analyst, [84]

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I have 4 questions. Now first, are the DTC. Actually, could you now elaborate on your investment and also kind of the returns you're seeing on this investment? And how you basically ensure that you also kind of benefit directly from the investment, and is it all under really a strategy for markets where you also have your own retail channels, not just Germany?

And the second question is just on restructuring. Are there any more measures now we should expect now to come up?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [85]

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So on the DTC side, I think DTC is normal for the retailer, right, because we need to generate the leads. So if you break down where the leads come from, some of it may come from an ENT. Some of it you have an outreach in the real traditional world, and you go to a senior home and educate people. Some of it is foot traffic coming to the store. But we do see a share, the 10% to 15% depending on the market, which comes out of the digital component. We historically, have in certain markets, used TV, as do other of our competitors use TV, if that's a good way where you have a big store network so you really benefit from the demand coming in. So we always have the DTC side. It's the normal in the audiological care side.

On the wholesale, it's difficult to economically make that slide because ultimately, that's the task of the independent, right, and there's not a good business model in that. What we're doing is we're working with different elements there on the online side. [There are certain] U.S. that has a significant contribution to the lead generation, the ultimate growth of our U.S. network.

In Germany, we went down a different path, partially because of the need to position us well in the eyes of the consumer after we had acquired Geers, which had a certain lower-priced positioning in the market over the years. And so there, we put our money together. We didn't increase the spend in marketing, but we put our market -- our money together in a dedicated TV campaign, which is currently ongoing, which has 2 objectives, driving leads and at the same time, increase the brand awareness and the perceived brand quality of Geers. And for the ones who are German-speaking, we have signed up with Mr. [Guchei,] which I think is a good person for that kind of target audience.

The second question was on the restructuring. I think we said middle last year that there are based on all of the acquisitions we've done, there are places in the organization in which you can find ways to streamline the way you operate. First, we get more agile. Get faster towards with the customer but ultimately, don't forget to more efficiency in the system, and so there's more opportunity, which we will uncover and work through, through the next 2 to 3 years.

Now we're not with any of the projects at the place where we know exactly this is the timing. We're currently working with the ones we have shared with you, and they're going well from what we have laid out as a plan. We're teaming up other ones, and so I would ask you to wait until we come forward with some more information on those.

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Unidentified Analyst, [86]

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Just a small one. You mentioned in the press release Canada, which had price pressure. I guess, you're talking about wholesale. And was that because of another competitor or what happened there?

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [87]

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So in Canada, a big part of the business get distributed through tenders of a certain Canadian region or state, and so they move on long time cycles. I'm not sure for the specific one, was it 5 years or longer, and so this one was up after we held it for a long period of time. And so we had to participate in that tender. We didn't want it to lose the business. So we wanted -- but we have a price headwind out of it relative to a couple of years steady pricing in that particular tender. And it's -- because it is state-wide, and it covers a lot of the patient -- the life under management, you can have a meaningful impact to your country results.

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Unidentified Analyst, [88]

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Canadian business relative to the U.S. business is that, proportion-wise, ballpark, like the population or, I guess, stronger?

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Hartwig Grevener, Sonova Holding AG - CFO & Member of Management Board [89]

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We're a bit over-indexed in Canada because we have -- this is the origin of our Unitron brand.

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Arnd Kaldowski, Sonova Holding AG - CEO, COO & Member of Management Board [90]

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And the other one, we have a quite nicely built out audiological care business in Canada. Also, some of our bolt-ons are happening because it's running well for us. Both sides are pretty strong in Canada.

Looks like no more questions in the room and on the phone. Then thanks for your attention. Thanks for the questions. Thanks for coming, and hope to speak soon.

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Operator [91]

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