Sonova Holding AG

here in the room, and Stefan, welcome to the full year results, also to the interested people on the audio call. I hope you can hear us well. I have Birgit Koenigs with me, our CFO, to guide you through the full year results, as well as the outlook. We plan to spend about half an hour on there, and then we have good time for Q&A, and Thomas told me already there's already incoming questions, so I take from there some people that have already read the material. Just a standard disclaimer, the presentation contains forward-looking statements which offer no guarantee with regard to future performance. Now diving into the matter here with regard to our strategy, business results, and financial results. I think if we look at the last fiscal year, it was not an easy one with regard to how to navigate the market environment I'm sure some in the room will remember when we stood here a year ago, our outlook for the year was more positive than what has unfolded in the marketplace. I think that's true with others in the market. I think the big underlying reason, I think we have on the one hand side underestimated where the inflation will go, and we have also underestimated to a degree what inflation does to our marketplaces. Because historically, when you look at other recessions, not high inflationary environment, our market was more immune. So in that regard, unfortunately, you've seen us going through the year, changing our playbook to a degree, which we will share because we had to adjust. Also adjusting our guidance for the year, unfortunately, in August. But relative to the market conditions we have, we look at the year as We made good strategic progress on what's important for us in the long run, particularly on the M&A front. We also look on the sales performance being solid, driven by predominantly acquisition, some organic lift relative to the macroeconomical environment, and the often discussed non-renewal of a large contract with a U.S. customer. Q4 was better than Q3 in market development, but also in our own sales, which allowed us to end where we ended. When you look on the profitability, clearly muted picture, partially because of a significant known headwind from the acquisition of Sennheiser predominantly, which came in at a low profitability. We said that when we acquired the company. And that created some headwind from a margin level perspective, but then also the macroeconomics, as well as if you look on the Swiss franc side, clearly a significant impact from the FX between our cost structure and our revenue structure with all the moving parts, dollar, euro to Swiss franc. But we can also see in the numbers that we have responded and reacted, particularly starting in Q2 when it was clear to us that the picture is different than we thought. on the cost side as well as on the pricing side, and we'll comment more on that. Strong focus on the M&A side in the year before with the Alpaca and Sennheiser acquisition, making good progress towards integrating them into our businesses, creating a new business unit and consumer hearing business, but also the ability to create now a meaningful footprint in audiological key in China through the Heisen acquisition. Significant advances on the innovation side. We launched our new platform, Lumity, in line with our normal cadence of two years. And I'll comment where we stand on the journey on that one, but also within the Sennheiser brand, but with Sonova technology launching the first area entry hearing solution in January. Now, looking at the outlook, I think if you look at the number, mentally deduct still the impact we have this year from The non-renewal, you're seeing the number pretty much in line with our midterm targets. We also look at the market and appreciate that the first calendar quarter was a good step up versus the quarter before, but we see still lots of volatility in the market. So look at it as the balanced perspective, hopefully appropriately balanced, not with the same challenge we had last year being ultimately too optimistic. But we really believe this market is not a full step back to the regular growth rates we are used to, but a gradual recovery of the market towards a more normal. Highest level results, 14.6% in local currency growth. You see the significant impact here from the Swiss franc on the top line, 3.5%. And then on the EBITDA, 6.1% in local currency growth. if you mentally deduct the dilution coming from, or the low profitability coming from Sennheiser, and if you take into account the inflationary headwinds we have, it is organically a good margin performance. EPS significantly better than the bottom line growth, partially based on the share buyback, but also some moving items on the tech side, Birgit will comment on. Now, sales outlook, 3% to 7%. I said already, deducting the headwind out of the non-renewal in line with the midterm targets we set ourselves. And then you see on the profitability side, a good step up from the margin perspective around 50 basis points because of the activities and initiatives we have, but also the volume falls through. Strategy unchanged, despite it being a more muted year, Clearly, believing in our strategy has worked well for us. And if we go to the organic minus losing one customer, I think we're also making progress in many of the dimensions. Clearly, a year of expansion of our consumer access. I want to highlight a couple of things on the strategy side, starting off with leading innovation. We launched the Phonak Audeo Lumity in August 22. We continue to see a good customer response The penetration rates and what we measure in penetration, how many customers move, B2B customers moved from the Paradise over to the new product, the Lumity, is in line with what we've seen in platforms before. That's always an important metric for us. And keep in mind, the Lumity comes at a higher price than the Paradise, so they're willing to pay more. But now in April, we launched two more, call it form factors or brands, with the Lumity technology. We launched within Unitron, the RIC device, called Vivante on Lumity technology. So that's normally a good step up in Unitron territory. And then we have launched the Phonak Slim Lumity, which has similar content, but a very different form factor, which we think is appealing to part of the consumers, just because it looks different, and it looks different behind the ear. So good news coming into the year in April. two product launches, certainly not the same order of magnitude as the first Lumity, but always, from our experience, a good second step lift to the organic growth. Another point on lead innovation, you see on the right-hand side what we launched in January in a, call it soft launch motors. We're going to go in this quarter into full production and then need to drive the demand side stronger, but we launched at the CES what we call speech-enhanced hearable under the Sennheiser brand, which really gives people an opportunity to have a device who only want to have it for two to three hours in a noisy environment who are not yet ready for a hearing aid. A little bit more color around expanding consumer access in the audiological care network. Continue to make progress on a high level of acquisitions and greenfield openings. The high sound acquisition giving us that entry into China in a more meaningful scale with 200 POS. But in addition to that, we acquired over the year 140 more POS in the target markets we have defined. And we continue to do green fields in the audiological care side. So our network has grown to 3,900 POS throughout the year. One new news which we haven't shared before. I wanted to share it today because it's relevant with regard to how we improve our footprint for multiple reasons. We have embarked on opening an operations facility for the Americas in Mexico. We're making good progress there. We expect that to start to have the first output in the second half of this year. So that's how far we are. It will serve ultimately hearing instruments and the cochlear implants business. Key benefits. especially for the custom-made products, which today often come from Vietnam to the U.S. This cuts at least two days out of the supply chain, and delivery fast is more and more important for our consumers. It clearly is a place in the world where the costs are pretty low, and you get highly skilled labor. Many medical device companies moved to Mexico and have built a brain pool there and the capability pool which we can tap into. And then in light of the uncertainties with regard to supply chains over the last couple of years, with our strong footprint in Asia, which we have established some 10, 15 years ago, I think we're well advised to balance more between the regions and the geographies. Significant return starting in a year up front. Some investments, Birgit will cover that in her section. ESG highlights, don't want to go through all here, but first, if you look at rankings and indexes, we're ranking very high, highly regarded with regard to the ESG footprint and the activities we do. We drive all three different pillars every year. Big highlight in environmental was the commitment to science-based targets about a year ago, and now embarking on the journey on scope three, we already had meaningful measures on the scope one and two. Social, a lot of focus on employee engagement because it is increasingly difficult to bring people to the industry and hold on to them. Engagement is really important, but at the same time, diversity and inclusion, you can see here, we're above 50% with regard to people leaders being female in the organization, and then more progress on getting more governance parts into place, which we think are important sustainable risks for our suppliers from an assessment perspective, but also the well-expected human rights policy. With that, let me move to the business and financial results. I commented on sales in EBITDA already. If you look at the EBITDA margin, 190 basis points down versus prior year, but if you unpick the onion, you will see, and I think Birgit does it later, On the organic side, if you take the dilution out, we had a positive margin expansion despite the macro environment and the lower growth than what we had in the years before. Gearing instruments, call it flat in local currency, 0.2%. If you're correct for the non-renewal, you're in a territory 4.1% in local currency 0.2%. as a growth rate, not what we have seen before, muted market, but I think a decent number here for the year. The Lumity helped as well as the price increases. Consumer hearing business, new to us, new to you to some degree. 284 million in revenue came from the Sennheiser product lines. First full year of consolidation, we're making good progress with regard to the organizational integration. We're also making good progress with regard to our expectations on the profitability, which we achieved for the first year. We're not intending to share the number all the time, but we're tracking it internally, and we make sure that we're on the path we have set for ourselves here. Market share growth, market share gains, meaningfully because we had many successful product launches. The two biggest ones were the two wireless earbuds. And then the Momentum 4, which is a Bluetooth headband headphone, which both are playing in the biggest category Sennheiser is active in. Audiological gear, significant growth, 15.7%. Organic, 4.5%. Same store. And then M&A contributing 11.2%. And then last but not least, our cochlear implants business. I need to unpack that more. 2.8% from the outside, a low number. But if you dissect into the instrument side and the upgrade side, there's a story to be told. I'll get to that in a couple of minutes here. From a growth perspective, the composition, 2-3 organic, mentally adjusting for the lost contract, you had 4.5. You see the 12-3, and you see a significant FX impact here. Looking at the performance by region and focusing on the full year results here, if you go top to bottom, Europe, Middle East, and Africa had a good number. On the market side, we've seen countries like the Netherlands, Austria, and Nordics being positive, felt like not impacted by the macroeconomics. Unfortunately, the larger ones, Germany, France, and the UK, were in a more muted environment. The UK particularly, given all of the microeconomic challenges in the country, France to a degree because they had a huge lift in the year before coming out of the new reimbursement and a little bit of a step down. If you go to the US, yes, we had alpaca coming in, but on the one hand side, we had that headwind from the customer contract. On the other side, we did see the US market going further down. than Europe. That was always the source of discussion. We've seen now recovery in Q4 to what's better territory. But in general, if you look at our Q2 and Q3, it was really significantly more muted than Europe's. Asia-Pac, a very positive number here, 40% growth. There is the high sound acquisition in there for three months. Sennheiser also has a meaningful footprint in China. but also many countries who in the year before still had lockdowns just on the recovery phase. Highest level on the P&L. I gave you all the numbers on the full year, so it's probably more interesting to unpack the first half, second half dynamic on this chart. On the top line, the first half year, almost 18%, second half was 11.6%. To see again the impact of the contract, but also slowdown in the marketplace. On the other hand, if you look at the performance on gross profit and profitability, you can see that the actions we took somewhere in Q2 started to have an impact. Price increases on the one hand side, the Lumity launch helped. Some easing of the cost pressures, not all freight still higher, but not as high as it was six months ago. Also on the component cost side and then dedicated focus on driving certain cost initiatives. So if you look at the second half year, getting to call it only 60 basis points decline profitability. Keep in mind dilution was significantly higher. So in reality, second half year, despite the lower volume, we were able to drive some good profitability improvement year over year. We'll spend a few minutes on the unpacking by business. For the ones who are not that often here, we share the revenue performance of the different businesses below the segment level, but not the profitability. Here in instrument segment, overall, you can see the 15.7 and the 2.3 organic. Growth-wise, very different stories last year. Archaeological care, 15.7, 4.5 organic. I would put in the territory at above market, good inorganic contribution, but also strong on the organic side. The consumer hearing business, as I said, meaningful growth year over year. We don't report this as organic because it's the first year in the company, but Sennheiser actually grew 16.6% based on the product launches as well as one quarter in the year before where we had lower supplies. But the predominant part of the 16.6% was growing share. And then on the hearing instrument side with the dynamic between slower market and and losing a big contract only in that 0.2% here. That's not for background. I voiced them all over on the HI, on the hearing instruments dynamic. I think positives, but also meaningfully negatives, ultimately leading us to that 4.1% if you exclude the contract, but only 0.2 if you look at the true number. Consumer hearing business, I think, Two more comments to be made. We have opted for a creating it as an independent business unit. So it has a full leadership team that is comprised of Sonova people and Sennheiser people. It also includes some Sonova engineering capabilities because of that early entry devices we develop. We've gone through all of this alignment of organization. They have one joint roadmap. They also have a roadmap on how they want to drive top line and bottom line. So in that regard, I think we're in a good position a year in of it functioning as one part and as one part in our organization. As you can tell from also the launch of the first product under the Sennheiser brand with Sonova ingredients. Audiological care, I don't think a lot more to voice over on the M&A side. I think two points I want to pick out on top of the M&A. We continue to make good progress on what we call the digital lead generation hub. The ones who were at the capital markets, Christoph was laying that out more. I think increasingly you need to engage with some of the consumers digital and then move them through a call center process into your own retail store. Ideally, you set while they're on the call already the appointment and it should be in two days, not in five, otherwise they may go somewhere else. We started that in Germany. We now have established it into serving five of our countries and it does help us drive additional growth. but also utilization in the store because we can target the leads where we have open availability in the calendar. The second one, we launched what we call the silent cloud, our first step towards a more medical services, call it technology enabled. It's an application on one side, which you can download iPad or phone or computer, which guides you through how you navigate Tinnitus as an individual and how you can help yourself. It's deeply embedded into the sales process. There is a significant number of people who come to the audiologist to struggle on genitals and the hearing aid is part of the solution. So we're getting our feet wet with regard to how do we do more than just the hearing aid and how do we do this on a technology-enabled way. Last page for me to cover here, cochlear implant segment. I said 2.8 in local currency from a growth perspective. But if you unpack it, you need to look in this business on the system sales, which is the implants and the first processor. And then five years after the first or the implantation, people in most countries have the right to get another processor. And that has a very different timing dynamic. Right. So the instrument or the system sales, the implants, that's really kind of you building your install base. I'm allowed to use that term. Right. Five point one percent. But. Unfortunately, for half a year, we had an injunction in Germany. We shared that out of a legal discussion. That injunction got lifted, but in the first half year, we defected at very little German revenue. If you're correct for that, you are in the high single digits from a system sales perspective, which is probably not a bad number in this market in the last year. Upgrade sales minus one, but we launched the Marvel processor two years ago. And what people do, they're saving and waiting until the new processor comes and they all jump on it. So having the same level in year two is actually a good performance, but you still have a little bit of a dilution relative to your growth rate. So overall, I think fair results here. I feel good about the system sales minus the injunction. On the EBITDA perspective, we improved by 150 basis point the margin despite the lower revenue growth. Unfortunately, also here we see a significant impact out of the exchange rates. So we're, quote, unquote, only at 12.5% margin. We still have the ambition to get meaningfully higher than that, but not so much in organic performance, but more, again, an exchange rate topic. With that, I want to invite Birgit up.

Thank you, Art. So welcome here in... Stefa today and for the people on the call also welcome. So I'm going to take you through a few slides and I'm not going to pass along on the financial highlights because I haven't already touched upon most of it. So let me dive immediately into the cross-margin development which you see here and you see the 180 basis points decline on an operational basis and The ethics is a theme throughout the presentation. So here you see there is another 60 basis points headwind from the currency here. And let me just explain the 180 bips. So you see that the main effect is the dilutive effect from the acquisition of Sennheiser. And then we also saw a weaker market performance in high ASP markets. that had an impact on our ASP, on our average ASP, but we offset that by price increases in all of our businesses. And then we had the effect of the freight and the component cost, but that we offset through continuous improvement initiatives and also structural improvements. So that is what you see on the left-hand side. You see that organically we improved by 40%. basis points. And what is important to note because we discussed that during the first half results is that we see the sequential improvement of 230 basis points from the first half to the second half of the year. Then if we look at the operating expenses and you look at the operational part, you see the growth of nearly 15% and if you look at it organically you see the 2.3% there and that matches exactly the organic sales growth of 2.3% and that really reflects our disciplined cost management and this is despite inflation and also the shift in the business mix with audiological care growing so we have that headwind and then also lower sales versus originally expected due to the market environment and so that's where you can see the impacts of the continuous improvement and then you see that the growth is primarily driven by our acquisitions so the AC network expansion and again the Xenizer consumer division because that was 80% actually of the operational part of OPEX Then if we look at this slide, you see R&D is increasing by 6% and as a ratio to sales, 6.5%. So this demonstrates that we maintain a very high level of R&D spend so that we can invest in innovation. And then when you look at the next slide, this is the highest spend bucket in terms of also of increase, the 19% increase Here you see that 75% is related to acquisitions. And then if you go to G&A, all of it is related to acquisitions, the growth, so the 6%, because if you look at it on an organic basis, we were even declining G&A as a percent to sales and also in absolute value. Then the adjustments, so 31 million, I'll come back to that on a later slide. So then How does this come together? You see here the EBITDA components, so 6.1% growth. And operationally, this is a minus 190 basis points in EBITDA margin. And you can see the effects here underneath. So organically, and that is what Arndt already said, we grew 30 basis points in margin, and that is reflecting all the cost discipline that we had. And then you see next to that the 20 million contribution from M&A, which had the dilutive effect of 220 basis points. Then you see the adjustments. That's another 100 basis points. And I'll come to that here. You see 38.8 million. In the previous slide, you saw 31 million, but that was the operating expense part of the adjustments. And this is the full... full spent and then you see again here a very adverse impact on the ethics and this is 80 basis points getting us to a margin of 21.4%. So then the next slide, the key financials and I already touched upon most of it so let me just quickly highlight the acquisition related amortization so the 54.9 million that is primarily related to again the acquisitions And then on the tax line, you see that we had an underlying tax rate of 9.7%. This is much lower than we originally expected. And last year, I mean the previous year, that was 14.5%. And this is because of a delay of the implementation of the global minimum tax rate. And actually for this fiscal year, so 2023-2024, we do expect a 15% tax rate again. Okay, then here the adjustments. So you see that this is divided in three buckets, as we always have. So first of all, the restructuring, and here Anto already mentioned one of them, which is the... It's investment in infrastructure. So in Mexico, the operations facility, that is one of them, but there's other structural improvements. Then transaction and integration, as you can see, Zeneiser, Alpaca, High Sound, and then legal costs, and that is the ongoing sort of patent litigation with Medell. And then tax, I already talked about that, that has an impact on the EPS here. And then the cash flow development, What you can see here, so actually the operating free cash flow before changes in networking capital is impacted by higher tax cash out and also decrease in long-term provisions. And then when we go to the networking capital part, there you see a $30 million which is due to the consumer hearing buildup of the networking capital. We talked about that already in the first half. And you see that here as well, so 30 million. And then if I move to the other bigger ones, this is so the capex investments, so we go back to normalized levels. So after COVID, we still had some catch-up to do. So that nearly 50 million is related to, you can split that into tangibles and intangibles, tangibles again, so the Mexico facility primarily, and then intangible investments into the AC network and also the digital ecosystem. So to give one example, the CRM implementation in our audiological care business. And then the payments for these liabilities are also related to the audiological care network expansion. Then if we go to the balance sheet, so DSO stable, as you can see here. So we keep on having a strong receivable collection. And then DIO went down because of a reduction in the safety stock. That is a 15% reduction. And then net debt going to $1.5 billion. This is primarily related to acquisitions, dividends, and also the share buyback. And then you see that we are at a 1.5 times leverage ratio, so net debt. to EBITDA. Then again, our capital allocation strategy here in terms of the four in order of priority. So first, the accretive acquisition, so value driving acquisitions. So here we did for the fiscal year 2022-2023, you see the $260 million, which is higher than what we originally guided for the $7,200 million. Here you see high sound and bolt-ons. Then the attractive dividends. So here you see the 5% growth year over year. So here we demonstrate that we can consecutively grow dividends in a meaningful way. And then the healthy balance sheet shows Here you see that we target a healthy balance sheet or a moderate leverage ratio between 1 and 1.5 times, and we are currently at 1.5 times, so the upper end of that guidance. And then the share buyback here, so we announced the program back in April 22, and we bought back around $420 million worth of shares and then given the balanced approach that we take and we say a moderate leverage ratio is what we aim for so there is no share buyback currently foreseen in the fiscal year 2023-2024. We believe that is a balanced approach given the rise of the interest rates and also the still volatile environment that also Arndt was describing. So let me then now go to the outlook for 2023-2024. So as you can see, the sales growth from 3% to 7%, and EBITDA growth from 6% to 10%. So let me unpack that. If you look at the market first, so that is the left-hand side of this slide. So we continue to see and really strongly believe that the fundamentals remain intact. low penetration, and obviously innovation driving growth. And then we do see still some uncertainties in the microeconomic environment. So for instance, the month of April, when we look at just the market data for four key geographies, we do see that it's weaker versus the previous quarter, that's where we saw the uptake. So there keeps on being volatility. But then we do still believe that the consumer sentiment will gradually evolve. We saw a big uptake in consumer sentiment in the past quarter, and we believe that will improve throughout the year. And then we do see potential support from pent-up demand when customers start renewing, the ones that delayed their renewal. So volatility and uncertainty is what we do still see, although we believe it will be positive throughout the year. Then on the Sonova side, that's the right-hand side, so we have a high comparison base in the first half, and that will be easing in the second half. This is an important point, but as you already know, so in the first half of the year, fiscal year, past fiscal year, so 22, 23, we did still have the large U.S. account and in this fiscal year, the first half, we don't, so that has an impact of around 4% on revenue and you can then easily do the math. Then we believe cost pressures ease and we will see that throughout the year we already saw cost pressures coming down and then we also have continuous improvement and we will see more of that actually in this fiscal year. And then we also would like to note restructuring and integration costs for an amount of around 20 to 25 million also for the fiscal year 23-24. So that means that the first half will be significantly lower versus the second half, and that goes without saying with the elements that I just described. So then on the ethics, and that continues to remain a headwind, so we just did the math on the May rates, but of course that can still change because we see that currencies constantly change, but if we do the math on the May rates, we see that the top line is potentially impacted by 4% to 5% and then the EBITDA by 8% to 9%. So that is what we currently see, but as said, that can easily change. So then let me go to the last slide, which gives you a snapshot of the upcoming events. So then as of tomorrow, we will go on Roadshow. And then on June 12th, we will have our AGMs, which you are all very welcome. And then on October 18th to 20th, there is the EU Congress in Germany, and that will replace actually our Investor Day, and we can meet also investors and customers and consumers over there. And then on November 21, that's when we then also meet next for the results, and that is for our half-year result publication. So with that, let me end this presentation and start the Q&A. So operator, if you can open the line for questions, please.

I think we will start with a few questions here in the room before we move on to the people on the phone. So just raise your hand.