Sonova Holding AG

Ladies and gentlemen, welcome to the Sonova Holding AGE Out-of-Year Results 2023-24 Conference Call and Live Webcast. I'm Sascha, the course call operator. I would like to remind you that all participants will be listening most and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing 31 on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Arndt Kaldowski, CEO, Cisco Head, sir.

Thank you, Sascha, for starting us off here. Good afternoon, everyone. Welcome to the half-year results presentation from us for the fiscal year 2023-24. In the room, I have Birgit with me, Thomas, and Jessica from the IR team. We're planning to voiceover the presentation call in 30 to 40 minutes, and then we have ample time for the Q&A, which we know some already have registered their first questions. Page two is the regular disclaimer, which you're all well aware about. Please take note of it. If we go to page three, before we go into the Half year results, we wanted to use the opportunity to orient us all on the strategy, but also our continued conviction into our ability to drive profitable growth, because on the one hand, we see the opportunity in the market, and secondarily, we've lined our strategy up in line with that. If we move to page four, Not a significant change, but just wanted to reiterate when we look at the market as well as our own position, we do see an attractive value creation opportunity for us as for NOVA. I think attractive market, yes, last year with the high inflation, we had unusual headwinds, which we normally don't see if it's a recession without inflation, but I think it's worthwhile to point out that our market is recovering faster than the general market for consumers. Significant penetration potential, continued growth coming from innovation to hear better, and as we have also shared at UHAR, an increasing recognition now with medical evidence that the hearing loss and the compensation with hearing aids is linked to very important health challenges of our time. particularly around cognitive decline, which all will help drive penetration. So NOVA was a leading market position, first in the broadest and most advanced product offering, but also from our distribution capability, historically on the B2B, but as you see from our M&A, going deeper and deeper also on direct consumer access, which we think is important to have. And then the last one I would point out here, when we look at the strong financials, I translate that into ultimately the capacity to invest organic and inorganic. The strong balance sheet and cash generation, if I compare with others in the industry, clearly a moderate leverage and long-term debt structure at low interest rates, which is quite important given the changes we've seen in an interest rate environment and the consequences for some participants. but then also the significant capacity for organic and inorganic growth investments where we see them supporting our strategy. So then on the market and us, if we move to page five, not a lot of voiceover on the page. We use that now since a couple of years, but it should give you confidence that we trust our strategy and that we continue to march down this path. There'll be adjustments, but on the highest level. were quite confident that we're driving the right things. If you go to page six, I wanted to take a little bit of a step back here together with you. And I think it's fair to do this in the middle of a volatile market, which unfortunately we've seen for many years now. And we hoped after COVID that's over and then we get into last year's new kind of dynamic for our market. But if we look at our ambition, and our conviction, we think we are able to drive our midterm targets, we see them as unchanged, and they are around driving above market growth and margin extension, if you look from a longer term perspective. Recapped here on the left, just as a sign of our conviction around, and our midterm targets is a six to nine percent sales kicker, and the EBITDA being faster than that, translating into a margin expansion. And that against a market which we think in the long run is a four to six percent grower. On the right hand side, and I will go a little deeper on the next page, just on how we've defined our focus and where our growth investment's going. Leading innovation for us falls into two buckets. There's how do we advance the hearing innovation along the lines of the products we know today and the benefits they provide, but also how do we expand the value for the customer beyond the known capabilities of a hearing aid. Clearly broadening consumer access and the B2B more the delivery of commercial excellence and the right coverage towards the customers. And then last but not least, probably not the most important, the next three years, but probably in the five to 10 years, how do we unlock the potential in high growth developing markets? So that's the themes. And if you go to the next page, rather than what we historically do, sharing the one or other example of that menu, we wanted to give you a frame which is a little bit more explicit, where are the big buckets, right? And what are the buckets which drive somewhere penetration, share gain, and value expansion? On the top, you see the five buckets I voiced over. So it's more relevant to go to the lower part, which we call the key growth drivers. And these are our focus areas. This is where most of our investments are going into. And these are the particular topics in which we believe we can drive above market growth. And you get to the first one, we're currently very focused on elevating the core hearing performance by improving the processing power and algorithms. You've heard us talk about artificial intelligence eventually moving into the device in real time. So helping significant improvements on noise reduction for everyone who wears a hearing aid. This is not in the market today. We talk about on the expanding consumer value, The combination of what I would call technology-enabled medical services, keep in mind the tinnitus app we have launched, all of those linked to the insights on comorbidities, no matter if that is tinnitus or cognitive decline, which I think will drive penetration, but also for the one who does it the best, an opportunity to grow share. And then the entrance in the early entry hearing devices, early innings, Not just relevant for the US in an OTC as a pathway to bring people earlier to the category and then move them, ideally, when they are maturing in their need, towards our regular hearing aids. I think not a lot of words I need to spend on broadened consumer access, which drives significant M&A, but also greenfield openings to reach more consumers in audiological care. And we're putting on top of that what's required in our eyes for digitization towards omnichannel. Commercial excellence, clearly the value add we provide to the B2B customers, feed on the street, which we do as we go, and then commercial execution. And then when we look at the accelerate high growth markets, no secret, the largest opportunity is China. For us, there's two opportunities beyond the normal. The normal hearing instruments, we have a good market share, cochlear implants, we have a decent market share, which we need to expand wide. volume-based pricing is going to come. But if we look at the audiological care, most of the value in the Chinese market is in the channels. And in addition, I think with the Sennheiser brand, there's meaningful opportunity on the consumer audio side in China. So if you look at those five buckets, this is where we put our focus and our energy. We do believe that each one of them in the long run has a potential to be creative over markets in the range of 100 million. That's why we raised them here. But we wanted to give that frame so then when you try to decide, you believe that we can grow above market, you know where we're focused. Page eight, last one on the strategy I think here, just a very high level recap on DESG. We've made further progress in the first half year. Three key dimensions I wanna highlight, strong progress of internal and more diverse leadership development. And you can see the numbers here nicely going up on the diversity in middle management and senior management, strong internal fill rate for leadership positions. On the CO2 side, our science-based CO2 reduction targets have been approved and we're on the journey and we make good progress in reducing our CO2 footprint. And last but not least, as a proof point, our continued high ranking in a positive way with regard to industry-leading sustainability ratings. Sustainalytics has reconfirmed us to be in their ranking, the number two out of 200 medical device companies just recently. So ESG clearly a priority for us, not just in mind, but also for us. Now allow me to dive deeper in unpacking the first half year. Many things happening, therefore we will try our best to unpack the most important ones. If you go to the first page here, how we look at the first half year from our vantage point. I think on market, clearly the volatility as we had laid out in May, a slowdown in second quarter, A re-acceleration in the third. If we look at the top 12 markets in the world where we have unit volumes, the sum of the two was about a 5% growth year-over-year. Almost slattish Q2, Q3, a nice pickup towards 9%. Particularly driven by North America and a couple of other European markets. Muted in the summer of Europe, particularly because of France and Germany, not so much a macroeconomics discussion, but more regulatory changes in the markets. In the first half year, and that was expected given some headwinds we have discussed and also flagged when we came into the year, muted sales and profitability development, still a half year of being held back by the non-renewal of a large contract. We had operational challenges in the hearing instruments business. The good news over the course of the first half year, they faded. We made good progress in improving those in the eyes of the customer. And we expect those operational effects to reverse in second half year, allowing us some pickup of market share, even if we're not having a new platform launched this year. If I look at the positive side on what we have accomplished, clearly ASP lift, particularly in HI and AC. I talked about the regained positive momentum in HI. Net promoter scores are improving over the last two quarters. The customer feedback is positive. And then clearly a strong execution in growth. in AC organic and inorganic as you have seen from most likely the pre-rigid. And then the continued focus on executing our strategy to a degree code here for we have not stopped to invest at the areas where we wanted to from our strategy execution perspective. So those positives allowed us to grow in Q1, but just a little bit. despite the headwinds and realize a margin expansion and local contribution margin. But if we now look forward, we want to build on this positive momentum. We do increase our investments into supporting this positive trajectory in HI and AC to accelerate the sales into the second half year while we're expecting to see continued margin expansion. If you go to page 12, that's just kind of the high level on the numbers as always. You see the growth one six, a significant headwind from a Swiss franc development, unfortunately more than what we had predicted in May. The EBITDA are slightly higher in its growth than the sales, translating to a margin expansion of 20 basis points in local currency, but harder hit even on the Swiss franc. A good EPS development in local, in local currency. And then if you look on the right, sales outlook confirmed for the year, given the positive momentum we've seen throughout, as well as the focus drive here from doing the right thing from an investment perspective. You can see a slightly revised EBITDA outlook. What are those investments in our mind? In the current market environment where many retailers struggle with consumer confidence, we have seen that we need to spend more to create lead generation, particularly where we're direct to the consumer, no matter if it's in CHB or if it is in AC, in order to bring new customers to us. And then on the other hand, while we're navigating through this year with lots of puts and takes on price, we are appropriately flexible at the places where we need to in order to keep customers or win customers. So that's the change here in the frame. If we go to page 13, we'll not voice over all many of the numbers I said already, but a soft start into the year, a strong performance in audiological care helping to offset the expected headwinds in HI and CI. Group, I think I voiced everything over. If you go to the hearing instruments, you see the growth minus 4.3 in local currency, but up 2.4 if you adjust for the large US contract. Clearly held back, not just by the contract, but the temporary operational challenges. But as I voiced over, business starting to regain positive momentum. Looking at the consumer hearing, We would call that at market. It's a very different dynamic in the consumer hearing business. We're attached to the consumer electronics. What we see from the peer group is flattish to slightly down. So I put the minus 1.9 at market. The positive news around it, last year we had a lot of product launches in first half year. This year they are coming in the second. So I would say after a strong growth year last year. were holding share in a difficult market, expect help from the new products, which we launched in September and some more to come in the Q4 of our fiscal year. Audiological care, you see the 11 and a half NLC, good growth, half of that coming from organics, so good execution operationally, but also half of it coming from MNA. These are bolt-ons plus high sound. A comment here on HiSound, we're really happy with the first half year. I think obviously we were fortunate buying in December because afterwards the market opened up again, but our growth is clearly above market in the first nine months since we're together. It's a combination of HiSound being a high quality company and at the same time us linking our new generation capabilities in China, which we have created over three years with that company. And then cochlear implants, a little bit of a soft spot here in our performance, down 0.9% in LC. On system sales, we were up to eight, but the upgrades now more than two years after the launch are turning negative because we've gone through most of the patients who were waiting for the processor from an upgrade perspective. Keep also in mind our largest competitor has launched a new product nine months ago, and that's always been for us. Speech 14, just a depiction of the sources of growth. You can see the organic as voiced over slightly negative. If you correct for the lost contract, we were on plus three. And then you see the very significant headwind coming on the FX on the right-hand side of the chart. I'm going to pick up pace here. You can see the regions and key markets. I think if you go through good growth in our key markets in Europe, there is quite some weakness in the US. Keep in mind that's where the large contract was, but it's also the area where we kind of lost the most momentum, but also now regaining most of the momentum on the market share side and hearing instruments. I think Asia, impacted quite some by high zone, but overall still a good performance. In Europe, some markets with very good growth for us, Germany, Belgium, the Netherlands, and Poland. In Germany, mainly driven by our geological care, but then weaker development in France, Italy, and Sweden. If we go to page 17, hopefully helpful how we depict the numbers here. You can see the different growth rates. You've seen them before. I think voiced over the segment sales components already. I think the big positive for me on the chart in addition to the audiological care business and the growth rate is actually the segment profitability with 50 basis points in local currency. We did benefit from lower component costs and last year's pricing initiatives. There is a significant shift mix when we have such different growth rates between HI and AC and keep in mind our AC is It has a good profitability relative to peer group, but it's meaningfully lower than the hearing instruments side. So we needed to make all of that up in productivity, price, and other elements. So I think really impressive results here with 50 basis points, given the shift mix between the businesses. If we go to the page 18, some incremental comments on the hearing instruments business. I think we were very focused in the last nine months to not just improve the reliability, which we were able to do pretty quickly because it was a temporary issue last year, and Lumity was always 30% better than the Paradise. But that then requires a lot of communication if customers are concerned. And at the same time, we had some issues with regard to delivery and others. We fixed those. The net promoter scores are improving, but as you can imagine, trust, is harder earned than lost. So we're on the journey of recovering the trust, but with a good improvement on that promoter score. If we go to the consumer hearing business, which I haven't voiced over as much, I voiced over the performance in line with market despite the new products. Happy to have the early entry hearing product out in OTC early innings, positive feedback on the product. Not a significant revenue because that market segment is still small in the United States of America. Launched new products, including the Xentum Wireless in the end of September, which should help us drive some incremental revenue and expect more growth to come out of new products later in the half year. And then page 20, audiological tier, really a strong story not just on the growth side, but voice over iSound. We are focused working on how do we improve optimization of the store efficiency. Christoph has voiced that over a year ago with you. How do we increase our share of wallet? We have added about 80 POS, the majority in bolt-on acquisition, some of them greenfield. And I voiced over some of the digital omnichannel ecosystem at UR, but all of that going on while we're growing the business significantly. Pitch 22 cochlear implants, I said it, more of a soft spot here, one which we have work to do. Sales, I voiced over the dynamic system sales versus upgrades. If you look at the EBITDA, quite a step backwards in the margin expansion with minus 100 basis points. Unfortunate, not so much lack of price or which we held in our driving, not so much cost structure, but really significant elements of geomix shifts in the sales we have seen. We also had some supply issues, which ultimately delayed some of the sales, but also created extra costs, which we have been through the past due on time delivery is at normal high levels now. but it did impact us throughout the first half year. With that, I wanna hand over to Birgit on page 23 or 24.

Hi everyone, and also a warm welcome from my side. So we go to the slide number 24. Here, I think aren't as already discussed most aspects. So I will focus on providing you with further insights into the drivers of our profitability, the cash flow, and also the balance sheet. So let's immediately proceed to the next slide that presents more in-depth information on the gross margin progression. So what we can see here is that our gross margin reached 71.6%. And this represents a strong year-over-year improvement of 280 basis points in local currencies and 200 basis points in Swiss francs. And this improvement was entirely due to organic factors. So firstly, the prior year price increases, which were implemented to offset the inflationary pressures. And then second, ongoing operational improvements. Then third, higher growth of our audiological care business, and as you know, at a higher gross margin. And then lastly, continued easing of the headwinds from components and freight costs. And this was then partly offset, as you can see here on the chart, by the currency headwinds with the strengthening of the Swiss franc. So let's then now discuss the progression of the operating expenses on the next slide. So here, You see the adjusted operating expenses increased by 7.2% in local currency to 950 million Swiss francs. And on the previous slide, I presented a positive impact on the gross margin from the shift in business mix due to audiological care. And in operating expenses here, you have the opposite effect because our audiological care business has higher sales and marketing expenses as a percentage of sales compared to the group average. And this effect combined with further investments into sales and marketing to drive growth led to a 4.3% organic increase in OPEX, as you can see here. And then additionally, the expansion of our store network, including also the acquisition of HiSound in China, resulted in increased operating expenses by 3% due to the impact of M&A. Then the currency development reduced the operating expenses by around 45 million Swiss Francs, or by 5.1%, and considering that foreign exchange had a greater impact on our top line, and most notably by 6.7%, the adjusted EBITDA margin experienced a negative influence of approximately 100 basis points. So let's now move to the next slide, which provides details on the development of different components within the operating expenses. So here R&D expenses, you see that they landed at 116 million Swiss francs or 6.6% of sales. So this is largely unchanged versus prior year. And we have maintained our high level of investments in R&D to enhance the core healing performance and enabling us to drive impactful innovation for our consumers. Then the sales and marketing expenses, they increased by 8.2% in local currencies with more than three quarters of the increase attributable to acquisitions. And additionally, we maintained our investments aimed at driving growth. And as mentioned by Arndt earlier, we will continue these efforts to sustain the positive sales momentum and to achieve a substantial acceleration in sales growth during the second half. Then moving to general and administrative expenses, they were up 10.8%. And this increase can be attributed to various factors, including the rise in energy and maintenance costs due to the high inflation, but also due to the harmonization of merit and pension plans following a number of larger acquisitions. And then as a result, the total OPEX increased by 7.2% in local currencies. I will address these adjustments in a moment, but first let's consolidate all the information and look at the EBITDA development for the first half year on the next slide. So moving from left to right, the adjusted EBITDA demonstrated a growth of 2.5% in local currencies. The organic EBITDA margin shows a favorable improvement of approximately 60 basis points. And this can be attributed to the earlier mentioned significant improvement in the organic gross margin, which was then partially offset by the higher growth in operating expenses. And then on the flip side, acquisitions had a margin dilutive impact of 40 basis points. So to summarize, these factors led to a slight improvement in the adjusted EBITDA margin when measured in local currencies. And then the adjustments resulted in a reduction of the EBITDA margin by 90 basis points, and I will discuss these adjustments shortly. And then currencies, as you can see here, remained a significant challenge, impacting not only sales but also profitability, which led to a reduction of 57 million Swiss francs in reported EBITDA and a decrease in margin by 180 basis points. So to summarize, this led to a reported EBITDA margin of 19% when measured in Swiss francs. So let's proceed to the next slide where we will review the key financials for the group. So since we have already discussed the increase in gross profit and adjusted EBITDA margins, let me now shift my focus towards some other items. So both acquisition-related amortization and net financial expenses were largely stable compared to previous periods. Income taxes totaled 44 million, as you can see here, resulting in an underlying tax rate of 15% compared to 15.5% in the previous period. Then adjusted EPS of 4.34 Swiss francs was up by 8.1% in local currencies. And in addition to the business results, the growth in EPS was boosted by the lower tax rate and also reduced average number of shares resulting from the share buyback in the previous year. Although the adjusted EPS experienced growth when reported in local currencies, this increase was offset when reported in Swiss francs, resulting in a reduction of 11.3% compared to the aforementioned growth of 8.1% in local currencies. So now, as I promised, let's delve into a bit more detail regarding the adjustments. Total adjustments recorded were 16.7 million CHF representing an increase from the 6.3 million last year same period. And out of these adjustments, restructuring expenses amounted to 10.2 million and these were primarily associated with our ongoing structural optimization initiatives. And this also includes the establishment of our new operations facilities in Mexico, which is now operational and has commenced production. In addition, we incurred transaction and integration costs amounting to 6.5 million, predominantly linked to the three major acquisitions we made in the past two years, namely High Sound, then either consumer division and also Alpaca. As anticipated, we expect elevated restructuring and integration costs of around 30 million Swiss francs for the fiscal year 2023-2024. So let's then now look on the next slide at the operating free cash flow. So slide 31. So our cash flow progression was equally affected by the strengthening of the Swiss franc. And the first two bars from the left compare operating free cash flow before changes in net working capital at the same prior year exchange rates. And as you can see, this number is at similar levels, namely 341 million compared to 345 million Swiss franc last year. And then the operating free cash flow before changes in working capital then ended after converting at this year's exchange rate ended at 280 million Swiss francs and therefore declined by 65 million of which as you can see 61 million were related to the aforementioned ethics. 8 million were due to higher cash tax payments and some 4 million were related to other effects. Then next, we improved our cash outflow from working capital by 15 million. But here, it's important to note that last year's figure has been influenced by the accumulation of working capital associated with the acquisition of the Sennheiser consumer division, as explained last time. Then CapEx was 16 million lower compared to the prior year period, and that was when last year it included a step up of investments and that was after the reduced levels during the pandemic. So to summarize, this led to an operating fee cashflow of 151 million compared to 185 million in the first half of last year. So then now let's look at the balance sheet on the next slide. 32, yes, thank you. So our DSO stood at 57 days. in comparison to 52 days in the previous year and 54 days at the end of the fiscal year in March. And despite our strong emphasis on collecting receivables, there has been a slight increase in this number. The calculation is based on our trade receivables at the end of the period, and the main contributing factor to the increase was the improved sales momentum towards the end of the first half period. Then next are DIOs to that 162 days, up actually only slightly compared to last year. This can be attributed to the presence of elevated safety stock, partly due to the transition to our new operations facility in Mexico. And then capital employed increased by around 300 million compared to a year ago, and by around 75 million since March. And both the period and year-over-year increase as well as the average year-over-year increase to calculate RSI was primarily driven by acquisitions, mainly higher goodwill as well as an increase in networking capital. And when combined with the lower business results in Swiss franc, This led to a return on capital employed of 18.9% compared to 23.4% from a year ago and 20.8% in the 23-24 financial year. Oh, sorry, no, last year, yeah. And then the net debt increased year on year to approximately $1.7 billion, primarily due to the acquisitions made in the last 12 months and a decrease in cash resulting from the impact of foreign exchange. And then this results into a net debt EBITDA ratio of 1.8 times. This is above our target range of 1 to 1.5 times, and this increase was anticipated and primarily driven by seasonal factors experienced during the first half, which included the payment of dividends. Then our long-term debt has an average tenure of five years with an average fixed interest rate of 1.12%, and our first bond is maturing in October 2025. So then let's take a look at the next slide, the capital allocation, which remained largely unchanged. So our cash deployment strategy of 70 to 100 million Swiss francs per annum for Bolton acquisitions remains in place. So we spent around 60 million Swiss francs in the first half. Then we maintain our payout ratio of around 40% with the most recent distribution being a payout of 41%. And then the leverage target of between one to one and a half times, as I already mentioned, remains unchanged, and we anticipate reaching this target in the second half of the year. And then as announced during the full year results presentation in May, no shares have been repurchased during this reporting period, as our primary focus remains on achieving our leverage target and maintaining a healthy balance sheet. So I will now Thank you. We'll now pass the floor back to Arndt.