Sonova Holding AG

Good afternoon, everyone in the room here. Welcome to the sunny Stefan to tease the people on the call. I hope they also have a sunny day. And thanks for joining for the full year results 2023-24 of Sonova. I'm here together with the IR team and Birgit. Birgit will later go through the financials and will be with me on stage with regard to the questions and answers. Regular disclaimer, everybody knows the content, therefore I'm not going to read it, but please take note. We intend to spend about 35-ish minutes or so on the presentation, then we have ample time for Q&A. You all had a chance to get the material which we uploaded, therefore lots of material in the background and the backup for people who want to dive deeper into numbers. From a summary for the last fiscal year, a couple of highlight items here to keep in mind. First, the hearing care market, has been for the full year, if we count the numbers in unit volume and assumptions on price, back to historical growth rates. So somewhere in the 4% to 6%, slightly higher in the second half. Significant regional differences. North America was clearly faster in growth than Europe, although in many European markets we've seen good growth, but Germany and France were more muted. U.S. In Canada, probably more year-over-year effect because the year before they really went deep under the high inflation environment. I think we're through the inflationary concerns on our consumers, at least for the hearing instruments and cochlear implants. I'll comment in a second on the consumer hearing business. From a Sonova perspective, when we met last time, we were at the end of the first half year and we said we're expecting to pick up in the second half year. particularly in the hearing instruments business, and that's what you're seeing in the numbers. We ended on a positive note. The Q4 was even a little stronger than the Q3 performance. We don't share it in numbers, but at least in the voiceover I can say that. And if you look at the numbers, the hearing instruments business and the cochlear implants business, with a significant acceleration from their growth, and then the hearing instruments, even if you take out the contract loss from a large customer, which only was relevant in the first half year. The audiological clear business continued on a strong growth rate, slightly lower. I'll comment why that is when I get to that business. And then the place where we had seen quite some difficult environment and headwinds was the consumer hearing business. And we'll get to the dynamics there between market growth and some product issues we had. I think everybody remembers our biggest Allow me to say rallying cry was needing to build back momentum in the hearing instruments business after 12 months, which were muted, not just the contract, but also some temporary challenges, we called it. When we look on the customer feedback and then also mirrored in the growth rate, even while we, quote, unquote, only launched additions to the Lumity portfolio, was pretty positive. And so I think we delivered on that dimension. Clearly, effects in the last year as in the year before. Significant headwind if you look at the revenue as well as the EBITDA in Swiss franc. Only positive, and you've seen that in the guidance for the year, a slight positive year over year in the way we enter into the new fiscal year. Obviously, it's hard to predict. Otherwise, we would be doing other things, I guess. But in general, clearly a better starting point than last year because there we could already see kind of the headwinds. From going into the fiscal year, I think coming with a good momentum out of the Q3 and Q4 momentum pickup we've seen, but also obviously coming to a year which in our normal cycle is the launch of a platform which in our eyes is a very significant step forward in the fiscal year. Highest level numbers, 3.2% on the growth side for the full year. Second half was 4.8. You see the acceleration there. You can see the significant impact here from the Swiss franc. EBITDA at 4.4, so slightly higher than the top line growth, showing a margin expansion of around 25. We had 20 in the first half, 30 in the second, in line with what we've done in local currency in the years before. We always try to achieve some margin expansion while we continue to invest into growth on the organic side. EPS better than the EBITDA. Now, important one, obviously, on the guidance and our perspective for the full year, we look at a 6% to 9% top-line growth. We look at a 7% to 11% EBITDA growth. Again, you see the ambition to drive a margin expansion, why we deploy efficiency productivity but also grow in a high-margin business but leave enough space for growth investments. Now, this is in line with the mid-term targets we have published. Assuming the market to be 4 to 6, that's our current assumption. Also, share gaining element here in the guidance. I will not go in all detail on the page. We like the page because it covers so much, but then we unpeel the onion later. Therefore, I'll only focus here on a couple of highlights. Hearing instruments, 0.7% growth in local currency. If you're correct, for the lost contract, it would have been 4%. But clearly the acceleration into the second half, stepping up to 6%. First half was 2.4, correcting for the lost contract. So you can see 2.4 like for like versus a 6. So the pickup we had expected. Audiological care 9.2, good balance between organic and the M&A contributions. Deployed another 100 million in the bolt-on status in line with what we've done the two years before. I found obviously not a bolt-on We're running normally at a 100 million capital deployment for network expansion in the markets that were already present. Consumer hearing, significant headwind here with a minus nine. Continued weak demand, but also a product issue, which I'll voice over later. And then on the cochlear implant, 3.6 for the full year, but that represents an 8.2% for the second half. So clearly a pickup there from a momentum perspective. More on the system sales. Keep in mind, processes follow a very different logic. When you launch a new process, people were waiting for it, so you sit on a high jump-off point, and from there, it decays to a degree. Hearing the instrument segment, you see the EBITDA performance for the 30 basis points pretty much in line with the whole organization, given that this is 90% of the total. You can see the size of the businesses here. I think on the segment profitability, because we don't comment on profitability by business, 30 basis points, despite what we called higher investment into go-to-market for the second half, which we did lead generation, some flexibility on pricing on the instrument side, but the continued focus on efficiency, also easing of transport and component costs, also a good impact from improving reliability, which ultimately translates to lower service cost at a positive impact here. Going to the hearing instruments business, 0.7, the four I said before, organic growth accelerated to six versus the 2.4, which it would have been corrected for the large customer loss. And we really followed the playbook and we benefited from the things we said when we met at the first half year results. Reliability improvements continued with new record rates on the Lumity, which I'll share in a second. Very strong performance on anything the customer worries about from a customer satisfaction in your delivery, but also approachability of your call centers. When I look at the Q4 versus Q3 dynamic, the market was stronger in the Q3 somewhat weaker in the Q4. I think there's some jump of point discussion because the calendar Q1 in 2023 was already a good number, but our growth in the Q4 was even better than the 6%. So you can see that we had a gradual share position improvement Q3 to Q4, which I think gives us some confidence coming into the new year that we fixed the issues and even with the current product, we're in a good spot. So some more insights on the issues. We voiced them over, but now we have some evidence on what's happening. Starting on the right-hand side from a reliability perspective, the Paradise, you may remember, we said was already better than the Marvel. And then we got to the Lumity. There was concerns in the market on our reliability. We did say for three months we had a little bit of a flare-up there, not that much. The Lumity was 30% better than the Paradise. And in the last year, we were even finding ways because we started to work on existing product for forward shipment, meaning we're making improvements on the technology even if the product is a year old. We don't do that as a field upgrade, but we do that for the forward shipment. You see additional 30% improvement of Lumity today versus Lumity a year ago. If you do two times 30%, you end up at almost 50% lower failure rate from Paradise Lumity today, right? So what you can see mindset wise we have changed the approach we're spending significantly more resources on before we launch but also when we have launched. And with that we do believe that we're in a very strong position with regard to reliability relative to our own products but also the market. On the left-hand side, you see the net promoter score over 12 months. This is the four largest markets. That's where we measure every month and other ones we do every quarter. And you can see that while 25 to 30 was not a perfect place, we're now getting close to the 50 in the U.S., but 60, which is based on many changes we've made from a process and a resourcing perspective. And for us, that net promoter score goes very clearly with our ability to win markets COMPETITIVE ACCOUNTS OR TO LOSE CUSTOMERS WHO MAY LOOK AT SOMEBODY ELSE. SO DELIVERED IN OUR EYES, MEASURED IN THE REVENUE PICKUP, BUT ALSO IN THE INTERNAL DRIVERS, OBVIOUSLY IT'S ENOUGH TO SUSTAIN A HIGH PERFORMANCE HERE. WITH THAT, I WANT TO MOVE OVER. THIS IS NOT A PRODUCT LAUNCH, THEREFORE I'M STILL NOT AT THE PLACE WHERE I'M GOING TO TELL YOU EXACTLY WHAT WE PLAN TO DO, BUT I JUST WANT TO GIVE YOU SOME CONFIDENCE AND SOME DIRECTIONAL GUIDANCE. We have invested over the last five years in run rate R&D spent about 60% more. That needs to go somewhere. It's not that we just spend it without an objective, right? And so what was a big focus of ours was accelerating, elevating the processing power of devices, the data processing, different type of algorithms, because in order to get to a significantly better speech to noise ratio, which ultimately makes the difference for hearing in noisy environments, we think we need a different type of technology available. And that's what we were working on for the last couple of years. So expect the launch to be very focused on significantly better hearing in noisy environment, which is relevant for all customer groups, and also some incremental improvements on the ease of use. With that, we feel we have something meaningful to launch in the fall. Obviously not done with the development, otherwise we would have launched it by now, therefore no exact date today, but certainly more to come and something we're excited and waiting for since quite a while. Moving on to the audiological care business. Talked about the numbers here. Unpacking a little bit the first half to second half. The first half was around 11, second half was slightly above 7. 2.5% of that is purely inorganic because the high sound came in, played for two quarters in the first half year, but only one quarter in the second half year. That was a meaningful size acquisition. The other 2% are mainly driven by China being strong in the first quarters after the COVID restrictions were taken out and a big positive in Germany from a revenue recognition perspective with the VDAC changes. But otherwise, if you look at the other markets, we're looking at similar growth rates first half to second half outside of China, Germany, and the high sound fading issue. Degeneration was higher. but in line with what we had expected. And I talked about the bolt-ons we've done in the AC business. Quick update on China. Obviously, the largest high-growth developing country, still in the world of 3% penetration. Obviously, more volatile right now, given all of the ongoing discussions and concerns on the macroeconomics. But if I just look at 3% penetration in an aging population and an increasing income per capita, still going to be an important market in our world. With our Hisound acquisition, we see good execution with regard to the integration. We now have a complete management team. All of them are local. Some came from Sonova. Some came from Hisound. We hired some from the outside. And they have brought the whole thing together, including the activities we had before. And when we look at the growth rate, we're clearly ahead of the market in our growth in Hisound acquisition. although we don't publish the number, we're in line with what we assumed at the acquisition. The market's a little bit lower. That's the volatility I talked about. And from here, it's about expanding the network, elevating the consumer experience in a way we think we can evolve the service model there. Coming to the more negative picture from a first half to second half, consumer hearing business, not expected to ask the second bullet point with regard to We had detected issues with battery for the MTW3, which is the largest revenue category. We, from there, because we didn't like the quality, stopped selling for a period. So for four months, we didn't have the revenue. The MTW4 was launched in February. That was in line with plan. But for four months, we lost the revenue, which the only positive in that one is, That will be helpful for this year because we do think that we will ship the MTW4 for 12 months. Problem is fixed. Change the battery supplier either way from one product to the other. We think we're in good hands there. In addition, the consumer electronics market has two dynamics. The one is a sell-in and then a sell-out dynamic. On the sell-out side, the market is... Whilst negatives in the first half of the year started to turn to flattish, we see that in the GFK data, which is the sell-out data. We're in line with that growth, even with the quality problem we had. But on the sell-in side, and I think you see that also with other people who publish in that segment, they all showed very negative numbers. I think what you hear from the channel is everybody was quite busy trying to get their channel inventory down, not just a Sonova issue. Positive in that, if the sell-out is better than your sell-in, that should be indicating that times will get better. When we look at market share outside of the true wireless, the MTW4 now, and the other three categories, audio file, the Bluetooth headband, and the TV listeners, we did win market share based on GFK data. So, not feeling bad about the product portfolio, but the market as well as our quality issue there. Second big Positive from first half to second half, our cochlear implant business, first half wasn't particularly strong. But if you look at the second half, growth was 8.2%, coming from minus one. 11% on the system side, which is a good number for that market. How did we get to the 11%? In some improvement in markets, We launched new functionality, most important, the remote programming, but also have seen continued progress on the lead generation through our own stores, but also Phonak loyal customers. Upgrades in accessories turned slightly positive, although for the full year, they're showing negative here. So probably a little bit of a reversal. They are coming to more of a stable level after two years post the launch, or two and a half years. And from a profitability perspective, The second half year was at 15.3, so getting to that 15% we talked about with the ambition to go gradually upwards from here. Quick note on remote programming. Very similar functionality as on the hearing instruments, but more relevant in the cochlear implants. You can do hardware checks. You can do all of the adjustments when you are apart. We're the only company who can do that in the market for cochlear implants. The technological capability we have because we're using the Phonak technology with the made-for-all phone and the Phonak in the background. Other people can't do that. And it's a bigger thing in cochlear implants than for hearing instruments. Why? People have to come a lot more often. You normally say six times a year. Pediatrics, nine to 12. And often longer distance. because there's far fewer specialized audiologists who can do cochlear implants. So very positive reception here, and I think it helps us to get more placements. Last area I want to go through quickly on the ESG highlights. I know it's important for everyone, and for some even more. Therefore, I just point towards the ESG report, which is quite extensive. 17 different KPIs, which are on our highest priority list. I want to highlight three here. Greenhouse gas emissions. Good progress, not just with the 28 versus 2019, but 12% year-over-year. On the social side, the second bullet point here of women in senior management and the middle management significantly improved. A lot of focus from us on getting more, quote-unquote, diverse or balanced. Do you want to call it balanced? And then the last one on the governance side, in two years we come up to needing to audit all of our ESG results. Mindset-wise, we want to be there next year so that we have some safety. Also, from the feedback we hear from the auditors and our maturity. Now, that's all interesting because everybody can publish numbers, so indices are also interesting. I think it's It's good to be able to share that we are comparing in four different indices, Dow Jones being one of them, and all four were amongst the top 2% in the medical device and healthcare environment. So we feel good about our progress, but also position. With that, I want to hand over for Birgit for the financials, and then I will come back to the outlook section.

Good afternoon also from my side here in Stever and also for the people on the line. Let me dive immediately into the financial highlights and I will keep it brief as I said we want to keep the presentation as short as possible so that there is more room for questions and answers. Sales at 3.6 billion as was already mentioned up 3.2% in local currency. And of that, when you look at the organic growth, we ended at 1.6% for the year in local currency. Now, if you're correct, for the non-renewal of the larger contract, that would have been 3.2% of organic growth in LC. Now, then looking at the profitability, so we are very pleased with the gross margin development. As you can see, we improved by 210%. basis points and I'll come to that later with with some more detail and then the EBITDA improved by 25 the EBITDA margin improved by 25 basis points also in local currency so here again as a result of our continuous improvements and is also what aren't already alluded to then EPS up 6.4%, so better growth rate versus the EBITDA adjusted that you see there of 4.4%, and that is primarily due to a one-time tax effect. Then you also see here very clearly the substantial ethics headwind, almost 10% decline in EPS, and we see that throughout all of the numbers. And just to give a perspective on the sales, This was 233 million. You'll also see it later, but that's really a big one here. And then on the EBITDA, almost or actually slightly over 100 million. And then coming to the operating free cash flow, there we saw an impact of 113 million Swiss francs, but here we were able to offset this. And so on the free cash flow, operating free cash flow you see that we slightly increased by 0.7 percent year over year then moving to the balance sheet our leverage ratio stands at 1.5 times and this is back into the target one to one and a half times and then um also in 2324 so we didn't buy back any shares but we do expect to resume a share buyback but more towards the second half of fiscal year 2024-2025. So then moving into the sales components, so here you see the 3.2% in local currency, the growth, and that is evenly divided between organic and M&A. And then if you look at the bottom end of the slide, you see that there is a significant acceleration in the second half, with 5% growth. And if you decompose that and you take two business units out, and it was mentioned already before, but hearing instruments was at 6% in the second half and cochlear implants at 8.2%. So you see a clear acceleration while AC was more balanced throughout the year. Then here you see the ethics impact. I don't need to go into that much. Any longer, let me quickly skip to the next slide. So then the gross margin development. Here you can see the 210 basis points, which is primarily organic. And you see that the items that you listed on the right there, you do have a residual impact from the price increases. This is more in the first half of the fiscal year 23-24. Then you also see the shift in business mix that always gives a positive impact. So here in 2023-2024, we had audiological care driving the substantial growth and the hearing instruments growing much less. And that always has a positive impact on the gross profit because audiological care has a higher gross profit and then has a negative impact on the OPEX development. And you'll see that on the next slide. So that's the shift in business mix. And then we also saw a big improvement in gross profit from repairs. And Arndt already talked about that. You saw the 30% improvement and also the continuous focus on that. And then we also improved on transportation and on component costs like every other industry and also many other companies. Then next, the operating expenses. So here you see an increase of 7%, and then you see the split between organic increase and the M&A increase. The organic increase is 5%, and that may seem on the higher side given our top line, but that is, as I explained already earlier in the previous slide, is due to the audiological care growth compared to the hearing instrument growth, and that gives a specific dynamic impact in the PNL, because it's mostly related to audiological care. Because if you look at the right-hand side, so there you see on the slide, you see the R&D expenses, they remained flat, and as a percentage to sales, that's roughly 6.5% to sales. If you actually take the R&D as a percentage sales on the hearing instrument sales, that would be closer to 10%, and that allows us to keep or to sustain these levels of R&D, investing in innovation, which you will also see materialize later in the year with our new launch. Then sales and marketing up 8%, so that's again due to the shift with audiological care having a higher share, and then G&A plus 11% and here equally primarily audiological care and investments in IT infrastructure That is what drives that position in the OPEX. Then moving to the EBITDA. So here you see organically we improve by 50 basis points and we believe that is a good statement of our ambition to always grow basis points organically and also obviously on the total but definitely also organically, and we were able to materialize that this year as well, and there is an acceleration in the second half as well, here, as you can see. Then on the adjustments, so the 47 million, so a big part of it, 24 million is restructuring. We also have the Mexicali, so the operations in Mexico, that's part of it. And then you also have some integration costs and then also legal costs included in there. Then the ethics here, I already talked about that, that's the 100 million. Then the cash flow development, which you see here, you see the 113 million that I talked about and going from 923 million to 809 million. That is the operating free cash flow before the changes in net working capital. And then you see the cash outflow due to the change in net working capital at 66 million. So that is an improvement of 18 million. And then you see also the capex at 129 million. That's an improvement of 25 million. And then you see some other items with 10 million improvements. you see that we end slightly better versus our position last year. And then the last slide here on the financial section, which is our total sale, return, and capital allocation strategy, remaining unchanged. So we are very consistent with this strategy. So first, in terms of capital deployment acquisitions, then attractive dividends, healthy balance sheet, and share buyback. And here you see, it was also mentioned earlier already, the cash out on M&A was approximately 100 million. Then on the dividend, we will stay around the 40%, and this time this year, it will be 43%, so in terms of Swiss franc, 4.30. And then the leverage ratio, again, I mentioned that already once, And then important on the share buyback is that we expect to resume in the second half of 2024, 2025. So with that, Hans, I'd like to hand it back over to you.

So briefly on outlook and the rationale. We have not changed the strategy. We still execute on it, although there's obviously adjustments as we go. But you've seen significant investments into leading an innovation on geological performance and consumer experience. You see expansion of the consumer access through the bolt-ons on the audiological gear side. Clear focus on how do we improve the value add and the perceived relationship with the B2B customers. not just on the interaction in a high net promoter score, but also through significant improvements in reliability, which ultimately, if you do that significantly better than the competition, becomes quite important to give you a number in audiology store. People spend 20 to 30% of their time just repairing stuff. This is an industry where you don't have enough staff. It's ultimately quite important, particularly for the large retailers. And then you've seen the China discussion, the high growth development. Guidance for the year in line with the midterm targets. We believe these are good midterm targets. We think the market is in a normal state, 4% to 6% at this point of time. And in that, we should be able to grow 6% to 9% to expand the margin. We went deeper on the key focus areas. So for the guidance for this year, market 46, North America coming down to a more normal growth level, not the elevated before some pickup in Europe, including France and Germany, which should normalize more. They had one-time events which had an impact in the last year. They should grow at least in a year out of the system. We expect to benefit from a strong platform launch. As always with platform launches, they do come in the fall. You have the launch cost in the first half year, and you have a product which over time gets a little older. So expect a stronger growth on top and bottom line in the second half than in the first. Restructuring and integration cost, 30 to 40 million, similar, slightly lower than this year. And then on the currency side, slight positive as I pointed out, at least if the currency exchange readers would stay where they were in May. Unfortunately, we can't predict it. But last year, you would have seen significant negatives coming into the year. With that, I think I would like to open it for Q&A. And Farid wanted to join me, I think. One more slide. So he wanted to do that before a Q&A, just from a marking your calendars. We do plan Investor and Analyst Day in person in Stefa, as we have done in many years. Before last year, we moved into not every year mode, but this year we'd like to invite you back to more update on our strategy. Now I can go to the Q&A. I didn't see that Q&A comes after the chart, sorry. Okay.