Sonova Holding AG

Ladies and gentlemen, welcome to the Sonova Holding AG half-year results 2024-2025 conference call and live webcast. I'm Sandra, the chorus call operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one 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's my pleasure to hand over to Arne Kaldowski, CEO. Please go ahead, sir.

Sandra, thank you. A warm welcome to everybody on the call to our half-year results 2024-25. I have next to me Birgit Koenigs, our CFO, and Thomas Berners-Kotter, our Senior Director for Industrial Relations. We want to, at the beginning, share the half-year results with over a little bit the slides you have in front of you, talk a little bit about market trend, and I am sure a well-received update on the progress we're making with Infineo and Sphere after the launch in August and September. On the disclaimer, please take note the presentation contains forward-looking statements. Everything else is well-known, so please look at it that way. Looking at the summary for the first half year, I think on a high level, we have been able to realize solid sales growth, driven by share gains in hearing instruments and cochlear implants. On the hearing instrument side, despite us being in a late cycle until we launched Infineon Sphere, Also strong development in the cochlear implant side, picking up momentum relative to the year before. We have some challenging market conditions and also headwinds from lead generation in the audiological care side, and particularly the market conditions in the consumer hearing business, which is holding us back on the growth side. Looking at the product launch, the last time we talked was around the capital markets day. No change in positive sentiment by the customers. No matter if it's at the trade show or in a one-on-one with a customer, very positive response to the significant improvements from Infineo as the platform, and then even more positive reactions on the Infineo sphere with regard to the better hearing in noisy environments, which didn't have a significant contribution into the first half year. Keep in mind, US launched in August and the rest in Europe only in September. But it clearly kind of gives us a strong momentum coming into the second half year, and we've seen that in the October numbers. I'm sure you took note on the pressures on the profitability side, planned. from a launch perspective and the dynamic on the hearing instrument side, you always come in at a low price in the old platform, then you pick up to a higher price. There is logically a product ramp up cost on the pure physical side. And then we chose to make it the biggest launch we ever have done as Sonova and as Phonak, which does have an impact on the cost side, but all of that well invested money for the momentum pickup, not just for the second half, but also for the positioning of the product for the year after. In addition, and not so much yet at the capital markets day because we talked on the product there, it wasn't a financial update, the combination of high regeneration costs and the audiological care and then the limited organic growth you see in the numbers have created some headwinds coming from the large fixed cost nature of the business. And unfortunately, the switch thing continues to be happening for us. I think on the market side, not a big surprise. We said that two months ago. The market is slower than what we thought when we came into the year. I hear the same from others. But despite that, I think we've shown a solid growth and do feel we're on good track with regard to the guidance we gave. And in that regard, we confirm our guidance for the full year on the top line as well as on the bottom line. On the bottom line, I'm sure there will be questions, but on a high level, if you go from lower ASP to higher ASP and you have incremental volume, those two together have significant positive impact to your avatar and the avatar growth. We, in addition, have put some additional cost-tightening measures into place, particularly on the audiological care and the GNA side. Wanna move a little faster from here, looking at the high-level results, you see the 5.9 solid growth in LC, organic 4.5. You see the EBITDA here with the negative 180 basis points in LC, very much driven by the specific headwinds we have seen, significant part of that being the Agile launch. EPS lower, there's some tax implications, which I'm sure Birgit will voice over. And then you see the output or the guidance here on the right-hand side, which we feel confident around. We go to page six, a couple of points more to tease out. Nice growth on the hearing instruments at plus 7%. Keep in mind that's the half year where we're late in the cycle or predominantly late in the cycle, and that against the market, which wasn't that strong. Even stronger on the unit volume, From a growth perspective, we don't publish the number, but you have to assume that the unit volume growth was higher and the ASP pressure was a negative number. Talked about the positive feedback. We had initial constraints on the shipments. We're, since end of September, in the position that we ship well, meaning everything which we have offered to customers is flowing nicely. We still have not launched on the Infineo of the 30 and 50 price range, which will come later. in the second half year and will be an additional helper from a top line perspective. Archaeological care, want to focus on point number three, which helps a little bit to understand the dynamic here. I think it's fair to say against the 1.1% in organic growth, we would have liked to see a high number. On the other hand, I think most of you are aware two thirds or more of our stores are actually in Europe. So Europe being the more muted market relative to North America is a mixed issue, but outside of that, I think we would have liked to have a higher growth coming out of better leads coming into the year, and then better execution on the lead side, which we see gradually improving in what we produce in appointments year over year, which gives us also some confidence into the second half year. We also expect on audiological care to have a page later a positive coming out of the new product. I don't want to use it as an excuse, but even our audiologists do know when a new product is coming, so you could say there may have been a little bit pent-up demand, but we clearly see a nice positive contribution in additional consumers wanting a new hearing aid coming out of the new products available. looking positively on the momentum on the AC side coming into second half year. Consumer hearing at a minus 1.7. That's direction in line with market. Where do we have market data from? We get information from GSK and the six largest markets, so we know pretty well how others are doing. We can also see it on published data. But in line with market, market share pickup in audio file, which is the high end, but the market still in a difficult environment. And then certainly cochlear implants with a positive start into the year at 12.5%, noteworthy to point out that the system sales was up by 18.2, which is really bringing new consumers for the rest of their lives to AB. We move to page seven. That's the whole segment. I voiced the top line elements over From a profitability perspective, in the upper right box, you can see that we were down by almost 5% in the second. Two spell outs are already voiced over, but these are the two major ones driving this performance. A, cost related to the product launches in the lower ASP, but then again, the negative leverage which we had in AC between the organic growth and the cost increases here. We can flip quickly through here. I think I voiced over pretty much everything on this page, and I have more detail on the products. So if we move to page nine, just a reminder, when you think about the new platforms, you actually have two distinct sellable items. You have the Infineo as the upgrade to the Lumity as we normally upgrade product with the new chip error for connectivity, but also the improved first-time fit. You can see the significant improvements on the Infinio alone with regard to fatigue and lower listening effort. And then obviously on top of that comes the incremental functionality out of the DeepSonic chip and the DNN, very significant improvements in noisy environments. If we go to the next page, that's probably the most interesting outside of the financials. It's how is the new product doing in the marketplace? I think we're three months in now, and I'm combining here a little bit with some information from October. I would say at the highest level we are where we want it to be, and read into that head of the balance scenario, right? Because you have a Low scenario, you have a balance. You have a high scenario. I think if we look at all of the numbers here and how we're doing eight weeks in or 10 weeks in, we feel very positive about the momentum out of the gate. If I start on the lower right, you've seen the positive customer feedback that has continued in all events. Very positive reception on the appeal of the product, also from a competitive advantage. If you go to the high share of Sphere Infinio, supporting the case that people are excited about the Sphere technology and the benefit and are willing to pay extra money for it, we're still above 50% globally Sphere as a share of the total, which does give a nice ASP uplift because that one was priced meaningfully above the normal, let's say, increase for the Invenio. The good repurchase rate at 70%, that's in line with our best product launches we had over the last six to eight years. Keep in mind it's somewhat limited launch because we don't have all colors and all price points available, so we feel good about this number. If you look on the commercial success, I think two important notes from a unit volume perspective, despite some hiccup at the beginning from an availability, it's the highest unit volume we have produced for the launch in eight weeks. Keep in mind that the ASP is relatively high because of the sphere components. Revenue-wise, this is a strong launch. We have pointed out, and you can measure different timelines, but at least from July market share in the United States and commercial market versus what we were able to do in the first two months after the launch, we had a meaningful pickup in market share. We get this information from all manufacturers accumulated. Nice five points. Don't read into that. This is our prediction for all markets and all timelines. It's just one way to measure how strong the initial first months were. Moving to page 11, more of a low light, as you've seen from the growth here. I think I worked most of the elements over. I think we have an elevated cost on the lead generation side. I do hear similar things from others who also publish information. I think at the end, you're looking at the interest of every player to bring people to the store in Europe in a lower consumer confidence environment, and you're ending up in higher prices for the marketing spend. It's still worthwhile to do it because at the end of the day, we have a big fixed cost structure below. We are making adjustments to the organization, not from a short-term perspective, but more given that the run rate is somewhat lower than we would have thought, we find opportunities to adjust the OPEC structure more in a structural way. One point I wanted to share, because I voiced it over at the beginning, a great new product that's super helpful in hearing instruments in the whole field, it also helps move consumers in our own stores. These are just an example of Boots. That's one of our large retail areas in the UK, where I think for the first time, we really had a concerted effort across the different ideological key areas with a new product. The excitement was very high for the new product. And you can see even their dedicated campaign on prints, existing customers, and even media engagement in Boots. And you can see on the right hand side, and again, this is initial commercial impact, don't take it as an average for two years, but clearly strong numbers with regard to incremental leads in the first couple of weeks. And then the share of the new product and the price realization. So it does help also in AC to drive more momentum. Page 13, consumer hearing business. The market is challenged. We see that in the data. There's an interesting bifurcation still going on. The Bluetooth headband version of products grows since two years nicely. The true wireless is declining. That's the market information. We see the same effect in our world. But the sum of the parts right now in market is shrinking, and we do believe We need to see improved consumer sentiment in the younger population for us to get back to meaningful growth. I think the market will continue to grow longer term. I think there are more and more people who want to listen as they are on the go. But I think it takes longer than the hearing instruments market to recover from the lack of consumer confidence. Stage 14 cochlear implant segment, that's For me, the second highlight of what we have been able to achieve in the first half year, obviously a smaller segment, but one which is also important to us. Nice growth with 12.5% overall. I think on the processor side, we don't expect a lot of growth until we launch a new processor. No, we're not announcing a new one today and not in the next couple of months, so no impact in the remainder of the year. Therefore, even more important that the implants are growing well. 18.2% clearly is a high number for a half year. We think it comes from, A, the remote functionality we introduced nine months ago on the back of the Marvel processor, which is unique. We're the only one who can do real-time remote programming, and that is apparently more important in cochlear implants than in hearing instruments. I think secondarily, we're learning to bring more and more leads from retail stores, independents, as well as our own to our funnel. So, good pick up there. With that, I want to hand over to Birgit, who will guide you through the financials, and then I'll pick up at the end with some commentary with regard to the second half of the guidance.

Thank you, Arndt. Welcome, and thank you for joining us today. So, on the financial performance, let's go to the slide 16. So group sales reached 1.8 billion Swiss francs, representing a 5.9% increase in local currencies. And I will break down the sales bridge into organic growth, M&A, and ethics on the next slide. Then profitability. So the gross profit margin improved to 71.9%, which is up 50 basis points in local currency from last year. Adjusted EBITDA reached 325 million Swiss francs at a margin of 17.7% and was down 3.7% in local currency. As expected, we incurred costs related to launch and manufacturing for our new products and faced late-cycle ASP pressure, as Arendt mentioned. In addition, we saw elevated lead generation costs in our audiological care business. EPS came in at 3.74 Swiss francs, down 9.6% in local currency. In Swiss francs, our EPS decreased by 13.9% in the first half. Our operating free cash flow reached 104 million Swiss francs, a decline of 30.7%, mainly due to the aforementioned H1 profit development, of which one-third relates to currency. Then also a more linear capex phasing in audiological care versus prior year and elevated inventory levels from recent platform launches. Then our leverage ratio remained stable at 1.8 times in line with last year. The first half-year leverage typically is above our full-year target due to seasonal factors like dividend payment. And then finally, our net debt position increased by roughly 200 million Swiss francs versus the year-end position, due primarily to the dividend payment in June, and it decreased by 100 million Swiss francs versus the same period last year. Then moving to slide 17, our sales growth was primarily driven by an organic increase of 4.5%, complemented by M&A contributions of 1.4%. FX had a negative impact, contrary to our May expectations of a slight positive effect. FX reduced our reported sales by 23 million Swiss francs, translating to a minus 1.3% impact, which gives us a top-line growth of 4.6% in Swiss francs. Breaking it down further, the standout performers were our hearing instruments business, which grew by 7% despite late-cycle ASP pressure, and additionally, our cochlear implants business showed strong momentum with 12.5% growth for the first half. Then moving over to gross margin, we saw a positive gross margin development compared to the same period last year, up 50 basis points in local currency or 30 basis points in Swiss francs, and the gross profit margin benefited from higher volume in hearing instruments and lower component costs. Additionally, we saw decreased repair costs due to ongoing improvements in product reliability. The positive development was partly offset by pressure on average selling prices in the period before new launches, along with costs associated with ramping up manufacturing. Then moving to OPEX. During the first half, our operating expenses were roughly 1 billion Swiss francs, reflecting a 10.6% increase in local currencies. Sales and marketing outpaced sales growth due to substantial launch investments, elevated lead generation costs in the audiological care business, and M&A activities. Excluding these factors, growth was below the sales growth in local currencies. From the G&A expenses increase, nearly half came from higher IT investments as well as costs associated with equity-linked compensation tied to the positive share price development. R&D expenses remained stable in local currency year-over-year, and while we continue our focus on innovation, this stability reflects the successful conclusion of our parallel platform development for Infineo and Sphere Infineo. Now let's go to our EBITDA performance for the first half of the year. Our adjusted EBITDA decreased, as I already mentioned, by 3.7% year-over-year as a result of the aforementioned gross profit and OPEX performance. Then moving to reported EBITDA, as we highlighted in May, we continued with our structural optimization initiatives, which resulted in restructuring costs of $14 million. including the setting up of a new operations facility in Mexico. Additionally, adjustments include 3 million in transaction and integration costs related to M&A, collectively reducing the reported EBITDA margin by 90 basis points. Currency headwinds reduced EBITDA in Swiss francs by 11.6 million, leading to a further 40 basis point impact on the reported EBITDA margin to 16.8%. Then moving to Cash flow, operating cash flow before changes in net working capital ended at 349 million Swiss francs, driven by lower income before tax, of which, as I already mentioned, one-third relates to ethics in that total number. Then the change in net working capital remained relatively stable versus prior year at 134 million Swiss francs. Its net cash outflow related primarily to the build-up of inventory for our new platform launchers, partially offset by benefits from improved payment terms and also improved receivable days outstanding. CAPEX amounted to 71 million sub-signs, up 18 million from the previous year, driven primarily by a more linear phasing in the audiological care business versus the same period last year. And then in summary, our operating free cash flow for this fiscal year reached 104 million Swiss francs below prior year due to the aforementioned elements. Then finally, let's review some key figures from our balance sheet on slide 22. This sales outstanding improved by two days year over year, reflecting our continuous receivable collection efforts. And then we also saw a notable improvement in days payable outstanding, rising from 52 days to 62 days due to success of payment term initiatives. And then on the other hand, DIO rose as a result of our strategic inventory buildup for product launches, which we expect to decrease in the second half of the fiscal year. And then capital employed ended at roughly 3.9 billion Swiss francs, driven by higher inventory levels and acquisitions. Then the return on capital employed declined from 18.9% to 16.7%, and more than half of the difference can be attributed to the adverse ethics impact, and the remainder is mainly due to lower business results in H1 and an increase in average capital employed from the acquisition of High Sound, which was not fully reflected in the average capital employed in the first half of last year. The net debt decreased by 100 million Swiss francs and the net debt to EBITDA ratio, as I already mentioned, stood at 1.8 times. So now I'll hand it over to Art for insights on our strategy and outlook.