Sonova Holding AG

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00:42 Sandra, thanks for the introduction. Good afternoon to everyone on the call.

Thanks for making the time on the Monday here. Obviously, we come together to comment and then open up for questions with regard to our results scorecard of the first half year twenty twenty one/twenty twenty two.

Let me quickly share who is in the room with me. I have the pleasure to have Birgit Conix with me, our CFO; and then Thomas Bernhardsgrutter, from our investor relationships team.

01:14 Jumping to page two, the standard disclaimer with regard to forward-looking statements. Everybody is well aware and it is published.

With that, I would like to jump to page three here, and if you look at the highlights of the first half year from our point of view, we're seeing a sustained positive momentum for Sonova on the growth above market as well as continued good progress on the profitability of the business and that's supported by a market recovery, which I think is pretty good with regard to the situation we have in the environment. 02:01 So looking at the market recovery, which has continued in the first half year, I think it's fair to say that there are some residual COVID-nineteen challenges remaining very much by geography difference, some markets are a little higher than the normal two-year CAGR, other ones are lower.

I will comment on the profile we're seeing by geography. 02:26 Good sales momentum on our side being here at the later part of the COVID challenge and from our point of view carried by the latest product innovations, the Paradise last year, then the CI Marvel processors and then advancements to the Paradise this year in August, but also continued strong commercial execution and investment into our sales and marketing infrastructure and the various businesses.

03:00 Positive sales momentum in HI, particularly driven by the Phonak Paradise. And then I'm sure noted when you did the pre-read, good performance on the growth side in Cochlear Implants, clearly being now since the launch of the new processors in the mode of recapturing market share.

Made further progress on the profitability as one can see from the year-over-year, but also two-year CAGRs on the profit growth and that despite our continued step-up in growth investments which we'll share a little bit more in detail, but also since August. So for this period, August and September, quite some headwinds on the supply chain side which I will highlight a little bit more about.

03:55 So from an outlook perspective, for the full year maintaining our guidance we gave for the full year on top and bottom line despite the remaining COVID-nineteen headwinds, which may be a little bit more than we thought for the second half when we came into the year. Keep in mind, it's not so easy to make a call in the April where you want to put the guidance, especially with the still, let's say, evolving COVID environment, plus the supply chain.

But I think the good progress we are making and the good momentum we have allow us to stay in the guidance range here. 04:36 Going to page five, the highlight numbers.

Sales close to fifty percent in local currency year-over-year. Obviously, that was the low point of the COVID pandemic.

But if you look at the two-year CAGR, which we think is the fairest judgement on how we're doing as a market, but then also we as Sonova compared to others at eight point five percent in LC, clearly, setting us ahead of the normal market growth rates. And then on the EBITDA one thirty percent expansion versus prior year, more relevant to look at the two-year CAGR at twenty six point three percent showing that we have created significant leverage from a continuous improvement, but also structural improvement, and you may remember the changes we made last year to the footprint allowing us to strongly invest, but at the same time produce more profit.

05:33 Nice development on the EPS side, obviously, following the EBITDA side here. And then on the innovation side, continue to invest.

So that's in the P&L from a cost perspective, but also reaping the benefits on the products we launched recently. And then you see the reiteration of the guidance which we put out in May.

05:55 Very quick note on page six, just to make sure I said it, there is no change to our big picture strategy. I think all of the ones at play, I could go on any of the six and explain what are the initiatives and what are we doing now, are we doubling down on things, but clearly further progress as we progress our sales here through the year.

06:22 Page seven, a quick reminder on the most relevant innovation steps forward. On the Paradise side, just want to remind two significant, let's say, feature additions to Paradise in August.

So, you can see we continue to do new platform every two years, but then significant advancements of the platform in the in-between year. We launched the ActiveVent, which is very relevant with regard to people with a severe to profound hearing loss and has good reception in the market from its performance improvement.

07:05 And then with the life proof, the waterproofing on the hearing aid in all transparency currently only available in some markets and at the higher end, because that's one of the areas where we struggle with chip availability. So it is in the market and finds positive reception.

But it's not yet broad based on the revenue side until we have worked through some chip supply issues there. 07:30 And then on the Naida CI processor, we have brought over and launched this in the December-January timeframe the Phonak Marvel technology to the Naida processors and with it came the Sonova Made For All phone, making it very strong value proposition, not just for new people who are looking for an implant, but also as an upgrade to the existing installed base of electrodes.

07:56 Moving on to page eight and I'm reusing the slide to share that the capital markets just to remind and make some comments on progress. You may remember, we said we want to step up the bolt-on acquisition side for Audiological Care.

We highlighted seventy million swiss franc to one hundred million swiss franc to be a good mid-term target of capital deployment a year. We were in a good position to do some of those end of last year, beginning of this year and so that contributed some five point two percent on the Audiological Care growth rate in the first half year.

We will continue on that journey. But clearly a good start to that elevated M&A bolt-on side.

08:43 On page nine, I don't want to repeat, the numbers are already set. So I'm going to go a little bit selective here.

If you look at the EBITDA side, [indiscernible] one thirty percent points in LC, clearly benefiting from higher sales, but also the structural optimization from last year. And I would say, tight cost management where we didn't invest into incremental people for growth.

On the growth side, we're leaning forward. Most relevant the EBITDA margin side at twenty five point three percent, that's up nine -- almost nine hundred basis points versus prior year, but almost seven hundred basis points to two years ago.

So clearly the step-up is sustained. 09:27 Turning on to Hearing Instruments side, getting back to the discussion at the beginning of the year, we have been able to hold on to our leading position with the VA.

Pretty much around the same number which I would interpret as a good sign for the performance of our product relative to competition. 09:47 On the Audiological Care side, I was talking about geographies which are struggling more versus less.

I think Audiological Care with a good performance when we compare side by side to markets in the markets, but in the global rollout -- roll up somewhat less, strongly growing than the wholesale business. This is pretty much coming from a footprint discussion.

Our strongest countries are Germany, Belgium, Netherlands is pretty large, U.K. is one of the strongest and these were the ones who in the first quarter and then the three names here in the second quarter where the slowest markets we've seen on the recovery.

So clearly for that forty percent of our book of business in AC more of a headwind situation, which we think will level out over the period it takes until we're fully out of COVID in those markets. 10:45 And then on the Cochlear Implants side, I will comment later in more detail, but I want to give the highlight number here.

If you look at the EBITDA margin, I think with some of you for many years now had the discussion, can this business get to double-digit in the EBITDA. I think this half year shows that we can been at thirteen percent and that's the highest the segment ever had and this is based on good work with regard to obviously top-line out of the Marvel processors.

But at the same time, the work we've done over the years on the cost structure from a continuous improvement, but also structural improvement perspective. So it's fairly earned.

11:30 If we go to page ten. Don't want to go too deep.

Birgit will guide us more through the numbers, just want to highlight some of the bigger picture here on the two-year CAGR. You can see on the schedule we're providing you with the comparison versus prior year comparison versus two years ago and then the two-year CAGR.

We do that two years ago because others have commented in that way. So it's easier for you to compare the numbers, but we think the best way to look at it is the two-year CAGR.

You can see the HI business is leading the three businesses with a ten point fice percent, AC with the geo headwinds from a mix perspective at six point three percent and sales in CI five point three percent. I think the market is somewhat slower in the recovery.

There are still hospitals who do not do elective surgeries. But at the same time to field corrective action is in the middle of that two-year period.

So we lost market share. We said that last year after the field corrective action, but since nine months are now recovering some of that.

12:35 Gross profit nicely above the sales growth, showing the fall-through as well as the continuous improvement and then despite the growth investments, you can see that we're reasonably tight in the sum of all OpEx and how we grow the OpEx base. So in our -- I sustained HI market share gains and the best-in-class profitability.

13:02 Next page is up to you, our benefit here to see the breakdown in the different components of growth. If you look at the organic, very strong organic growth in this year.

If you look at the two-year CAGR also with a seven point six percent a strong number. The M&A is a small proportion to all of that right now, although we'd like to do more from a bolt-on perspective.

You can see the negative FX effect here over two-year period while currently we're slightly positive. 13:34 If we go to geographies on page twelve and focus on the two-year CAGR in the middle, you can see that while all of the geographies have a mid-single digit to high single-digit growth rate in two-year CAGR, U.S.

stands out with a twelve point two percent, and that is good work on the wholesale side because that's predominantly a wholesale market for us. We only have a small footprint from a retail.

It is also that the market is recovering currently faster than the others, there are quite some pent-up demand on the way, but the twelve point two percent is not just pent-up demand, but it's also market share gain over the last two years in the U.S. 14:17 I commented in EMEA on the AC slower markets.

I think in the U.S., clearly there is market share gain on the independents, but also the private-label contract, as well as the sustained VA position are helpful here. If you look at the others in our world, the Asia a little weaker, particularly, because Japan, Australia, New Zealand had elements of lockdown in the first half year.

And then in Canada, we also see a slower recovery, because of the more careful opening scenarios of the government. 14:57 I want to go a little bit more into detail on the Hearing Instruments segment.

On page fourteen, I want to cover on the blue boxes, which is the segment numbers. You'll see in the segment eigh point eight percent two-year CAGR, you'll see the profitability at the twenty five point six percent and us getting in the overall segment to a twenty six point five percent margin level.

I think I've commented on the sales side, it's pretty much all of the elements. I'll get to the individual businesses in a second.

But clearly strong performance on how we manage the cost structure, at the same time, as I said earlier, at least for two months in the half year period more costs on the supply chain, so the way you have to think about it, I think the freight was already elevated over the whole period, but since August we do have certain chipsets more on the standard chips, so more of the things we may integrate in accessories on a product like the Roger, where we may be short and at the same time, we're trying to buy on the broker level, which is more costly -- sometimes far more costly than what you can get directly from the manufacturer. 16:24 We interpret this as to some degree more demand, but on the other hand also people having bought a lot for their safety stocks.

And so, at this point of time, we do pay a significantly higher amount for those kind of chips than we normally would be -- would do. We expect this to continue for at least next six months, so for the second half of the year, it's hard to predict how long this will last, we hear many different, let's say, directions, we're thinking more on the twelve month, but clearly for the next six months we have factored this into our guidance here.

17:02 A couple of more comments on the Hearing Instruments segment. So our wholesale business, you can see the numbers on the top.

We continue to invest strongly into R&D and in customer-facing resources in the markets, because we think there's more market share to be gained over time and we think that innovation continues to be an important driver of our ability to sell more. Talked about the ActiveVent and the Audeo Life, important to note that the Unitron product also has migrated to the Paradise technology in the March, April timeframe and we do see a very good growth there on the basis on the Paradise technology.

And then on the lower bullet points, no major change, but continued work on sales funnel management in the different regions, and also supporting our independents increasingly on the journey to find more leads. 18:05 If we go to page sixteen, the Audiological Care business.

Similar to the wholesale business, we continue to significantly invest into the business. On the one hand on the lead generation side and on the other hand on the World of Hearing concept and the greenfield openings.

On the lead generation side two elements, as we discussed at the Capital Markets Day, we do build more capability to drive digital lead generation and we continue to build those teams within Sonova. At the same time, somewhat unplanned, the cost to generate a lead at this point of time is significantly more expensive than before COVID, and that is because everybody is trying to push the revenue here a little bit.

So in that regard, that's less of investment into the future one investment into the current run rates, which I'm pretty sure other people have to also factor in. 19:14 With that, I want to move to the Cochlear Implants side, and share a couple of more comments here, but also a couple of facts, particularly the breakdown into system sales and upgrade sales.

You heard me talk about the five point three percent two year CAGR versus twenty nineteen, that's probably directionally with market. If I assume that we still have a couple of hospitals who are not doing elective procedures.

So clearly a recovery in minimum significant first step of recovery relative to the few corrective action. You can see the margin here at the thirteen percent.

19:56 If you go down to the system sales, you can see that we're still lower than we were prior to COVID. And I think you see the elective surgeries here are probably still some customers to be convinced after the field corrective action, but a very strong sales contribution from the upgrade sales side.

And on the segment profitability, you talked about the improvements. I think, ASPs helps at this point of time a little bit, given that we have; particularly in the U.S.

a good upgrade sales position. 20:35 With that, I would hand it over to Birgit, who will guide through more of the financials, and then I'll come back to talk about how we think about the outlook here.

20:45 Thank you, Arnd, and good afternoon to you all. So indeed, let me take you through the financial highlights of our first half year results and all variances are at constant exchange rates unless I state otherwise.

As Arnd already mentioned, we ended the first half with one point six billion swiss franc in sales and saw an increase of forty eight point five percent versus prior year of which forty six point six percent was organic. Our sales growth was supported by a low base in the first half twenty twenty one due to the COVID impacts, however, when we compare our growth on a two year CAGR basis, we see a nice eight point five percent annual growth rate as Arnd already highlighted.

21:32 And we continue to outperform on profitability with an EBITDA of four hundred and six million swiss franc for the first half year, and a margin which is up eight point nine percentage points or seven percentage points versus the same period two years ago. And our EBITDA more than doubled, up one hundred and twenty nine point three percent and besides the comparison to a lower prior year base, it is -- which was affected by COVID, our results are driven by continuous improvements in our cost base, both in cost of goods and operating expenses and we will see that later.

Our adjusted EPS was up one hundred and forty two percent. 22:14 Then moving to the operating free cash flow of three hundred and thirty seven million swiss franc, this is thirty seven percent versus the same period last year, and this reflects our continuous focus on working capital, partly offset by an increase in safety stocks to counter supply chain issues as Arnd already mentioned and higher tax payments.

And in addition, please note that last year we posted a non-recurring cash benefit due to a patent infringement settlement. 22:47 And then lastly a few words on the balance sheet.

We bought back shares worth two hundred and seventy seven million swiss franc by September thirty. And our net debt position is at three hundred and forty five million swiss franc, which is up since March due to the effect of our share buyback program and also dividend payments, and this leads to a net leverage ratio of zero point three times.

23:13 Then moving to the next slide. Here you will see a recurring graph, we always show you with the EBITDA components and here you'll notice that our first half of EBITDA growth this year consists basically of an EBITDA related to organic growth, that we keep also in this slide, [indiscernible] you can then also see going forward that movements between organic and M&A.

And then the adjustments on this page relates to firstly the structural optimization initiatives, for which we incurred restructuring costs of seven point four million swiss franc; and secondly, five million swiss franc transaction costs, which relates to the planned acquisition of Sennheiser. And then the last lies blue box and its bridge relates to profitability when we covered our conference exchange comparisons to a Swiss franc base.

So, basically reflecting the foreign exchange translation effect. 24:13 So then if we move to the next slide then actually we discussed sales at length in the previous slide of the presentation.

So let me jump immediately to gross profit, and here we -- you can see that we continue to perform well in terms of profitability by advancing our structural and continuous optimization initiatives even further and driving higher sales volumes, obviously, resulting in a gross profit margin of seventy three point eight percent, which is up four point three percentage points. And as you can see, we could clearly more than compensate our higher transportation and component costs.

24:53 As you can see from the two-year CAGR column, we continue to drive operating leverage but I will come back to this later. And we do that while investing in growth, which is really, really important factor here.

We already discussed the EBITDA components and adjustments on the previous piece, so let me move to the next P&L lines. So first, our acquisition related amortization remains in line with prior year.

Then the net financial expenses increased from ten point three million swiss franc to nineteen point two million swiss franc and this is driven in part by increased borrowings during the pandemic. And then income taxes representing a tax rate of fourteen point five percent and this compares to a prior-year tax rate of thirteen point five percent when we compare like-for-like, because last year we had a non-recurring benefit included.

25:49 And then, as I already mentioned, EPS up one hundred and forty two percent, which reflects an EPS of four point eight six swiss francs compared to the one point nine seven swiss france in the prior year period and this reflects our strong earnings growth. 26:07 And then -- so let's now move to page twenty three on the operating expenses and here as stated earlier I already said that we leveraged P&L keeping our OpEx growth nicely below our sales growth, while investing in growth.

And as a further note, the OpEx leverage was achieved despite a significantly lower subsidies, which we received related to COVID-nineteen in the same period last year. And as you can see from this table, we are investing strongly in R&D with a two-year compound annual growth rate of plus twenty point four percent, reflecting our continued step-up in new technology investments.

26:48 We equally posted an increase in our acquisition of development costs in our CI business. And then we continue to invest in customer-facing sales and marketing, while at the same time, we continue to generate savings from successful structural cost optimization initiatives, which is a recurring theme here on this stage.

And then the same applies for our general and admin costs and there as well we are able to absorb ongoing investments in a new IT platform for our retail business and this due to structural savings in back office consolidations and then we already talked about the adjustments on the previous slide. So let's move to the next page.

27:34 And here you see operating free cash flow. So for the complete detailed cash flow statement, I would like to refer you to page thirty six in the appendix.

And on this page, I will concentrate on OFCF which increased by ninety one point five million swiss franc or thirty seven point two percent. So let's look at the drivers of change besides the increase in profit before taxes and here you see that a positive seven point one million swiss franc in depreciation and amortization relates to the earlier mentioned step-up in amortization of capitalized development costs in our Cochlear Implants business.

And then the increase in cash taxes is due to COVID related tax payment prolongations last year when we only paid actually three million swiss franc. 28:29 And then net working capital.

This was largely stable versus the end of March, but increased versus last year and then receivable collections continue to be strong. While the group allows for an increase in inventories related to component safety stock to manage the aforementioned supply chain shortages.

And this is mainly in the microelectronic components area. 28:57 And then moving to the last slide, slide twenty five.

And here I will take you through the main balance sheet items. And here you can see that clearly our DSO continued to be strong, while DIO reflects an increase in inventories related to components safety stock to manage the supply chain shortages that I already discussed.

29:20 And then capital employed slightly increased compared to the two point eight five five billion swiss franc, which we communicated during our year-end results in March twenty tweny one and this is driven by a rise in receivables due to the sales recovery also again the aforementioned increase in safety stock as well as a step up in bolt-on acquisitions in our Audiological Care business. 29:47 And then ROCE improvement is driven by our strong profit growth and then net debt, the net debt position increased versus our year-end results in March twenty twenty one and this is driven by the share buyback program announced in May of this year.

The dividend payments and also, lastly the step up in M&A and our net debt position. However is still lower versus the same period last year.

30:16 So with that, let me hand over to Arnd for our full-year outlook.

30:21 Thank you, Birgit. So getting to how to think about the outlook and us keeping the guidance where it is.

It's a tricky year to judge the phasing between first half and second half and sometimes when it's tricky we give you some incremental, let's say, thinking on how we think about the effects in first half and second and that really should be just helping you on you're trying to judge our numbers and our outlook here. 30:50 So I think it's fair to say that clearly the comparison base in the first half was significantly lower than in the second half.

I think that's clear, given the curve we had last year and that's true for both businesses. I think why we had some stronger markets above the normal two-year CAGR in the first half year, namely the U.S.

was one of those, obviously a big market versus some which are on the weaker side. 31:24 I think we can't predict better than that for the next half year.

But I think we all ought to be also recognizing that there is still a fourth wave coming our way and some discussions are happening in the market. So I would call that kind of a put position, it's about the same as in the first half year to the best of our knowledge.

31:42 On the France side which we benefit from, particularly in our wholesale business, I think we've seen very strong growth in the first half year after the reimbursement changes, we would expect that that gradually slows down, not completely but gradually. And then on the CI side, I think you have the highest, let's say, demand for your processor at the beginning after the launch.

So we expect still a good upgrades business in the second half, but probably not as strong anymore as in the first half year-over-year. 32:19 So that's the top-line considerations here.

If you look at the bottom-line, I think the ones to spell out, we started our structural optimization last year. In the first quarter, we started to have significant impact in the second quarter.

But then the full impact pretty much in the second half year. So in that regard second half year already had seen lots of the benefits.

Therefore, the comp base is already a lot lighter on the cost structure and then we voiced over the supply chain constraints here, particularly on the sourcing cost side which we "only had for two months in the P&L" but at least in the spirit of the guidance, we gave have no effect that in for the full six months because it's really hard to call when this is over. Some people say twelve to eighteen, some say it's soon.

So at least for the next six months who wanted to factor this in. 33:20 I think I spoke briefly about the higher lead generation costs in the markets, particularly where the markets are still slow, we're trying to drive the demand.

I think you'll probably see this with others, too. I would say that's probably similar second half to first just wanted to note that, right now we have quite some marketing expenditures, which are fully baked in in the first half year despite the good performance.

33:48 It's probably worthwhile to say if you look at the two-year CAGR, the first half year is at eight point five, the second half year has had a eight point four. So in that regard, not very dissimilar.

If you look at the outlook just for completeness, as I've said, guidance unchanged for the full year. You remember the mid-term targets we put out in the Capital Markets Day.

If the headwinds remain in the same order of magnitude as we've seen them in the last two months of the first half year, that's baked in. We expect resilient consumer demand, not a significant change here to the positive or negative, if that happens, it would change the perspective, the acquisition of Sennheiser is not factored into the numbers, we expect the closing by the end of the fiscal year, and we will inform you when that is close by and then talk about the financials for the go-forward.

34:47 And then only a slight swiss franc positive here, when we came into the year was significantly stronger. We give this to you just for courtesy of the modeling, but therefore, even if it is only zero percent to one percent on the top line and one percent to two percent on the bottom, we had significantly higher numbers at the guidance for the full year and we want to make you aware about those.

35:10 That was our report out, I would suggest we go to Q&A and people need to register with their questions. We know the first people have raised already questions, therefore, Sandra, if you want to guide us through on who gets to ask first, we try to answer them all.

35:58 Perfect. Thank you very much.

I'll keep it to two, please. The first one, you guys had mentioned a little bit on the M&A side that there was both a little bit of more interest on bolt-on, but potentially, I think something larger.

I'm just curious -- just strategically, the kind of assets you're thinking about and where you feel like you'd like to bulk up. So that's the first question.

36:17 And then the second question, very strong gross margin in the first half, despite some of those supply chain pressures. If we're thinking longer-term, if some of those pressures remain is there an ability to push through a little bit more pricing, let's say, with the next innovation cycle, just to sort of get, let's say, some compensation for the fact that you've had to absorb a fair bit of the semi side?

I'm just curious, like-for-like how you feel about the pricing environment? Thanks.

36:45 Patrick, thanks for the questions. And you're following closely what gets published, because the M&A question came just out of the discussion this morning with one of the buyers.

So bolt-on is clear, Audiological Care is a priority for us, that will be true also for "a larger asset", if it is a larger independent somewhere in the market we find attractive, we'd be participating in the process, and then we have to look at it. I think the other one is really -- if it comes to technologies, which are relevant in the HI environment, also on the Hearing Instrument environment.

Probably not such big capital layout, but you don't know until you see what it is. But don't read into the question, I was expecting something tomorrow, it was really more a question of somebody with regard to would you consider, and we said, yes, we would consider larger M&A.

37:43 From a gross margin perspective, yes, I think we need to think about how does the inflation environment change, and I would say inflation plus microelectronics. And we also need to kind of find ways to translate this into some lift on the ASP side, that's not very normal in our industry.

So I think we will need to see how much of that can stick. But in principle, I think given the combination of inflation in microelectronics, at least to move a little bit in this direction is, I think, which we are well advised to do.

38:25 Fabulous. Thank you for taking the questions.

38:27 You're welcome.

38:33 Yes, thank you very much for taking my questions. I'll also stick with two now.

Great results on AB finally, it's good to see that this comes through. Since you are expecting a bit of a softening on the processor upgrade side in revenue, can we still expect to see a double-digit EBITDA margin, is that what you kind of budget for the full year?

That would be my first question. 39:00 And my second question is, you talked about the higher lead generation costs, and you expect this to continue into coming months.

I believe, I understood it right that you said in the slow market, so I guess like Germany and generally those kind of markets. Can you maybe give us an indication on how much higher are lead generation cost?

Are we talking about ten percent? Are we talking about five percent?

Just to get a bit of a feeling for that. Thank you.

39:31 Thank you, Maja. Thanks for the question.

So on the AB side, yes, we are -- I think the cost structure is in a place where you should expect double-digit on the EBITDA. Keep also in mind, even if the upgrades go down a little bit, our second half tends to be stronger in the AB business.

So not something to worry about from an operational performance. 39:55 On the higher lead generation cost, I think it's really very dependent on the geography, but there are some geographies where you're well higher than twenty percent, twenty five percent than what you were used to.

And it's really not just in the hearing aid environment, but I think in the markets where consumer confidence is low. I think everybody is fighting for more demand, right?

And so, I would say this is something I would expect to be in those markets until we're back to normal consumer confidence levels.

40:33 Okay. Thank you very much for that.

40:42 Yes, good afternoon. Thanks a lot for taking my questions.

The first one is on the U.S. So on growth in U.S.

and respective market share gains. As you've said in the script twelve point two percent CAGR U.S.

looks like a strong outperformance, if I compare them to official data. However, if I look on a one year period, your performance looks pretty similar to the underlying market.

So, could you comment which segment has hold you back over last twelve months as you made some positive comments on your performance at independents and also the VA should have had positive contribution. So that would be appreciated.

41:22 The second question is, also on M&A in the acoustic retail space. So I would say what your major competitor, as well as, Amplifon also look -- seem to be more aggressive on the retail side.

And there's also more private equity around which is acquiring some acoustic retail. So do you see any changes in the available assets or basically on the price front?

41:55 Oliver, thanks for the questions. On the U.S., I think you make a fair point, if you look at the two year CAAR, the first half -- the first year minus the COVID, but from a market share gain perspective it was stronger for us, that was on the back -- on the private-label contract and us coming in VA from a very low level to the above fifty percent.

We've seen all along good performance and some market share gains in the independents in the first and in the second , and we do get that data as an industry participant. 42:33 I think under-performing quote "from a growth perspective" is the VA were we are at that level since twelve months and longer.

And the VA honestly was growing pretty much not with market, right? So I think we're doing fine on the independents, we're doing fine on the private label side.

I think the VA is a little bit of a headwind, just because of the slower recovery of the VA. But that's the way we would look at it, but clearly the first year was stronger from a market share gain than the second, just given VA and the private label.

43:13 On the M&A side and the retailers, I think it is true that -- and if it's just because we're more active, overall, the number of active participants has gone up. I think we still find attractive acquisitions, if not, we wouldn't have done the ones we've done in the first half year.

I think if it comes to larger targets, one really needs to take a look on how attractive is the market for oneself and what is the "price premium the bidding leads to". You have recognized, there was a larger asset which traded in the first half of the year at a quite high multiple.

We apparently were not going to the endpoint from a pricing perspective. It is a market we are less interested in, meanwhile as we have a relatively low market share, so I think it really becomes a question of how strategically important the switch market and that is different by player, by geography.

And that's the way we think about it, we will be thoughtful on what is a strategic priority, and we will be thoughtful in what is a meaningful price and we still return a meaningful ROIC. But overall, yes, more people are currently active.

44:38 May I just ask a follow-up to my first question, please. Just [indiscernible] calculation on the VA market.

So your comment basically was more about this two-year period within VA, because if I look on the H1 performance, H1 your physical performance versus H1 to previous year in VA, it looks like that VA has grown much stronger than the remaining market. So just due to it was low base in your H1 last year.

45:13 I would need to go back to this Oliver, and we're happy to do that and get back to you. My recollection is that the VA is not as well growing.

I maybe off here, so allow me to go back to that. But in general, I think the strong market share position in the VA is great that we sustain it, it's not one where we're getting a lot of year-over-year benefit out of.

45:42 Okay. Great.

Thank you very much.

45:51 Good afternoon, and thank you for taking my questions. The first one is on component cost.

Could you disclose what was the impact from the higher component costs on your gross margin in the first half? What impact you expect in the second half and perhaps your assumption on when these higher costs start to normalize again?

46:11 And the second one is just around the Sennheiser Consumer Division. Could you give some qualitative commentary as to how that business performed and whether they are seeing any headwinds from the component shortages in the industry today?

Thank you.

46:22 Thanks for your question. So on the EBITDA -- on the component cost side, allow me to comment more in EBITDA framework.

I think the two months higher prices did cost us for the full six months around fifty basis points on the EBITDA side. And we're expecting one hundred to one fifty basis points for the second half as a headwind, which is -- it either is slowing -- getting a little bit better in the Q4, it's at the same level, as we have seen in those two months where we were impacted, so quite a meaningful order of magnitude to our EBITDA performance year over year.

47:08 With regard to when will that improve, in the best case scenario in the Q4 at some point, if you go through the worst case scenario and there is lots of different opinions on semiconductor supply and we're not as close -- as close as we can be, but I'm sure you find people who are close in that industry direct participants, I think we hear things anywhere between six to eighteen months. So I think we wanted to factor then properly here which we have for the half year, I think we need to measure as we go.

And in the Q4 probably wrap our head around what does it mean for the next year. 47:53 On the Sennheiser side, not significant impact with regards to availability of product, also some increased cost, which they have on the component, they are in some products buying similar chips as we do, overall the business is going well this year.

I can't disclose an exact number, but from a growth rate in line with what we had expected for the year, perhaps a little bit better. So overall, happy on their performance, the component side is more of a cost matter there, which I would look at as a short to midterm problem, but not impacting their ability to sell.

48:40 Okay. Thank you very much.

48:41 You're welcome.

48:47 Hi. Just a few questions about the U.S.

Market. I assume we continue to see pretty strong growth from the Medicare advantage coverage and hearing aids.

You have a strong partnership with Unitedhealthcare. Just clearly, I don't think you'll give us hard numbers, but how does the size of that contract compare I would say, you're sales in the VA channel or Costco?

I mean, this is another potentially significant channel in the future. 49:14 And then second question is just because of that contract with them, how do you interact with other Medicare Advantage players?

And then lastly, any comments on the potential for Medicare expansion? I know it's been in one of the bills in Washington that may actually get passed, but just how would you think about trying to address that market opportunity?

49:42 Lisa, thank you for the question. So with regard to our managed care position relationship to United, it is as a revenue contribution for us, significantly smaller than VA or Costco.

I can't give you my exact numbers, but it is a meaningful size opportunity and customer and it has grown very nicely, because United is very good in switching more lives on the management under this type of an offering. And that's what they've done in the last two years.

50:17 On the other side, we are participating in some other managed care contracts, but probably under proportional to some of our competitors. And I think that's an opportunity overtime for us to play in.

And it is something we're wrapping our head around, but you may remember that we moved into the United relationship some three years ago and we were quite busy with them to build that new way and new relationship, and I think we're now getting to a phase in which -- that well sustained than we're looking for upside in the managed care environment. 50:57 On the Medicaid advantage or the Medicare reimbursement of the Medicare Advantage.

It is in the second bill from the current administration now, I think, included, but the [Multiple Speakers] it’s in the what I think call, is it social infrastructure, it's the infrastructure which is not the bridges and the roads, but it's more building the care system for the country. So it is included in there, but I think as we all know that bill hasn't passed yet, it comes to question, if the democrats get it through the house.

But if it would happen, it would be a net positive, then we would expect it to start to be relevant to our industry in twenty twenty four most likely. 51:52 The current writing of the bill is very comparable to what we're used to in other markets.

It would cover the severe to profound who are under Medicare with a reimbursement for hearing aids. It would be non-competitive tendering, so it would be multiple players can participate and the consumer can pay up but gets the base for the hearing aids, so very much like most of the European countries, which is a positive for us.

So I think we need to see if this overall build would have and then obviously, they will be busy for two years putting this all into place, but twenty twenty four would be an incremental reimbursement benefit in the United States for severe to profound.

52:41 Great. Thanks.

And actually just one quick follow-up. You mentioned that structure would be similar to what you see in some other countries.

So in France and Germany, especially given the inflationary environment, can you just remind us the amounts that they cover, do those automatically increase each year? I'm just trying to think through the inflation implications?

53:04 I go of memory, but I don't think they have an inflation component, I think these are fixed fees, but they do get revisited after period of time. But that's more in the, I would say, four to five year environment.

I think France is currently on the first year and the second year there is price changes already defined and factored in. Because the introduction started for the Class 1, which is the low end to higher end and it’s stepping down for the first two years or so.

So, I think France is clear, but not improving, slightly degrading. I think Germany will come up for the next round of discussions, but that happens more on every five years basis or so.

I go with memory.

53:51 Okay, thanks. Very helpful.

54:00 Thank you, Sandra. Good afternoon.

Arnd and Birgit. I had two questions.

The first also on the CI business. Could you actually talk about to what extent kind of this margin increase is gross margin driven, just to get a better understanding what is still the upside opportunity there?

That would be kind of the first part of the first question. 54:25 And the second is on that business, could you elaborate on your level of provisioning, given these recent press article?

Particularly I noticed that in this press article, it was mentioned that in Hannover kind of the re-implantation rates would be somewhere like thirty percent, which no doubt must be kind of materially higher than you likely assumed when setting up the provision. And the second question relates to the balance sheet, but maybe take it one by one.

54:58 Hi, Chris. Thank you for taking it one by one.

So on the CI improvement, this is -- I would say, broader-based, but the significant part comes out of the cost of goods sold in the combination of getting better in the cost per unit, but also with regard to the warranty provisions we need and we have for the ongoing business, so improved quality of the product. I think there is an OpEx component, because we also went through some structural improvements in the AP business.

I think the third one is a good ASP development with innovation we introduced. I can't give you an exact number, but the largest of the three is the gross margin side as an improvement.

55:53 On the provisioning side. First, I think one should not read too much with all respect into the claims of one institution on the failure rates.

We do look at the total population worldwide and we do this on a monthly basis. We have to from a regulatory perspective.

And so certain people who get quoted may be also amongst that peer group at a high end. The number is increasing as you would expect, but is in a place where when we look at the development, we're feeling we're well provisioned with all of our product liability provisions on the CI side.

56:38 And therefore, we have made no change with the closing of the books here at the first half year. We obviously look at it on a monthly basis, but ultimately, think about the right positions on provisioning when we come to reporting moment.

So we obviously will stay close to it. But right now we feel that on product liability for CI, we're properly reserved.

57:04 And now your balance sheet question.

57:07 Yes. So the balance sheet question is -- I mean, I noticed that you still kind of have this cash of one point point billion swiss francs on hand which sounds pretty a lot.

And on the other hand, kind of, if I look at the buyback the two seventy seven million swiss francs that Birgit mentioned is way less than half of the up to seven hundred million swiss francs you were trying to buy back this year. Maybe could you kind of comment on what you think kind of would be the best strategy kind of to get to a more efficient balance sheet here?

57:42 So my first answer would be, keep in mind the seven hundred million swiss francs we announced with our AGM, so that was in -- and it has to go through -- with announcements we do and things like that soon before the AGM, I think in the respective Board meeting. So directionally, we're on the pathway plus, minus a little to the seven hundred million swiss francs for the year.

But you need to keep in mind, we started this six weeks into the fiscal year. 58:15 So that is a building block.

Keep in mind, we're accelerating our M&A. We'll open for other things, want to keep some flexibility there.

We also will "have to consume the acquisition of Sennheiser." So if you put all of this together, it's probably a good stepdown for a year.

We also don't want to overdo it, particularly on the buyback side, because I don't think that's a good way of doing things. So I think we will need to count when we come to the March, April time frame and then get back to the market.

I think the best assumption right now is that, we're going to look on how much we have as a debt ratio here, and then we'll take a decision on what's the right level of a buyback next year, if that's the right thing after deducting M&A and dividend.

59:06 Yes. Okay.

I appreciate your comment. See you tomorrow.

59:10 See you then, Chris. Thanks.

59:13 See you. Thank you.

59:24 Yes. Thank you very much for taking my follow-up question.

I would like to start with your comments, Arnd, around consumer sentiment being subdued. And I guess this is in your bigger markets, but are you referring to consumer sentiment being subdued due to government communication on the pandemic or infection rates picking up, boosters coming?

Or are you talking about consumer sentiment also being a bit down due to inflation? Just to understand that.

59:57 And then the second question would be around wage inflation, is that something that you're seeing in some of your markets? Yeah, that's it.

60:08 Thank you, Maja. When we comment or when I comment on consumer sentiment, it's pretty much with regard to how COVID plays out in a specific market.

And what we see is, when we compare the markets, it's interesting, it's less driven by infection rates which the scientist in me would assume. But you can have a country with a higher infection rate and we still see in our industry, but also in others, a lot of positive consumer confidence on going to shops.

It's more tied to what is the general mood in the economy with regard to lockdown scenarios and the voice-over of the governments. 60:52 And so, it may not be a surprise that Germany is one of the ones who at least until recently had very low infection rates.

I remember, less than ten in the spring, and we still had low traffic in the industry, and I'm not just talking us, but Germany is one of the countries where we get monthly data, right? While on the other hand, you were in other markets where infection rates were significantly higher like the US, and we're seeing good two-year growth rates, well above the norm in the United States, despite high infection rate.

61:26 So we, at least, believe it is mainly the mood of the society based on communication, lockdown scenarios and however positive or negative the messaging is in the marketplace. It's not the inflation side.

I think, fortunately, we are in a world in which the vast majority of people who decide that they can -- want to get a hearing aid when they are over that hump, they tend to be willing to spend the money. Keep in mind that the elder population is probably the least impacted also from economical downsides, because pensions are pretty fixed and even in US, where people depend on their 401(k), I think the stock market has done really well.

62:11 So we don't see the inflation as being a driver for less interest to engage with a hearing aid. I think we need to convince people to come to the hearing aid, when they have a hearing loss.

I think on a wage perspective, I think we read the publications and then make our mind up. I think coming into the next year, yes, we will adjust a little bit more to the higher side than we have normally done.

This is not a huge impact on the P&L, we have ways to mitigate this through structural cost improvements and continuous improvements. But I would think that the next year, we'll see probably zero point five percent to one percent more, but not in the range that we're concerned about it relative to our ability to manage our cost side.

63:03 Great. Thank you very much for that.

63:05 You're welcome.

63:12 Hi, guys. Thank you.

Good afternoon and thanks for squeezing me in. I just want to follow up, Arnd, on your kind of the M&A commentary that you made earlier in the press.

Just curious about your desire to look at assets outside of the traditional hearing aid market, both in terms of maybe some synergies to Sennheiser or also more broadly kind of thinking outside of the box. So just curious, if that's changed at all, and if that is maybe some of the M&A that you are referring to as you're spending time on?

63:43 And then my second question, and apologies if this has been asked, I got disconnected through part of the Q&A. But the Medicare expansion, I think looking at the House Bill, the most recent version talks about a competitive acquisition program.

Should indeed Medicare begin to cover hearing aids more broadly. And I'd love to get your thoughts on what you think that might look like and what that might mean for ASPs in the US market long term?

Thank you.

64:15 Thank you for the questions. I'm noting them down.

On the M&A side, I think we wouldn't go overly broad at this point of time. I think there are significant opportunities in our field around hearing that I wouldn't easily go away from things which are related to hearing and the consumer journey over their life cycle.

I think that's one statement. The second one with regard to Sennheiser, I think there may be attractive assets around, but I think we're -- for the time being first needing to catch the ball and then make sure we develop the business well.

And so we have a temptation to first kind of get what we wanted to get out of it being good operators before we go on a journey of doing more in that space. 65:17 I can never exclude anything if some magical great opportunity arises.

But I think you should expect us first to get our speech-enhanced wearables out, used the Sennheiser brand and their channel to market and make sure this is a well-run sustainable business before you think about adding anything to the portfolio there. 65:41 On the house bill, you called it competitive acquisition.

All I am understanding and thinking at this point of time is that, this is going to be very similar to what they used in other places, at least that's the way we interpret the current writing that there is a certain element you get paid for from the reimbursement side for hearing aid. Most likely, I don't think they're that far in the detail that may require you to have a basic product which has full functionality at that price.

That will be more kind of a German model and then you can buy up. 66:26 I think there will be still lots of discussions until anything is fully in law.

I think first, it has to pass the budgeting for us this year. But then secondarily, I am sure we will have lots of opportunity, give input and others, we will give the input.

So I wouldn't even say this is definitively how it comes out at the end. But I think the in-going from all we can tell is more of a German-like model where then multiple vendors will have a chance to have a basic product and can up-sell from there.

67:01 Okay. Because I think -- I guess let me rephrase the question.

I guess, what would be your thoughts on the upside from the expansion if we were to end up with this co-pay model which, by the way, I don't think is in the most recent version of the bill, but I know it's been discussed versus a pure-play competitive acquisition when you bid and tender for the hearing aids for the Medicare population because I guess, there is potentially some things in between. But I'm just kind of curious your thoughts under scenario one, what would this mean for you if it is a German model?

Whereas if we do get a competitive acquisition model, what do you think that would mean? And I guess just your thoughts on what you think the ASPs in the moderate to severe category look like today?

67:50 I think in the first model, you're going to see an increase of demand, but pretty normal ASPs. At the end as we're used to them, perhaps some of your additional demand comes more on the basic level, but I wouldn't see a significant price pressure on the existing business we have in that category because these people even buy them without a reimbursement contribution.

You could argue, perhaps it goes up a little bit because they get the reimbursement and then they still have money left in their pocket. If you go to the other model, I think you're describing something which is more like the British model with the NHS where you get a competitive bidding most likely at the low set of features, perhaps as we have an NHS on older product technology and then that segment will have a low price.

But most people in that extreme case don't go for it, at least the ones who can afford better because ultimately, they see the difference in the technology. 68:57 But it would be two very different outcomes on how the market evolves.

The one is a bifurcation but again, at least if you look at the NHS environment where you have such a competitive bidding at a certain price level at the end, most people go for, who can afford it go for the higher end.

69:15 Okay, that's helpful. And your thoughts on the sort of potential penetration increase opportunity here, because my sense is adoption in the moderate to severe category is already fairly high.

But I'd love to get your data on that.

69:30 I think you have some potential there. It's not going to be that you're going to double your hearing aid sales in the severe to profound.

I think the severe to profound have a good penetration. There is a part of the population in the US who can't afford these kind of prices.

They probably to date and go to more of a mild to moderate product and probably get this at a private-label contract partner from ours who is more focused on the mild to moderate. But I think you're going to see some penetration upgrade, probably some people going to higher prices.

Again, I think it's net positive, but it's not going to be in that segment of doubling of the market in any shape or form.

70:23 Okay, that's helpful. Thank you, guys.

70:25 Thank you.

70:40 Okay. Then thanks a lot for the following and the interest.

Thanks for the "colleagues" on your side who were asking questions that makes it worthwhile on all ends here. And with that, we all wish you a good rest of the Monday and a good start into the week.