Sonova Holding AG

Welcome everyone to the full-year 2021/2022 analyst meeting and conference call. My name is Thomas Bernhardsgrütter, I’m part of the Investor Relations team here at Sonova.

With me today, I have our CEO, Arnd Kaldowski; and our CFO, Birgit Conix. It’s a pleasure to welcome you here in Stäfa, at least some of you for the first time in over 2.5 years.

The meeting today and the call will take approximately 75 minutes. So, after the presentation both the people here in the room, as well as the people on the phone will have the opportunity to ask questions.

I will be moderating between the two. And with this, I would like to pass the word on to Arnd.

Thank you Thomas. A warm welcome from myside too, particularly for the friends and people who follow us in the room.

Thanks for coming here, but also for the people who are on the call seeing the video here. Obviously, full-year results, we don’t want to go through every line item.

You have to material received this morning. You have it also in front of you here, but we want to highlight a couple of points we wanted to tease out and put some emphasis on because I think it is a lot to digest given that the business complexity is increasing with the acquisitions we do, but at the same time, we're also in a dynamic environment and there's lots of puts and takes currently around us from market dynamics.

Just a housekeeping here, the standard disclaimer presentation contains forward-looking statements, but we don't offer a guarantee with regard to future performance. If you look at the full-year, which we have concluded end of March, we would put it under the headline of we continue to bid our strategy and march down the strategy, feel good about the strategy, and we're able to deliver solid results despite the dynamics in the marketplace.

We've seen further market recovery. I think we're all aware it's not fully recovered.

We had a first half year headwind in some of the European markets, Australia, and New Zealand were always weak throughout the year. We also had the Omicron coming our way as a version of the infection with its own dynamic.

And on the back of that, coming around somewhere in the August timeframe, significant headwinds from a supply chain perspective on cost, but also availability. You've seen from the numbers, positive sales momentum on our side throughout the year, but also on a two-year perspective.

If you look on the HI side, we continue to drive; the innovation side, we drive the access to customers on the wholesale business through commercial execution, and we are expanding our reach from a footprint perspective on the Audiological Care side. And there, particularly note around the higher store opening from a greenfield perspective, but also from an M&A perspective.

Clearly strong progress on the Cochlear Implants site, unfortunately, we had a few corrective action two years ago, but I think it's yet to say with the numbers published, we're regaining market share. At the same time, we're dropping significant profitability relative to the historical run rates to the bottom line.

One of the things which kept us quite busy over the last couple of months was how do we find the right balance with some of the headwinds? To continue to invest into the growth where we have laid out, we want to continue to drive growth.

At the same time getting the margin expansion equation right. We took a decision that we continue to drive our growth initiative, while we're doing as much as we can to protect the bottom line.

And then last but not least, particularly with the Sennheiser acquisition, expanding how we serve consumers on the journey, moving to the earlier hearing need around the type of devices Sennheiser brings to the party, and with it the ability to build a continuum from, let's say, regular hearing to an early hearing loss and then to hearing aids and Cochlear Implants. Looking at the numbers on the highest level, growth at 29% for the year in local currency, probably more relevant a question of the two-year CAGR of 9.7%.

If you would put the market at [4 to 6] [ph], which is our historical, you would say that's winning share. If you know that last year, not all markets have fully recovered, we were not yet at the 4 to 6 over two years at market level, you see even a little bit more market share gains.

EBITDA adjusted 39.3 in local currency. I talked about the balancing we have to do.

If you look as a two-year CAGR, clearly a strong leverage relative to the top line growth. EPS following similar order of magnitude here, an important move on our strategy reaching more consumers on expanding the network, but also getting into earlier devices where younger people engage with hearing devices.

From a sales outlook perspective, we're going to unpack this later what the logic is behind it, guiding towards 17% to 21% year-over-year growth in local currency and an EBITDA growth of 12% to 18%. We review our strategy every year and we see if it works.

Good way to measure if it works is if your performance is good from a outperformance of market top and bottom. And we haven't found significant flaws in our strategy.

Therefore, we continue to drive down the strategy. We see a little bit of a nuance here because of the addition of the consumer hearing business, which the strategic objective was to reach more consumers.

Now, a quick note on how are we organizing our ourselves in the consumer hearing business? We said that when we announced the acquisition We have built a dedicated business unit leadership team for the consumer hearing business, so this is separate from the hearing instruments business in the way we run it.

Simple logic, different customer, different access. It's predominantly direct to the consumer.

And it's [Technical Difficulty] different sales cycle. So on that regard, we're bringing the Sennheiser Organization together with the people we had for consumer hearing business already on the Sonova side and you have a mixed management team, but dedicated focus on this corner.

Does not hold us back from leveraging horizontal technology synergies. From a reporting perspective, it will be reported as part of the hearing instruments segment.

Want to tap into two strategic priorities of our briefly with a quick update, leading innovation, most important for the Cochlear Implants and Hearing Instruments business. You’ve seen announcements from us from new product on the basis of the paradise platform, but different form factors, the Phonak Slim with a very different design making it more appealing for certain consumers who don’t wanted to look as much as a hearing aid.

You can also see [the Phonak] [ph] out of your fit the first step from a sensor technology towards being able to track heart rate and with it starting to build an application around more of a health data tracking at the moment. That’s in line with the strategy we laid out that the hearing aid, it's very important to have the best hearing, but we need to add more value over time from a functionality perspective.

Second one, talked already about it, the expansion of the Audiological Care network, keep in mind, we're driving in omnichannel strategy, meaning we're building the capability to reach people in a lead generation world digitally. We also offer for whoever wants excess from a remote fitting and second and third fitting environment, although the vast majority of people want to have all [indiscernible] with the hearing care professional in the store.

Therefore, we're expanding the store network. We talked about that we want to accelerate the bolt-ons last year.

Now, we were pretty successful with the organization we built and the people who were going after this opportunities in the different markets. So, you can see in addition to the Alpaca, which was 220 point of sales in one step in the United States of America, additional 180 POS, which we have added through multiple bolt-ons you can see in the countries where we did this.

So, this is in-line with the strategy Christophe has shared at the Capital Markets Day. At the same time, we opened about 100 POS out of the OPEC side.

So, significant move towards accelerating the access to the consumer. Some ESG highlights.

We were already on the path over many years to being well-recognized for our ESG strategy and execution. We always had high ratings in the relevant ratings.

We're making progress on the different elements here. You can see the carbon neutrality, which we've achieved last year.

We have done a full scope three CO2 emissions assessment and we have now also committed to science-based targets. You can see on the social side, a lot of focus in the last year on the well-being & employee health.

A, because it’s a good thing to do; secondarily, it is increasingly important in the talent market. And then a significant focus on the diversity in the inclusion side.

So getting to the results here, talked about the 29% on the growth side. It's unpacked by the different businesses.

You see the 39.3% that is probably more relevant to see that for the full-year, the EBITDA margin went up by 180 basis points in LC. That was strong in the first half.

Second half was a little weaker. We are held back by higher sourcing cost from a supply chain and freight perspective.

We've talked about higher lead generation costs on the Audiological Care side. Think about that foot traffic isn't as much flowing in many of the markets as it did historically.

So, you need to compensate for foot traffic which tends to be cheaper than digital. At the same time, in general, lead generation costs have come up.

And then an interesting wrinkle towards the CI profitability, you may remember we are on CI capitalizing R&D. Some of you may have even noted that that kind of capitalized amount every year went up, which was in the balance sheet.

Last year was the first time we had went in the other direction. So, think about the EBITDA from a CI perspective and from the group, it is in reality actually better because for the first time we're moving from putting one balance sheet to significantly paying back, right.

So, Hearing Instruments, you can see the growth rate here 25.4% and probably one note to be made on the ASP side. We talked about it that during the COVID time, the independents recovered faster than the government funded channels like the NHS and [DVA] [ph], but also certain markets, which are higher priced markets recovered faster.

So, there is mathematically an ASP headwind in the mix here. We continue to invest into the business on the R&D side and on the customer facing side, Audiological Care, I spoke about most of the elements here.

Clearly January and February wasn't easy from a staffing of the store perspective because around the world many people went into quarantine, similar, actually for the Cochlear Implants side on the hospitals. On the Consumer Hearing side, we are super happy that we closed the Sennheiser acquisition first of March.

March as the month wasn't the strongest. You will not be surprised different than the hearing instruments where our supply availability has normalized in the consumer electronics that's still difficult.

So, the first month was a low revenue month and with it a negative EBITDA contribution, we don't worry about the prospects going forward, but the first quarter was difficult or the first month, which was in the books. And then Cochlear Implants here, strong demand for our new sound processor recapturing market share.

There is some headwinds in the January, February, March also in supply chains, but also availability of medical staff in the hospital. So, I think more recovery to be made over time.

You may had a chance to look on this chart here, we were putting this in to help you, because some people talk about one-year or two-years growth rates, we talk about the two-year CAGR. I find it two-year CAGR the most relevant number you can see.

We were nicely growing in two-year CAGR’s in all of our businesses. If you look at the full-year results on the P&L you can see that for the full-year, the gross profit improved versus prior year by 90 basis points and versus two years ago by 160 and you see the OpEx leverage here, driving the 180 bips on the EBITDA margin over two-year 500 basis points.

Composition of revenues predominantly organic, early revenue contribution from the bolt-ons we did because they accelerated throughout the year, as you can see. If you look by regions, probably two relevant information.

The one, the fastest growing over the full-year was the U.S. for us.

The first half of U.S., pretty strong. There was some pent-up demand coming the market, but we're also doing well on the channels we serve.

You see the VA numbers being published. Costco is pretty strong for us.

But if you look over the second half year, all of the regions were almost growing the same number. Everybody was in the 14% to 16% of code here.

But again, some markets, I watched them move already still had a headwind in the first half year or on the second. So, I think still a little bit more to be done to fully recover.

Now comes the interesting chart. First half versus second half year.

We chose to put that here because obviously, you knew the first half year numbers and you're sitting there and trying to decipher from the full-year the second half there and there was quite some dynamic here, right. You've seen the full-year results.

If we go down the second half year, you can see good top line, struggling a little bit on the gross profit side. And that really comes out of the supply chain headwinds and some of the ASP mix items we had.

OpEx, we continue to invest into our growth initiatives, but we also had some headwinds. The headwinds we had throughout the year, I talked about lead generation cost on the retail side, which we had in the numbers.

And that's for the whole year. The freight and logistics cost and then the CI amortization put those three alone at more than 300 basis points dilution.

There's a couple of other headwinds in there, but in general, what I want to say with that, we're not as concerned about the minus 300 basis points from the sustainability of the cost structure. I think there's a couple of things, which are currently have gone a little bit against us, but in the sum, we feel comfortable about the profitability and at the same time the investments on the growth front.

Want to go quickly into the hearing instruments segment. That's the segmental view.

Good growth here at 9.4, EBITDA at 19.2 for two year, a margin level of 26.2. So, 60 basis points lift.

You can see the breakdown. I'll go in the individuals here.

I think that profitability is pretty much self-explanatory, including the voice over I have done. Looking on the hearing instruments segment, a sustained momentum of the Phonak Paradise, have expanded further to the Unitron brand with a launch of unit on Unitron BLU, which we done last year, now bringing it to further form factors, including the ITE and now with the SLIM and with a [FIT] [ph].

Good performance as I said on the private label and the U.S. and DVA side.

On the Hearing Instruments, you see the 23.4% organic growth year-over-year, about 5.7 already coming from M&A. We continue to invest into the omnichannel side.

We continue to invest into our digital systems and competencies. You may remember we're in the journey of rolling out consistent ERP system globally.

We are reaching one more of our geos, which is important for that omnichannel because at the end of the day you need to have full data transparency over the consumer throughout that journey. There were some capacity constraints in January and February, but they have normalized by now.

And then on the consumer hearing business side, I think most important is again reiterating where we want to go with us. I think there is the convergence of microphone and speaker in the hearable space.

We believe that's an entry point into early hearing improvement devices. We think the hearable is the more logical form factor, that's why we're working on having a product to be launched under the Sennheiser brand.

We expect that to happen in the second half of this year. And we're making good progress.

Why are we that fast? Because we started to develop before we acquired Sennheiser and now emerging brand and the technology.

At the same time, we've seen Sennheiser making good progress last year from a growth perspective. So, if I look from January to December, we really had a good year while it wasn't under our ownership.

So, we think that it is in a good position to continue the organic growth. They have many product launches to come this year.

The MOMENTUM 3 has launched, I think three weeks ago, that's the next generation of the two wireless with an active noise cancellation and gets very good feedback on the online platforms. Cochlear Implants, I said most of it, you can see the numbers here probably interesting in addition to the profitability and the growth rate to look on the system sales versus the upgrades.

Our growth was very much from a two-year CAGR driven by the upgrades given that we brought new processes out. We also see us regaining market share on the system placement side, but obviously there is still some more work to be done.

On the profitability, I think I [waste] [ph] most of the points over. With that, I want to ask Birgit to see the financial side and I'll be back with [Technical Difficulty]

Hi, good afternoon. So, let's go through the financial highlights, but as you have seen and already talks a bit about the P&L, so I'm going to try not to be to repetitive here, but on this slide, you see obviously the solid growth that Arnd talked about with 29% in local currencies, but 29.3% in Swiss francs here because we had a favorable impact although small.

Here you can clearly see that the fundamentals of our industry remains strong and that we see a sustained recovery in the global hearing care market. And despite the gross profit headwinds that Arnd talked about in supply chain, we still are improving 90 basis points in local currency and you also have seen the two-year development and this reflects the continuous and structural improvements that we have seen over the past years.

Arnd already talked about the higher sourcing cost and some pressure on ASP and we can also discuss the data that's due to the normalization of the channel mix versus the past year, which was affected also by COVID. And then in terms of profitability, we ended at 844.4 million, up 39.3% in local currency with a margin up 180 basis points in local currency as you already saw in the previous slide.

And this is despite this gross profit headwinds all of our growth investments that it continues to be a priority for us, and then we have an impact from net amortization in the CI business. So, amortization higher than capitalization that is for the first time that we have that and then the ASP.

And then also the Sennheiser integration in March. That has an impact and we can discuss that later as well.

Then EPS adjusted is 10.76 and that's up 38.7% well in-line with the EBITDA adjusted growth. And then on the operating free cash flow side, we ended at 764 million and that is up 26.8%.

but you need to bear in mind that last year, we had a patent infringement award included in the numbers, which you'll see here in terms of the growth versus prior year. And then in terms of dividends, you will have seen that CHF 4.40, up 37.5%, and this represents the other 41% is also well in-line with the EBITDA adjusted development and then we completed the 700 million share buyback and we announced a new three-year share buyback program of 1.5 billion, which started in April 2022.

Then our net debt to EBITDA ratio is at 1x and this is up versus when we presented the half-year results where it was at 0.4 and we are targeting 1x to 1x over time. Then the bridge that is well-known to you.

So, with our EBITDA and EBITDA margin components and so here, you see the 240 million added through organic growth and you also see that adds 250 basis points to the margin. And then you also see that this is partly offset to a smaller amount due to the in-particular inclusion of Sennheiser for the month of March.

And this decreases with – then the margin decreases with 0.7%. Then you see the adjustments that we have there of 42 million.

We will discuss those later. There is a separate slide for that.

And then on the far right, you see the currency development. Therefore, slightly positive this time adding 0.1%.

And then the P&L. So, as Arnd already highlighted, so for the full-year and also for the half-year, so I will immediately jump to the EBITDA adjusted here.

So, you see that again the 39.3% solid growth and then when we bridge to the EBITDA reported, and you go to a 20.3% growth. That is where you see the impact of the patent infringement award last year.

That is where that comes to play and acquisition related amortization because that is what [EA] [ph] stands for as Sonova is in-line with prior year and then maybe notably on the tax side also there we have a step-up of underlying tax rate to 14.5% versus the 12.5% last year and also going forward just to mention that already, we expect like around, let's say, [mid-20s percentage] or 15.5%. Then on net profit side, that is where you see then that the difference in tax versus previous year, that is what leads us to a 12.5% growth.

And then on EPS you see and I already said that it is well in line with the EBITDA adjusted and then EPS reported. Again, there you have the patent infringement and the tax impact in the comparison versus last year.

So, then if we go to the operating expenses then here and you also saw it in the two-year [indiscernible] here, you also see the two-year CAGR, which is important for the operating expenses here at Sonova because you see that we have been leveraging our P&L over the past two years. This will be the 5.6% increase over two years in the compound annual growth rate.

And you also see that we keep on investing in R&A, you see the two-year CAGR at 19.3%, but this includes to step-up in amortization that I already talked about, but if you take that out, then we still grow double-digits and that is for the third year in a row in R&D. Then sales and marketing, here you see the 4.9% growth over two years.

And this includes all of our investments in network expansion also leads generation is included there, but we continuously optimize and improve in that area as well. And then on the general and administration side you see that we only grew one – I mean, it's relatively flat versus two years ago.

And here is the bridge between the reported and the adjusted EBITDA. So, you see the part relating to restructuring costs of 13.5 million and then 12 million on transaction costs, so we did a fair amount of M&A in the last fiscal year.

And then in legal costs, you see the 16 million of which the majority of the settlement agreement in principle with the U.S. Department of Justice.

And then the rest are [smaller parties] [ph] ongoing patent litigation in the CI segment. And then on the earnings per share between the reported and adjusted you see that it is a slight positive impact from related to tax reforms.

Then if we go to the operating free cash flow, so and here remind you the 602 million that includes this already explained patent infringement awards. So that is why you need to take that into account for the comparison.

And here what is to be called out is the improvement in net capital. So, despite our higher safety structure.

So, we were clearly impacted due to the supply chain constraints and you also see further normalization of CapEx and you will also see that for the year to come for this new fiscal year. Then on the balance sheet, here you see that this DSO improving by four days then the days inventory outstanding, you see that there is an increase and that is due to the safety stock elements that are related to the supply chain constraints and then you see the – in capital employed that is mainly due to acquisition effects, return on capital employed improved, obviously driven by strong profit growth, and then here you see our net debt standing at a billion and this is translated into a one-time leverage as I already discussed.

And then let me then show this final slide on the financial section on the total shareholder return. So our total shareholder return strategy and cash deployment strategy remains unchanged.

So, first with the acquisitions, and you know if you may remember from last year that we've stepped up our acquisitions to 70 million to 100 million per annum. That is what we announced, but we actually exceeded that amount because, excluding Alpaca and Sennheiser we acquired, we did CHF 150 million on bolt-ons.

And then including Alpaca and Sennheiser that's what you see there is a 600 million. Then today we announced, obviously the dividend.

I already talked about that payout ratio around 40%. We are at 41%, so that is within target.

Then we continue to maintain a healthy balance sheet with the target leverage ratio of 1x to 1.5x over time. Already said that, and then finally the share buyback and I already talked about that as well.

So, we believe we continue to have an attractive shareholder return strategy and also, I mean, in terms of accretive M&A and we return cash to the shareholder. And with that, I would like to hand back to Arnd.

Thank you, Birgit. Can you hear me?

Am I on? Can you hear me?

Yes, okay. Thank you.

So, quickly our thoughts on the guidance, I already shared the high level numbers here 17 to 21 on the sales growth side. And then 12 to 18 on the adjusted EBITDA growth.

You can see on the right hand side, what we shared is our midterm targets at the Capital Markets Day last Fall, a couple of assumptions here. Why there are certain headwinds?

We assume they stay at about the same level. Meaning, yes there's inflation and we have factored that in at directly the current level of inflation we have seen.

The same with regard to headwinds from the geopolitical side. Clearly there is a big element of the growth rate, on the particular, on the revenue side from the Sennheiser and Alpaca, but also new product launches over the course of the year.

And you can see looking at today's FX rate or middle of May, so pretty much today, you would expect an incremental lift to those numbers in Swiss francs by 1% to 2% on the top line and 2% to 3% on the bottom line. Now, one thing to unpack this 17 to 21 and the 12 to 18.

I think clearly, particularly the Sennheiser acquisition at the beginning is decretive to the profit margin, but we still look at both acquisitions. It's good acquisitions because a, they allow us to reach more consumers with the Sennheiser that opens new adjacent segment we're playing in and can bring the Sennheiser and the Sonova together.

And over time there’s good prospect for further margin improvements coming out of that underlying base. If you look at the right hand side, we were trying to depict how we think about what we call the Sonova base, meaning everything minus Alpaca and Sennheiser and then what's just mathematically the consequence of the consolidation.

So, when we think about the top line growth for the base, again without Sennheiser and Alpaca, we think 6% to 9% is a good year-over-year growth rate. Now, I said it's a dynamic market environment.

So, how do you make sense out of that? I think on the one hand, we have potential based on the COVID normalization in some of the markets, which were slower still last year.

On the other hand, the inflationary environment may bring us some headwinds with regard to consumer demand. Probably not so much in unit, perhaps it is a little bit of a trading down.

We're normally a segment, which is less harshly hit than the average industry. We haven't been in a high inflation environment for a long time; therefore it is also some ambiguity in the assumptions, but if I look at the positives out of further COVID recovery and the negatives out of reaction to the inflationary environment, we said that's in minimum of [wash] [ph], right?

That's how we get to the 6 to 9 because that was what we felt good about given our investments into growth and the underlying market growth. If you look at the EBITDA on the base side, we set relative to the mid-term targets, which were 7 to 11, we think there is a little bit more basis points we can get at this current state knowing what our projects are, knowing the inflationary headwinds, but also productivity in some of things improving, which we had as one-timers.

So, we said assume about a 60 basis points EBITDA lift for the base business without the Sennheiser and without the Alpaca. And then the 11 to 12 come pretty much out of the size of the business we have acquired and announced if you add the together that base is about CHF 380 million to CHF 400 million, and then from the profitability in Alpaca, slightly lower from the profitability than our running business and then Sennheiser at mid-single digit profitability at this stage.

So that's how got to what we see as a guidance. Obviously, there is quite some dynamic.

Therefore, the ranges are little broader than we normally use or normally the 2% or 3% on the top and normally in the 4% on the bottom allow us to do that given the pluses and minuses in the different swings here, but overall we feel good about the 17% to 21% and the 12% to 18%. With that, we're through with the prepared remarks.

I'm asking Birgit to come back and we would open it for Q&A. Thomas, can you briefly explain how we want to handle questions in the room and on the phone?

Yes. We'll go back and forth.

I would suggest that we start with a few questions here in the room and then I will ask the operator to bring in the questions from the phone.

Hi. It's [indiscernible].

First question is about your – basically announced verbal hearing aids, which will come most likely on the Sennheiser umbrella. So, if we talk about the whole OTC opportunity, both as the initial start of a whole OTC campaign or the idea basically has withdrawn from market not more than one-year after the first launch.

And the only offering we see right now is [indiscernible] enhance plus. So, could you share your view about, whether some market fundamentals in favor of OTC might have changed and OTC might play a much smaller role than potentially anticipated one year ago?

And with regards to your offering, do you think that it's better to offer it in the traditional acoustic channels similar like Jena is doing right now or do you still believe okay that's the OTC opportunity and we want to commercialize on that? Second one is, a more financial question, but it's also related to Sennheiser, so can you comment on the marketing spend for the Sennheiser consumer business, because data suggest that there is a ramp up of at least Internet-based marketing over the last one, two months and what does it mean for your marketing expenses next year?

Thank you.

So, first on the ITC side, we have always said that a hearable form factor for situational hearing call it two to three hours, which looks like about a year ago makes a lot of sense to us. And that's what we were after developing and that's what we call the speech enhanced hearable, right?

It's less challenging for people to buy a device, which is a great hearable and they in addition get the speech enhancement because even if the speech enhancement is perhaps not as great as they thought, the hearable is great from the audio performance, right. Secondarily, it's probably less of a channel conflict discussion and it's a lot easier to fit, right.

So therefore at the form factor, which is the one I shared about for the second half year is going to be an earbud style of device, which has a speech enhancement. You can use it for your telephony, for your music, but you also get a meaningful improvement of what you hear in the noisy environment.

And I think that form factor is pretty straightforward in logical. If it comes to a device, which you may want to wear for 10 to 12 hours, which is what people have put more into the OTC bucket, but we call it early entry device because ultimately, it's not about the regulations, it's about does the device of benefit and can I sell fit?

And I think that's where you've seen the [indiscernible] and others working on. I think technically, we're able to do those kind of things.

So, couldn’t even imagine we have some pilots somewhere, right, we do. But we just see the challenges, probably similar to others where it is not so easy to convince somebody to buy the device in the first place.

And if you want to sell direct-to-consumer, you have to worry about the lead generation cost. And then secondarily, they need to keep it and not send it back, which is your return rate, right?

And so on that economics, I think people learned that it is a lot harder to convince somebody to just take something and later on think it is a good device, right? And so, I think it's interesting to see if in that full date type of self-fitting device is at the end anyone has a technology and a segmentation and a targeting where you can make it economically firewall, right?

Therefore, our focus at this point of time is the speech enhanced hearable, also not as conflicting to our channel. Observing the OTC side as a full-time device, and if it is doable, I think we're in the world to help people to come to the category, right?

So, that's what the game plan is. We factored in some revenue of the speech enhanced hearable into our guidance, we have not factored anything on the OTC side.

From a marketing spend perspective on the Sennheiser side, I appreciate that you are tracking this carefully. I think first and foremost we’re in the middle of a launch cycle.

We have launched the MOMENTUM 3. MOMENTUM 2 was the first true wireless device from Sennheiser coming about two years ago.

There's a couple of other launches going on. We've launched a new sports wireless device also just a couple of weeks ago.

So, not being that close, we have not planned with a significant increase in the marketing spend over full-year, but as normal and product launch cycles, we’re trying to build more momentum. The other one, I think we're currently in the range of 40% online, 60% offline.

Keep in mind on your offline, you leave a lot in the channel. So, we're over time going to shift to more online.

So, you will see more on external marketing spend. It is ultimately substituting what you otherwise pay to the Best Buy’s and others.

Okay. Thank you.

Thank you. Thomas, had a question on the phasing, could you help us understand and I think actually historically you provided some insights on that how we should think about your sales and profitability performance in H1 versus H2, maybe the key building blocks mentioned pent-up demand and all kind of etcetera?

Yeah, I think from a pent-up demand perspective, this is kind of a gradual curve. I think little bit of the unknown is what's the impact of the inflation and when are people responding to that?

Haven't seen a big hit win from there yet, but we’re observing it carefully. If you look from a product cycle perspective, you would say the second half is probably stronger than the first half.

The main blocks you would call out.

Yeah. I think the rest is more steady.

I think what we need to learn on the Sennheiser, but that's a smaller business. Sennheiser is super cyclical.

So, you are January to March in the historic business is really low, because it is at the end, the October, November to what's the Christmas season, which makes a vast step-up. So, I think that's an overlay we need to look at.

On the other hand, the first calendar quarter is over. So, it's probably still a little lower in first half year in our world versus the second because the October, November, December is in the second.

But that's on the basis of call it 280 million to 300 million revenue probably not as dramatic, but otherwise relative to our normal seasonality, I think the second half will be somewhat stronger on the new product side.

And then I have a question on pricing, you know some of you will comment, competitors also commented on hearing devices that know they are increasing prices, maybe could you share your thoughts on an pricing and particularly also discounting and maybe differentiate no retail versus wholesale?

Yes, we have seen over the last year and expect the same good ASP momentum on the retail side, keep in mind we’re in good control there because somebody chose to come to our store. We have them relatively captive.

So, I think that's the place where we can increase prices probably not with the currently quoted inflations, but probably somewhat in that direction. I think on the wholesale – on Cochlear Implants, we were doing fine on the backend of our technology.

We were putting it up on the list prices right now. On the hearing instrument instruments side, we have introduced first list price increase in January.

Given that the inflation is significantly increasing since January, there may be further steps to be taken. And so I think we're going to go through the year at just list price potentially a second round, new product probably will aim to a higher delta versus the prior product than we would have done historically.

Historically, would have said, it's about a 5% or so. So, clearly needing to educate the customer that in a high inflation environment, we also need to kind of get to funding the things we do.

You know, the discounting pattern, has that changed in the last few weeks since now this inflation topic came up?

No, I think we're driving our own call it, muscle building and better tighter focus and tighter energy. We don't have such a transparency in the market that I would exactly know what discounts other people are doing, but on our end we're clearly moving into the new fiscal year with clear expectations to the sales reps.

Thank you. I would say, let’s say if we have some questions from the phone and then we go back to the room afterwards.

Operator, do we have any questions on the phone?

Yes, thank you very much. First one, maybe on the two product launches, the Audéo Fit and also the Phonak Slim.

I mean, pretty interesting, it just changed to design factor and also introduced basically sensors [indiscernible] something we could imagine as becoming more standardized with the new platform that you introduced both things in one new premium device. And then adding up on the question on price increases, I mean least a good part of your business is also done with governmental healthcare systems and insurance companies, how is the pricing going there.

because I could imagine that it's much more difficult to raise prices there than in the business where you are directly dealing with consumers and where as you said you have much greater pricing power? Thank you very much.

Thank you for the question. So, on the SLIM.

That's certainly is a unique form factor, which we hope will be liked a lot and help us to bring new people to Phonak. I assume it will be meaningful that all of our [VOC] [ph] would say that.

So that's incremental revenue towards other players in the marketplace. I think on the fit side, first, it is quite some effort and also incremental investment to put those, kind of sensors into the product.

Because the step sensor is in the hearing aid. It was there already with the Paradise, but the pulse is in the receiver.

So, the receiver becomes more intelligent, unfortunately, with it also more expensive. So, you need to charge more.

And it also takes a lot more battery. So, you can't get to the smallest device.

At this point of time, we'll see mini authorization help-out over time, right. So I would say, this is an extra version to your product and then people need to choose do they take the standard from 30 to 90 or do they want to have the one which is a little taller and a little bit more expensive with that fit functionality.

I think we will learn more as we go on how relevant is that? How many people pick up on it?

Certainly it creates a lot of interest and excitement, how many people are buying, we will learn. How much further do you want to go towards health applications is also something we're exploring, but I think this is really one-step at time and we're happy we are able to do it technologically and we will see what the response and the demand is.

Remind me of the second question. On the pricing again?

Or on the large accounts? So, it is different by account.

If you would go to VA, there is a certain timeline for which your price is in fixed and even if you introduce new technology you can't do anything about it, and then later on, there's a new price point to be set after a certain period of time. It's a couple of years.

We have gotten a good price lift when this came around 1.5 years ago. So, I think we're margin wise in a good position.

I think we will come to the next step there. But yes, we can't use that just to balance out inflationary pressures, the same is true with other large contracts.

So, in reality, we can introduce higher prices to the independence, smaller retail chains, we can have it in our yearly or every two year discussion depending on the account with the larger retailers. I think on the government side they go on their own speed.

Reimbursement does not necessarily change in our environment. Very rarely, we had a very positive at some point of time in Germany many years ago, but in general, the reimbursement will not be adjusted because of inflationary pressures.

On what the consumer gets, we can still increase if we deem to do that share co-pay [indiscernible].

Okay. Yeah, maybe just a quick follow-up on the last point and in your guidance on the margin side, I mean doesn't really read to be meaningful than the impact from not being able to fully adjust prices on these larger accounts, am I right in net assumptions?

Yes, I think it would be difficult to assume that the large accounts can move to price in the next 6 months to 9 months easily and then it gets a little short in your time window here, right. Perhaps many of those turn in January or so, whatever the portfolio is.

So, I think you need to accept that for half of the business, you can only move slower. The other half you can adjust [indiscernible].

Thank you very much. Very clear.

Good afternoon and thank you for taking my question. Arnd, I was wondering if you could give us a bit of an indication or a bit more color on Sennheiser, you have elaborated that Q1, calendar Q1 is obviously always a soft quarter after strong Christmas period, but could you tell us whether this quarter there was something specific in a component supply that were a headwind for Sennheiser and whether we should expect something from the component supply impacting growth for Sennheiser for the rest of the year?

And then my second question is related also to the product launches that you have announced a couple of weeks ago, really interesting products, really bringing something new to the table. I'm just wondering, you know given that you're launching a new platform in August and you're coming out with this now, why the timing?

Is it something that you had in the pipeline, but didn't think that the market was right 12 months ago or is there anything happening in the competitive environment that was causing you to say like look, we have it, let's get out with it right now? Thank you.

Thank you, Maya. On the Sennheiser side, I would put the first calendar quarter into this, this is always the slow quarter, and we did struggle on the component availability side.

January and February was on the “balance sheet” of the prior owner, March on ours. We have seen very meaningful improvements from a revenue into April and also into the early days of May, which also means there was significant improvements of the component supply side.

There are still some challenges there, but by no means in the same order of magnitude as the first Calendar quarter was. Probably one more comment on Sennheiser, the last year growth year-over-year from January to December before they had significant component issues was in the high single digit for their core business.

So, it was in-line with what we had expected when we did the acquisition or when we announced and when we signed, which is a good sign because if you're that long between sign and close, you're hoping that you're not finding certain things you didn't expect to see. On the product launches on the Slim and the Fit, and I may add the life, which we started to ship last year as the Paradise 2.0, but we only were able to sell that in the United States of America for the 90 range, which is our highest price range.

All of the three were struggling with some component issues. We didn't speak that loud out about it because we thought we are in good terms with regard to where we have guided, but at the end, we now launched the life for all consumers a couple of weeks ago, which is the waterproof technology for the hearing aid.

And then on the Fit and to Slim, we would have liked to launch a little earlier, but we struggled in those cases with the individual chargers and the microelectronics we needed for the charger. So, no competitive discussion.

We would have launched – like to launch them two months earlier, then we would have been in our normal Spring season before the Fall season, now we're one or two months late, but it's really internal [indiscernible] supply availability. The Slim and the Fit, we have always planned to launch at the back-end of a platform technology because as you can imagine, you're trying to get the new Paradise algorithms out to the most important product first, and then some engineering time frees up, which you can now put onto finishing your Slim and finishing your Fit.

And given that they are relevant, but not a big from the revenue contribution and we tend to bring these line extensions at the backend of the new platform. So, don't read anything competitively and that was the plan probably two months late because of component issues.

Great. Thank very much.

You're welcome.

Maybe just quickly on the Cochlear business, I just - compared to all your thoughts and demands decision to exit the markets and whether you thought that was an opportunity for you guys? And then secondly, sorry if I missed it, but on the consumer business, monthly you have the business, have you disclosed the loss that you made within that month?

Thank you.

Yeah. We did disclose it.

It's in the annual report. Yeah.

Last 8 point something million in net income. In the month of March.

Which is pretty much the fall-through from, if you're running at 9 million and you normally would be running at take 8% out of 250 million or so right. So, it's not a concern on the OpEx level.

It wasn't a concern on the margin or the profit contribution side. It was a pure volume matter.

But that's in our second half year profitability. On the demand decision, I think ultimately if you look at the playing field there, we were four players in the Cochlear Implants space.

One was coming “even later than the Advanced Bionics team” because that was a third coming to the market, and I think we understand the length of the time it takes to get the right technology together and to get to a meaningful profitability level, right. And not knowing what they were thinking, but I would venture to you guys that the small market share they had and then a field corrective action they had to think about how much longer do we support this, and how much timeline do we have?

And can you even follow the three larger ones from that small position? So, that I think must have been their thinking.

I think for us, on the Cochlear Implants side, not such a relevant thought or idea. At the end, we often talk about an installed base, but the installed base is most relevant if you can sell your processors into it because that’s your renewing revenue.

If the installed basis with somewhat ALS’ implant, you at least first have to develop a process that you can put on that implant because their technologically so different. So on the Cochlear Implants side, not such a high attraction to take over 10,000 or 15,000 people, we have an implant.

If that scale is too small, even struggled developing the processor from a cost perspective there.

Thank you very much. We'll move back to the room.

Thanks, Thomas. I was a little bit surprised that you mentioned Germany was a bit subdued because your – although your bigger competitor was quite positive in Germany.

And also on France, you have talked a lot and France was in Q1, calendar was better than everybody expected because of the base effect. So, I wonder how you developed in those two countries?

Yeah. I think on France, certainly the reimbursement change has driven a lot of lift in revenue.

We also see the first calendar quarter to be still attractive year-over-year. We do participate in that growth.

I think it's probably less important to us because our retail footprint is relatively small in France, and other people have larger market shares in France. So, they have over proportionately benefited from that lift, but we also did see lift.

Now, on the Germany perspective, looking at the data from GSK, by also looking at the data which gets shared in unit volumes from all competitors giving input, last year as a year was not that great year-over-year, right? Germany was a more stable market in the first year of COVID, but last year, particular on the first half year by the government and I talked our first half year, so probably April to September.

We have seen consumer confidence come down not just in our segment, but in Germany overall, people were not as interested to go out and buy. So, it was actually a slow market relative to France, U.S., UK, and others, which I would put into the bucket that is improving second half was better than first half.

So, I would think it's one of those markets where we will see continued over proportional growth of the underlying market.

Just follow-up France, I mean retail, yes, but wholesale sale is, you're quite big, just to be sure.

That's true. Yeah.

And we had good growth in France. So, I wouldn't – it's not an area we worry, but again, I think it's probably we come more from when we compare with other people, they're relative friends share is larger than ours, especially the ones who have a meaningful retail footprint, but the market was obviously very strong and it did tell us.

The second question, you didn't talk a lot about U.S.-owned retail, which is now being boosted by Alpaca, but you're are still much smaller than your other bigger competitor in U.S-owned retail. So, how does Alpaca help with combined TV ads whatever in this, how you got the golden belt and so on, so what that bring your margin in all retail in the U.S.

to a better level overall?

So, I think first, I think if you look at the U.S., it is sub segments of different regional markets. No matter if this is from the purchasing behaviors on the underlying structure, but also from whatever you do on the marketing side.

U.S. has very strong regional TV channels, if in case you want to go TV there, even from a digital you can obviously target, right.

So, on that regard, we think about the U.S. as a very large country with many sub segments geographically.

I think while we were reducing our stores, we learned, you need to have enough density of stores to operate it well. And so while we had California, Florida, and Texas, which be held on after our restructuring.

We did some bolt-ons in Florida last year to create a higher density. Alpaca has a good density in the North East side.

And they have a good footprint from a store density perspective, a little bit into the Midwest. So, I think it has a good density within the network, and that's a good starting point.

I think how do we help each other? I think Alpaca very good medicalized focus.

Predominantly focused on private pay, not participating in a managed care environment, probably also not yet that much on the omnichannel journey and the digital lead generation as us. So, it's less the more might to put nationwide to what's the marketing spend.

I wouldn't do that. I would go where the network is, but I think there's a lot we can learn from each other and also combine more on how do we go after all different segments?

How do we do that profit? And how do we learn the digital lead generation?

How does Sonova learn from the medicalization and the price points they are able to achieve? Overall, I would say on the U.S.

it is an attractive market. I think we reduced because we were not well operating our network.

We slimed it down to a good footprint. We showed same store growth and profitability expansion and at that point, we said, we are brave enough to be also good operator in the U.S.

if they have the right network, right. And that's why we're expanding.

You could go further; it depends on the opportunity, but the market is attractive from a price point perspective for sure.

Thanks.

Any other questions?

Thank you. Looking just at the geographical distribution of sales, we see that APAC is still relatively modest to the other regions, what the challenges that you meet there?

Do you have plans to expand, let's say retail or do you prefer to go omnichannel, well, because these are countries with relatively [rebate populations] [ph] and density? Thank you.

You're welcome. I think on the [APAC] [ph] side, it starts with in average far lower penetration of the potential consumer base.

If you go to China, we only have, call it 2% of the people with a hearing loss who have a solution today. So, there you're really in the call it awareness building and market creation, including the right channel and the right support.

Different in Japan, for its own logic, it has its own dynamic in there. So, they're all interesting and attractive to us.

We're pretty much a wholesale player. We have about 25 stores in Japan.

We've expanded them a little bit, but that's a small share of the market on the retail side. More relevant, I think the China discussion, we have gone on a journey some 1.5 years ago to build a digital team in Shanghai, which has grown to a meaningful size.

And there we work from an awareness creation in a [Tencent] [ph] environment and our Ali health environment. We have last year started to open stores even greenfield in Shanghai.

So, we're starting to have some footprint not that large, but it is important while you build the digital front-end that you can at least experiment with the back-end, right. So, call it 15 stores us, one of them being World of Hearing in Shanghai, and we're starting to learn how we move the leads into those stores and generate meaningful revenue in the stores.

By the way, in our stores we like the revenue per store we have and we know other companies stores have revenue per store to because they are all of our customers. So, I think the store format we have works well with the lead gen side.

Early innings on that journey, right. More to come, but clearly of a high appeal and intrigue, I would say in 5 years to 10 years, the market where you have to be with the right footprint on the retail side and now we need to find a way.

Okay. I would just inform everybody on the phone, last chance to register for question and we'll take one more question from the room.

It's again Oliver Metzger from ODDO BHF. One question regarding your hearing instruments.

So, currently, you're in a phase, basically the end of the cycle of your current hearing aid platform. And historical experience would suggest that we will see in August the new announcement at this U.S.

Commercial launch. So, the normal cycle would assume a comparatively weak momentum ahead of a launch and then the strong momentum.

Right now you're in a position where competitive dynamics might be less severe than in previous cycles. So, would it be fair to assume that in the current heavy instrument phasing the described weakness in H1 is less profound than it was in previous cycles?

Yeah, I think it's true that we launched Paradise 1.5 years ago. And if you compare with prior cycles, it's doing reasonably well, right.

As you can see from the two-year CAGR’s and from the 1 year growth rate. So, on that regard, I think it has a good place in the market.

You see also us doing some line extensions at least with the Slim. The Paradise 2.0 comes later as I said due to component at least from an impact to market perspective, which should help us to stem some of the headwinds there, right.

And then comes the question whenever we come out with a product, how much is the innovation lift? You've seen significant continued investments into the research and development site.

It's been very vocal that Audiological leadership is quite [tenant] [ph] of us translated ultimately into algorithms and other things. So, I think that's what we're working on.

And for the 6% to 9% underlying growth assumption for hearing instruments as a whole, do you expect wholesale to outperform retail?

It's probably – it's a tricky one because you have all the dynamics we're seeing, right? Therefore, we're – it's not so easy to come up with good guidance where you serve all needs appropriately.

You need to have some realism with regard to the market dynamics and inflation and still some COVID out there. So, in that regard, I think I would say, if you don't drive a good debate with me 6 to 9 is too high or too low, but just a relative slide, I would say what AC has done, Audiological Care in incremental bolt-ons and greenfield fields should be helping to have incremental growth above market to a similar degree of the new product, because as you've seen outside of the Alpaca, we've also added 180 POS in the last 12 months from a bolt-on perspective, right.

So, from an organic, pure organic, if you take the bolt-ons out, yes, I would think new product cycle has an impact in our world.

Thank you.

[Indiscernible] I have a question about the outlook 2022, in the outlook, how much further restructuring costs are included in your outlook? And the same question is for legal costs, and from these cost savings, you expect to reach 15 million to 20 million a year, how much is included there in the current year?

Yeah. I can answer on the adjustments.

So, what we’ve got. So, it's difficult to foresee, of course, on the legal side.

So, but we currently have foreseen. So, we have a provision in this fiscal year that we are presenting that you have seen, but for the next year, we of course, do not plan anything further at the moment and in restructuring, it's the same kind of amount of what you saw for the fiscal year that we presented.

And then your other question was, sorry?

From these cost savings of 15 million to 20 million you expect to reach and when – how much is already included in the current year?

We are at almost at the end of the cycle. In this fiscal year, we still have some left and then we would go to a full run rate, I would say in the upcoming fiscal year.

Well, thank you. [Indiscernible] projects.

If you look at it, we had some in the first half. We have some in the second half.

The first half would probably started to kick into the run rate.

Yes.

And the last question is about CapEx, how much do you plan to invest in capacities?

The normal, I mean what we kind of guide for is like between 3% and 4% that is what we typically do.

And that has started to normalize more post-COVID because we're getting back to renewing some of the stores from, kind of the layout?

If I see this correctly, we don't have any more questions from the phone. Are there any more questions in the room?

Last one. Your exit rate was ironically – organically in wholesale and retail exactly the same in the second half.

So, it is fair to say that when I look now at the court [indiscernible] in the second half that you had some issues if the [components] [ph] more in the first quarter of the second half, right? So, in Q4 calendar.

So probably Q1 calendar was a notch better. So, I'm looking for the exit rate.

So, I guess the run rate at the moment is still quite strong, right.

Yeah, I would say, in the [sum] [ph] you are right. I would say, we see a little bit of a better pickup on the Audiological Care side also given the bolt-ons and the greenfields, which were stepping up second half.

I think in the hearing instrument side, the launching the life into Fit, into Slim comes to good time to help us a little bit. They were not in March.

A life came in just two weeks ago to Slim and the Fit as we speak.

Operator, are there any more questions from the phone?

Any more questions from the room? If not, I pass the word on to Arnd.

Thanks again. Thanks Birgit, thanks Thomas for helping me here.

Thanks for your interest and coming. I hope we helped understand the moving bits and pieces.

We know it's a lot right now given the market dynamic, but also some of the changes we do including M&A. Going back to what I said at the beginning, we think we're in a good position.

You've seen above market growth over the last years. You've seen quite a good margin expansion if you look over the two-year horizon here to a new call it industry benchmark level.

We have moved a little bit forward with the foot towards more growth investments, which we think will help us to sustain winning market share. We will do that with the right balance between the top line and the bottom line growth, but clearly, I think we're well served if we get a little bit margin expansion, but more of the above market growth ultimately for the company, but also for the shareholders.

With that, thanks for coming and have a good rest of the day.