Sonova Holding AG (SOON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sonova conference call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Arnd Kaldowski, CEO. Please go ahead, sir.

Sandra, thank you very much. Good morning, everyone. Thanks for calling in on a Monday morning on such an early time here and on short notice. I have with me Hartwig Grevener, our CFO; and Thomas Bernhardsgrütter, our Head of IR. And we want to update you on a better performance above our guidance for the first half year, which we gave in July 2020. I trust everybody has seen the press release we put out, and I do plan to voice over the highlights from the press release and then go to Q&A, assuming that most of you already have some questions. So from an update perspective, the business in the Q2 was significantly faster than we had expected when we came into the Q2. I think 2 effects here. We see a stronger recovery across the different markets than what we had expected. You may remember at the beginning of COVID, we were concerned about 2 effects: one was retail store lockdowns; and then secondarily, what we could have imagined, a more careful behavior of the consumer going to the store even if there is infection rates. I think the first one was pretty clear present. On the second one, we have encouragingly seen that consumers are far more comfortable coming back to the retail stores, our own as well as our wholesale customers. I think the other one we see is that our strong product portfolio, first, the model now with the Paradise launch, the growth initiatives we have initiated over the last 2 years, and then clearly, the productivity initiatives we have started 2 years ago but have accelerated now are helping us in the COVID situation. So in numbers, we expect the first half year to be at around 79% of prior year sales. Keep in mind, the first quarter was 59%, so a significant step-up here in the second and well above the 65% to 75% we have guided in July. Particularly of note, I think, is the adjusted EBITA margin, which we expect to land around 15% in Swiss franc for the first half year, still representing a 30% reduction as an adjusted EBITA in LC but, I think as most of you would probably appreciate, still a pretty strong performance with 15%; if you adjust it, 79% of your top line. From a Q2 perspective, just a little bit more color on the different geographies. The Q2 in Asia Pacific, and it's the mix of many different countries, but clearly driven by strong China as well as good numbers in Australia and New Zealand at around 4% for the quarter versus prior year. EMEA around flat, but many markets have turned positive in the last month. And then the U.S., being the laggard here with minus 10%, I would say a different infection scenario there but in particular VA on a slow rebound curve. I think we've seen good execution from all 3 businesses we have on the rebound and really driving the opportunities in the marketplace. As I noted before, Paradise has started to contribute since end of August and is now available in all major markets by the end of September for sales. I think it's also fair to say that CI is slower recovering than the HI market because hospitals are still very careful in what they take on as elective procedures. Now coming to the second half year guidance which we have put out this morning. We expect faster than what we have shared in July because we said we expect same numbers as the year before, in '19 and 2021. We now expect for us to grow between 4% to 8% in the second half, LC corrected. We expect to achieve an adjusted EBITA growth of 20% to 30%, LC corrected, versus prior year. This assumes a continued improvement and specifically no government-driven lockdown in any of the large markets. So that's the scenario we're using here. I think it's important for us to note that we have significant exchange rate headwinds and we've put that out in the press release. We expect for the full year, because of the strength of the Swiss franc particularly relative to U.S. dollar, our top line in Swiss franc being 4% below or lower than what you would be, LC corrected, and then a 10% negative headwind on the EBITA growth. So overall, as you can hear between the lines, we're very happy with how the team has navigated the difficult first half year, how fast we were able to tighten the cost side and consecutively now here in the Q2 starting to ramp up driving the top line again. With that, I would switch over to Q&A. And Sandra, the operator, I think, has it in control to move us to the questions. Sandra?

[Operator Instructions] The first question comes from Patrick Wood from BMAL (sic) [ BAML ].

I'll keep it to 2, so everyone gets a chance. But I guess the first one, I'd be curious for an update, if you guys can, on the mix of demand, I know it's always difficult, of new versus sort of existing customers in lead generation on that side. That would be the first question. And then on the second side, the market is clearly stabilizing and the consumer, as you said, not so afraid to go back to the retail. Does this mean that we should think that maybe relatively soon, you might look at bolt-on M&A again within either the retail franchise or otherwise given that confidence is back in the market?

Patrick, thanks for the question. On the mix of demand, new versus existing, I think we're still a little overweight on the existing. If we look at where we have access to the data, that's on our own retail channel, but we've seen a nice step-up of the new pretty much in line with the, let's say, step-up we're doing on the marketing spend perspective. So I think it's fair to say that somewhere in the next 1 to 2 months, you're probably starting to get closer to the normal mix here. On the stabilizing driving bolt-on and other things, I think we're clearly in a position now to continue the pathway we were on with regard to doing bolt-ons or thinking about other opportunities. So if you look at the stability of the business and the cash position we have, clearly starting to look at things again when they come our way.

The next question comes from Veronika Dubajova from Goldman Sachs.

I'll also keep it to 2. First, can you talk a little bit -- the second half guidance that you have given, just if you can give a little bit of color what it assumes for cochlear business versus the hearing business just to help us understand. And I guess, I mean it's a fairly impressive statement to be able to make this early on into the half year, I mean it hasn't even begun, that you are expecting growth on a year-on-year basis. If you can talk a little bit to sort of how you assume the market performs as opposed to your own business. And is the bigger driver here the market recovery or your relative performance with Paradise? A little bit of color into that would be really helpful. And then I actually want to spend a little bit of time on the EBITA. That's my second question. Really impressive performance that you're anticipating in the second half. Is this a reflection of the underlying strength of the business and the cost savings? Or is there an element of mistiming between some of the savings and the activity that you have from a marketing perspective versus the revenue recovery?

Thanks, Veronika. I think it's clear that the HI business has recovered faster. The CI is following. But to give you an order of magnitude, if you look at the hospitals who are open for CI procedures, the top 150 in Europe and U.S. together, they're somewhere in the range of 80% to 85%. And we still see some of them being slower if it comes to the adult population. So I think HI is driving the business here. We do expect CI is going to improve gradually. I think it's more vulnerable for higher infection rates because you could imagine that the hospitals get into challenges with regard to the intensive care unit. So in that regard, I think CI with a higher risk profile of potentially falling back and clearly behind. Right now, we assume that both gradually improve from here. On the is it recovery or is it own performance, I think clearly there is a positive recovery in the marketplace. And we do have access to market data and we see that all the markets are stepping up. We also have seen that the markets, in particular in Europe, while we're seeing infection rates going back up, still have month-over-month improvement. So in that regard, it's pretty broad-based. I think there is an element of own performance. At least we have the Paradise out since the middle of August in the U.S. and in Germany. It's now out in all markets. We've seen very good receptions in the first [ half ], meaning audiologists liking what they see and putting it on the ears of consumers. So I think there's an element here. I think also, keep in mind, the Marvel was still a pretty strong platform if you look at VOC. So I think product-wise, we're doing good. We've done certain investments into growth including more feet on the street in the U.S. last year, which we held on to. So I think -- I can't give you the exact number, but I think you see both effects, recovery and our own performance. From an EBITA performance, I think if we would estimate it, we would say about 2/3 in the second half is really better performance from us. And keep in mind, we announced structural improvements in the July, we're making good progress there, so this will have some impact. We obviously have found in the crisis of COVID more ways to think harder about our cost. We're not allowing everything to easily grow back except for if it relates to growth drivers. And about 1/3 of what we estimate is really at the tail of last year and March already savings and cost cautiousness.

And Arnd, can I just ask a follow-up? I think you used to talk about the market normalizing maybe first quarter of calendar year '21. Has your view of that changed?

It may be a little faster here. I think it's fair to say that not all what we are better traveling as well as for the second half is not all just us. I think the market is faster than we thought in July, but I think we're also doing good.

Okay. Okay. Understood. So it's possible that the market returns to last year's levels already in the fourth quarter of calendar year '20?

It's a possibility, yes. It's -- if the trajectory continues, it would.

Okay. Understood.

The next question comes from Daniel Jelovcan from Mirabaud.

Yes. Thanks for providing the very good news on a Monday. Good timing. And so the question is that U.S., you mentioned this was still minus 10% in the second quarter. So going forward in the second half, I guess the U.S. market will also be below your guidance of 4% to 8% for the group. And so is there still a kind of pent-up demand in the U.S. account, I guess, looking at the next 1, 2 quarters? That's the first question. And the second question, I'm very surprised that Americas was also flat. When we look at Latin America, all the news, it's actually unbelievable that you are flat. It is small now at the level -- at the group level but still if you have some more color on that.

Yes. Daniel, thank you. Thanks for the question. I think on the U.S., the biggest driver for the lower level is VA, which even at this point of time, from our read, this is just at 75% of prior year. And then over the quarter, it was less. I think it's also true that on the commercial side, the market is recovering a little slower. When we look in detail, it's really dependent on state. And if you kind of look at the government or the state rules put in place and the infection rates, I think the picture starts to make sense there. But in that regard, we expect it to be still improving but still a little bit below Europe. I think it's fair to say that in particular for the VA, given that they have a well-defined group of patients, that there must be some pent-up demand. It's a little hard to predict on how long does it take VA. If you go back 1.5 years ago, VA had capacity constraints to fitting everybody, so I think it will be interesting to see if they have sustainably improved their capacity issue. So I think pent-up demand probably more in the U.S. but probably not a matter of a quarter until this is through the system. On Latin America, it's -- I think the one thing underlying, Latin America had some good growth before. But again, I think what we're learning as we look at the different markets one by one and compare notes on what we hear in the market and then what we see in our own stores or what we hear from the independents, I think the consumers are more resilient if it's time for them to think about a new hearing aid. I think the other comment I'd make, we report not Latin America independent. There's Canada in there when we talk about the Americas. And I think Canada is more comparable to the European picture. But overall, even Latin America is improving, I'd say, similar to others on a steady curve.

Excellent. And can I just -- on the U.S. again, sales in -- not in your own retail but sales to independent channels, let's say, excluding Costco, excluding VA, was that, I guess, better than the minus 10%? Is it fair to say?

Yes. I think it's fair to say because VA is so much down. I think the independents looked pretty robust to us. They were faster back to the business than Costco and they're clearly ahead of the VA.

The next question comes from Maja Pataki from Kepler.

Two questions from me as well, please. Arnd, when you're -- with regards to your guidance for the second half of the year, could you just give us some indication on how you're thinking about the VA pickup and development in Costco? I do hear that in Costco, they are considering how to do the setup in stores and that this is still representing a bit of a headwind in some stores. What is your assumption for the development over the next 6 months for those 2 channels? And then second of all, could you remind me, please, of the cost savings based on government funds in H1?

Yes. Maja, thanks for the questions. On the VA side, it's a little hard to predict because it's not a central decision, it is driven by the different clinics. But if they're at around 75%, I think it will take them a couple of months to get back to the prior year, so probably more in our Q4 rather than in the Q3. I think on the Costco side, we've seen some initial good volume development. I think they stalled a little bit, but I think that they're going to sort through the, let's say, costs they have from keeping the patient safety, their good operating entity, and so I would rather see them getting back to normal in the next month -- in the next 1 or 2 months or so. From a cost savings perspective, I'll give it to Hartwig, who's sitting here waiting.

Yes, Maja, for the first 4 months of our fiscal year, so April to July, we had between 10 and low teens each month of a benefit from government subsidies.

The next question comes from Issie Kirby from Redburn.

I have 2, please. Firstly, on the restructuring initiatives, you mentioned you're making good progress. Could you possibly provide some color on how you're doing here particularly in regards to the action you're taking with your retail footprint? And then just a quick follow-up from this, can we expect to see you reinvest some of these cost savings going forward? Secondly, just following up on the M&A comment from earlier. Have the events of the past year influenced what sort of acquisitions you're potentially willing to look at?

Thanks for the questions. So in general, I think we're making good progress on the actions we've put out. It depends a little bit on last-day negotiations and things. We're going to be directionally a little bit more weighted on the restructuring in the second half than the first quarter but pretty close to the middle point here. On the retail side, I think that's one of the items which goes a little slower. We have communicated where we want to make changes. But as you can imagine, if you're trying to secure the database and the consumers and move them over, you need to have quite an elaborate process until you're really closing. So it's probably more back-end loaded but same game plan as before. From a reinvestment perspective, yes, our intent is to provide the growth opportunities we have organically with all the, let's say, dollars, which they need, whether return on investment is good. So in that regard, I think some of the savings will fall to the bottom line. Some of them will be reinvested into growth opportunities anywhere from product development or go to market. It's obviously depending also on the development of the overall business, but it's not all going to the bottom line, but it's a balance, as we have done before in other, let's say, productivity measures. From an M&A perspective, maybe the not-so-appreciated answer but our mindset hasn't shifted a lot in COVID on where would we go. Clearly, in markets where we don't have coverage in retail and we can increase our catchment area and find more consumers, we are open. I think technologies are always of relevance. There's a certain number of adjacencies around us where we're learning to understand those markets better, but the profile of what we're looking for hasn't changed. I think it's also fair that in our industry, COVID was pretty sharp at the beginning, but it's recovering reasonably well. It's not that the number of available targets would have doubled now, yes. And so in that regard, we're going back to the plans we had before and we're working on those.

[Operator Instructions] Gentlemen, so far, there are no more questions.

Okay. If there's no more questions, then thanks again for dialing in here and also the ones who had questions, and we wish you a good day. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.