Sonova Holding AG (SOON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sonova Holding Ag Half Year Results 2020-2021 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Thomas Bernhardsgrütter, Director, Investor Relations. Please go ahead, sir.

Thank you, Sandra. Good afternoon or good morning, everyone. I just wanted to provide you with a small housekeeping item. For participants who joined us on the webcast, but who would like to ask a question live over the phone during the Q&A session, we kindly ask you to register under the link provided on our home page under the IR section. There, you will receive a dedicated dialing details, so you can easily access the call over the telephone. If you don't want to ask a question, you can remain on the listen-only webcast. And with this, I pass the word on to Arnd Kaldowski, CEO.

Thomas, thank you very much. Good day. Good afternoon to everyone who has called in here. Thanks for taking the time. We have with us not just Thomas but also Hartwig Grevener, our CFO. He and I are planning to take the next about 30 minutes to guide through the provided material, which will leave us ample time for Q&A afterwards. At the outset, there is normal disclaimer, which you find on Page 2. We're obviously in an interesting time with regard to the regular communication we have with you. We have given a trading update in September. We then had the Capital Markets Day. So in that regard, it's not all completely news, but now the final numbers for the September as well as some incremental information, which I'm sure everybody is looking forward to on how we're looking at the market at this point of time. Looking on the first half year performance, from the outset, I would say it's a solid first half year. If you take into consideration the challenges we had due to COVID, particular in the Q1 at a very low trading level, I think, it's a pretty strong financial performance for the cards we had to play with. And I think it depends on the good execution of the teams, but then also the ongoing market recovery which we have seen in our Q2. We made good progress on our structural optimization initiatives, which you, I'm sure, remember we announced in July the intent to giving us enough flexibility with regard to the ability to provide meaningful profitability, but at the same time, freeing up the capital to invest into growth where we find that needed. We're expecting to return to profitable growth in the second half year despite what we would call, at this point of time, to be temporary market headwinds out of the increased infection rates over the last couple of weeks, and I'll go a little deeper on this when we get to the outlook section. And despite all of the changes and all of the things we have learned throughout the last 6 months, we do see our strategy to being directionally unchanged. Certain things may go faster or may need to go faster. But in principle, we feel very good about what we have as a starting point with Sonova and where we are planning to go from here. If we go to the highlights page here, the 6 most important pointers throughout the presentation later. Clearly, sales, lower than last year by just -- by about 21% in LC, but a return to growth in the month of September. I think a pretty good performance on the profitability, achieving margins of 16.3%, which, given the weak performance we had in Q1, would indicate that in Q2, we performed significantly better than in the prior year. Good EPS performance. By the way, EBITA and EPS are marked here as adjusted. We have corrected for the restructuring items as well as the incomes from the patent case with regard to cochlear. So in reality, the EPS as reported is higher than this, but we wanted to be using the adjusted to give you a good read on the ongoing business. Now what was important for us, particularly in September, was the good first couple of weeks of the Phonak Paradise in the market and the channel. We've seen a strong positive reception of the hearing care professionals measured in -- on the one hand side, the conversion rate from the Marvel to the Paradise but also in the price realization we were able to realize. Now coming to the outlook section, certainly a point of interest here. I think couple of things to consider. We have good momentum in the business based on our growth initiatives but also the Paradise launch. The stores on a global level are pretty much open, so when people talk about lockdowns, that tends to not impact us at this point of time because we're counted as an important business or an essential business with our hearing aid store, similar to pharmacies. And we see a higher resilience of the consumers than what we've seen in the wave 1 with regard to their willingness and ability to go to the store if they need a new hearing aid or looking for a new hearing aid. Strategy, as I said, unchanged. Therefore, I'll flip quickly over. Want to go a little deeper into the Phonak Audéo Paradise here and just voice over what consumers like about it. I think the biggest positive we hear is around unrivaled sound quality. Three different use cases, which are relevant, and we have worked on. The one is hearing of soft voice, which may sound easy, but it is not because, in the world where you do more and more noise reduction, you really need to have the right algorithms and the right optimization in order to hear a soft voice not being taken away by the noise reduction. So significant improvement here. Secondarily, noisy environments, where we made a big step forward. And then thirdly, 2 individuals are moving next to each other with the accelerometer that -- we can see the direction of the movement and the microphones get differently focused. So all of those seen as significant improvements. The digital solutions enhanced by many different elements. And then clearly, also the universal connectivity. We're still the only one who can serve all Android phones, and that's appreciated. We've expanded the Bluetooth connections far beyond what is available with others. And then with the new Tap Control due to the accelerometer in the product, we allow for easier interaction with the hearing aid to switch things on and off, which is seen by some of the consumers as quite remarkable. Now coming to the numbers here. On Page 8, we're obviously comparing product launches with each other. And so we wanted to voice over how we look at the Paradise launch relative to the Marvel launch, which, I think, we all know is a high watermark as a comparison. Before I get into the comparison, I think it's also fair to say, it is difficult to launch a new product when you have to keep physical distance. I think we voiced over that the benefit is you reach a lot more people faster. The downside is you don't reach them as thoroughly and deeply than if they would have come to your event. And as you can imagine, to describe a product and then the audiologists or hearing care professional really wants to try it, and that's a little difficult in the virtual environment. And so we really needed to find new mechanisms on how we have a first touch point virtually, but then we figure out how we go deeper one by one, which really was a task to overcome. Despite that, if I look at the commercial metrics, we're talking 9 weeks after the launch, we have the conversion in the local open market, so the independents, of people who moved from the older product Marvel to the Paradise being at 77%. And that's exactly the same percentage we had when we moved from the Belong platform to the Marvel at the same point of time. So that's hopefully a strong signal for the customers moving over. The second one, when you look at how fast are they repurchasing after they fitted the first set of Paradises, we see that 70% of the HCPs in the second week already bought the next versions, which is a good indicator for what feedback do they get from the initial fitted devices from the consumers. That number is in the same range as the Marvel. It's a few percentage points below, not concerning us. If you look on the right-hand side, customer feedback, and you can read the percentages here. The recommendation rate at 92% is a high number, and more than 2/3 seeing the Paradise as being next-level relative to the Marvel in our eyes also is a high number. As you can see, the n was 116 for the right-hand side on the customer feedback, the commercial metrics are obviously out of our global customer base. So we would look at this as very strong numbers, which, I think, is also reflected in our good September performance. That gets me to the Sonova Group summary of the first half year on Page 9. And we wanted to give you a little bit color. This is unusual for us. Normally, we talk about the half year, but we understand that the most interesting question is how the curve evolving. Therefore, you see a little bit more information here than we normally share, trying to depict quarter as well as, in some cases, September performance. Tail side on the group level, close to prior year in the second quarter, high single-digit growth in September. You see on the EBITA line, a significant FX headwind, which I'm sure Hartwig will talk more about. And then you see the EBITA margin adjusted, just being shy 190 basis points of prior year despite the low volumes here in the first quarter, and in Q2, well above prior year for the same period. I think a couple of things coming together: Good cost management, good prices, partially mix, partially the Paradise. But then also, obviously, taking advantage, particularly in the first quarter of government subsidies where that was appropriate. Now going deeper in the 3 different businesses. I think the first one to note is Hearing Instruments has fared better in the first half year than the other 2 businesses, with a strong pickup in momentum with mid-teens growth in September. And as I said, the strong initial demand and good conversion on the Paradise. And we look at this as 2 elements. Clearly, continued innovation, but we also believe that the commercial execution initiatives we had started 1.5 years ago and our tight control over how the sales force is spending their time and how they reach customers was a plus for us here in the first 6 months. I think on the Audiological Care side, a good gradual improvement month-over-month. We're returning to mid-single-digit growth in September. We've restarted the lead-generation engine in June, and we're seeing us getting closer to the pre-COVID level on new customers. I think on the strategic initiatives, good progress, particularly towards the omnichannel strategy. We talked about this at the Capital Markets Day in more detail. And then Cochlear Implants, the one which is slower on its way, and I think it's fair to say part of that is market. And I think we all understand that side because of the hospitals and the discussions about elective procedures. But then also with regard to the voluntary field corrective action in February, it is work one has to do in order to regain confidence, and I think we're going through that work and seeing the improvements step by step. So a solid performance in light of COVID-19. A quick note here on the structural optimization, I think everybody remembers that, a, this is not the first time we do this, but an accelerated larger package of work, with the objective to improve our run rate benefit by CHF 50 million to CHF 70 million by end of the year. We're making good progress. The things we have planned to be concluded by September, by and large, are concluded. And we're not seeing any reason why we wouldn't get to the run rate savings it laid out here. The team is doing a good job on the execution. You've seen the restructuring cost was CHF 21.9 million so far. And we expect to step up to the level we have indicated by the end of the year. Quick look on the P&L. I think don't want to go too deep here. Good to see the 16.3% on the margin side versus the 19.6% last year. It's even closer if one adjusts for LC. I think the other ones worthwhile to note, EPS at a good number given the small size of the business, with quarter-to-quarter just losing 29% in LC here, lots of ins and outs. So I'm sure Hartwig will go over on the EPS as reported. And a pretty good operating free cash flow as well as ROCE given the circumstances. I think you also see here, when you compare Swiss franc to LC, again, the significant FX headwind. The next page is just a service to you to make it easier to see where 2 adjustments, which are pretty much the 2 in this period, are falling by business segment as well as line item in the P&L. There's 2 effects. The one is a restructuring cost, as I said, the CHF 21.9 million and then you see the line in other income and expenses, the CHF 99 million we have booked out of the cochlear patent infringement lawsuit as a positive to us. Page 13, I think most of it is clear. I think you see the organic drop on the revenue. You also see the significant FX impact here on the right-hand side. Page 14 the growth rates for the period for the 3 different businesses. You've seen them on the pages before. Probably one thing to tease out here, and this should not be an excuse for our CI business, but one could also argue that last year's comp was a little high given that we were in full swing, taking advantage of the Ultra 3D MRI, which in the second half started to get slower with the field corrective action we had to announce. Looking by regions, not a big surprise. We had talked about it. Asia Pacific was the fastest to recover, clearly in a positive territory in the Q2. You see the 10.5% for the half year here, Very much driven by China, which came out very strongly out of the COVID, which was earlier in their world, but also New Zealand and Australia being in good shape. You can then see the Americas, which is significant headwind in Brazil across the businesses, as well as Canada not being as strong. And then you look at our biggest business here with EMEA at 19.1%, but strong recoveries in many of the markets in the Q2. You see a rebound in Germany, France and the Nordics in the HI business, strong performance in France, Netherlands and Benelux on the AC, I think, worthwhile to comment given the size of our Audiological Care U.K. business significant headwinds still in the Q2 in the U.K. because of the longer lockdowns there. And then the CI business pretty much hit in EMEA as well as the U.S. In the U.S., for HI, it's relevant to mention that we look at our performance as market share gaining in the private market, but held back by the slower VA rebound given our high market share and, therefore, higher mix there than other players. But a good dynamic recovery across the, granted, smaller Audiological Care network. So that's the regional split here, certainly interesting to compare also how other people are talking about the regions for you. EBITA components, you see the organic down here at CHF 77 million. Keep in mind, the volume was 301 million. So therefore, you can see, when you compare those 2 numbers, the good work on the cost side. You see significant positive, which is a mix between the AB damage award and the restructuring cost on adjustments and then the significant impact of FX to our bottom line. We then have more information on the different segments. I will try to speed up here a little bit. On the Hearing Instruments side, I think worthwhile to note on the EBITA, and this is wholesale plus Audiological Care, that we were pretty good in countermeasuring the volume loss of almost 20% in "just losing 80 basis points on the EBITA margin." If I look at the Hearing Instruments segment, I talked about most of the elements here, which drove the performance. I think at the beginning, we still had good momentum with Phonak Audéo Marvel, and when the Paradise came in, it helped us to accelerate from there. It's also worthwhile to mention that Unitron and Hansaton launched new products at the end of Q1, which are helping those 2 brands. On the Page 20, Audiological Care. Clearly a big task to make consumers comfortable to come with extensive hygiene measures in place, which, I think, are helping us now in the second wave. We have practiced them, and our customers are used to them. And then the increase in the marketing investments, the network streamlining well on its way. Going to the cochlear side, obviously more difficult P&L here. Talked about the slower market recovery and the continued headwind from the February voluntary field corrective action. Despite this being a negative EBITA, I think if you see that we're almost CHF 50 million short on revenue versus a particularly strong half year and the year before, given the growth rate there. You can see that there was quite some work done on the cost side, not just in pushing things out, but also structural steps in order to set us up for a better path after the challenges. And I talked about how it is important to get customers back being comfortable with us. At the end of September, we had 95% of the top 100 Western accounts being positive on us when we were interviewing them on that, and we had 95% of the large accounts worldwide, who had purchased the improved Ultra product from us, which ultimately is the best signal you can have. Next page, you have the split between implant systems and upgrades. Not that different. One would have expected probably that the upgrades and accessories hold up better. But what we see is that because of the reduction of activity in the hospitals and many of the fittings happen in hospital environment, also from the processors, we've seen, even there, appointments not being scheduled. With that, I'm through to the business side, Hartwig will pick up the financials now.

Yes, getting on Page 25, which allude to the subsequent pages. Just wanted to make the point of emphasis again that the first half is the story of 2 tales with the second half returning to close to prior year on top line, but significantly better in terms of margin. So that raised -- was an achievement for us. And in case the question would be there whether this would also be the case if I would take out government subsidies in the second quarter, then I can tell you, still the profit was over prior year. You have seen that on cash measures, we have around CHF 1.4 billion of gross cash. But let me flip over to Page 26 to just quickly draw your attention on 1 or 2 things here. The gross profit is on a reported basis, as the margin, down year-over-year by 170 basis points. But if you would look at this on a constant currency basis, it's only 100 basis points. And you have seen in the bridge early on that Arnd took you through that on EBITA, the local currency is down 190 basis points while reported is 330. Looking at the local currency declines on the margin, I believe we can be very satisfied with what has been achieved there. And we are -- we think that bodes well to the upcoming quarters in regards to development of our profitability. You see that EPS and EBITA on an adjusted basis, they correlate. But there is a little bit of higher financing cost that is in the EPS on both the adjusted and reported basis. That's a bit of a difference there. And when you look at the reported pair of numbers, we have in the prior year, the CHF 650 million benefit from transitional tax benefits compared to less than -- to a high double-digit number basically of benefits from the cochlear patent payments that we have been receiving. So that's why the reported EPS in Swiss francs is a bit different to the growth rate or declines on EBITA. Moving forward to Page 27, you see how we have been faring in the different cost categories. And ultimately, that's what drove the profitability development to a certain extent as well, that we have been very savvy with our cost development. There is benefits from the restructuring already in there. And you see that we have had around 40 -- just over CHF 40 million of government support, mostly focused though on July and backwards, and none of that is still in place today, as business has come back. We have talked about the adjustments already. So let me just flip forward to the net profit -- EBITA to net profit bridge. Identifying to you that aside from the adjustments, the acquisition-related amortization is, more or less, unchanged. The financial result is a bit worse because we have taken up quite a lot of debt. And we also pay a little bit of negative interest, to be completely frank here. And then we have, on the tax side, an underlying unchanged tax rate of around 13.5% but a onetime benefit because we were able to use the CHF 99 million from cochlear in a way that we can represent this as the tax charge of this being completely absorbed by new tax loss carryforwards that were previously not capitalized and can now be capitalized given that there is this profitability event. Moving on to operating free cash flow. You see that, if you look at it year-over-year, yes, we still start from a lower profit before tax. Then you see that there's a positive of CHF 49 million from lower income taxes paid. This will flip back mostly in the second half of the year and relates to respective government programs, including the ones, in particular, in Switzerland, allowing us to pay later, which, however, is no longer something that we really need, given our high cash balance. Then you see that there is the negative on net working capital. The prior year, we had a pretty nice receivables collection catch-up, but also a much higher end-of-March balance that we could collect from. And that basically is causing that decline. [ From memory ], we already obviously had an impact in March 2020 with revenues dipping in and out, a very, very high month traditionally at Sonova. CapEx very low, getting us to the CHF 252.8 million of operating free cash flow. Last page, Page 30. So you see that on the receivables and inventory side that the receivable is relatively constant to the same date in prior year, which is also indicative, in case that question might arise with you, that we don't have particular difficulties due to COVID to collect at this point. And so also, I can say that it was not necessary yet to consume a lot of -- or any significant amounts of the provision of around CHF 20 million that we had booked as an increment to the ordinary bad debt provision in March. And on the inventory side, there is an increase of 7 days, and it is reflecting -- a reflection of that we are, in a controlled and targeted way, that we have upped our inventory to be on the safe side in our supply chain in regards to elements that are particularly exposed to COVID. Quickly on the capital employed. Something that I'm really proud of is that like-for-like in regards to IFRS 16, we're only down 140 basis points from 20.6% a year ago to 19.2%, so I believe that's a pretty good result. And you see where we are with net debt and EBITA. So really, we haven't burned any of this cash that we have taken on with all the debt and new debt. And correspondingly, our leverage has come down. I give back to Arnd for the outlook.

Hartwig, thank you. So coming to the outlook page on Page 32. You've seen the numbers before. This was the outlook we gave for the second half at the end of September. And as you can note, we have decided to not change this outlook. So where are the puts and takes? I think we still -- we had a pretty good October, pretty much in line with, let's say, the momentum we've seen in September. We recognize a good positive momentum on our Paradise in the different markets. You've seen the conversion rates there and the positive customer responses. And if we look on the increasing infection rate, and you can imagine, we look at that on a very regular basis and what that does to leading indicators, I think, at this point of time, and we're a couple of weeks in these higher infection rates, we do see some impact but by no means anywhere close to what we have seen in the first quarter. But once we look on particularly carefully is the no-show rates in Audiological Care, which are directionally in a similar range as what we have seen in the months when the infection rates were lower. We also look at the ability to create leads of new customers, which you could argue it has gotten a little bit more difficult to get the people moving, but not in an order of magnitude that the sum of all of the positives I have shared and the good momentum we have, plus what we see as somewhat slower behavior right now, would put us at a position where we think this guidance would not be appropriate. Now you can read the bullet points here. It's a little bit of a, let's say, estimate in there with regard to how long do the lockdowns continue. By the way, I said it earlier, lockdowns in our world at this point of time does not mean that stores are to be closed. It is just the movement of people when other types of stores are closed and people are asked to not move as much. But if we're looking at what we call a limited temporary impact here, think about the level we have seen over the last couple of weeks probably extended into the December. We feel pretty good about the guidance we're giving here. And yes, that's as much as a transparency I would like to share. But in general, we feel good about the guidance we're giving out here. Important to note, the FX on the last bullet point, we expect that the current levels just to have an impact of 5% on the top and 10% points on the bottom line as we already have seen in the first half year results. With that, I would turn it over to questions to any of the 3 of us.

[Operator Instructions] The first question comes from Daniel Buchta from Zürcher Kantonalbank.

Yes. Three questions from my side. The first one on the guidance, which you just elaborated on. I mean it's a, in my view, a sign of quite some confidence to reiterate your top line guidance, and with that, also the adjusted EBITA guidance. Given what we see in the market now or in the global environment, Austria, for example, from tomorrow on, I think, will go into a stricter lockdown and the most famous -- biggest newspaper in Switzerland is also saying that experts say that Switzerland should go into a stricter lockdown. Would that materialize also in other countries? How would you see that to impact your guidance and, yes, especially the revenue growth outlook? And the second one also on your outlook statement. You say that basically, the reacceleration after the first wave is over now. So no pent-up demand anymore, as I understand it. Given where we -- what you have seen there in terms of mix and volumes, would you expect that the market then was back to the pre-COVID level? So customers or patients willing to buy also especially more expensive hearing aids to the same degree? And the last one on your commercial numbers on the launch for Paradise. I mean you said that numbers are a little bit below Marvel launch 2 years ago. Why is that? Is that because the jump from Marvel to the previous platform was bigger than it is now from Paradise compared to Marvel? Or any other reasons why the launch numbers are a little bit weaker here in that regard?

Daniel, thanks for the questions. So with regard to strict lockdowns, I think what's interesting when we observe markets like Germany, also France and others, so not Austria and Switzerland where you now have discussions about potentially stricter lockdowns, we have seen good performance, clearly better performance than what we've seen in the wave 1. So I think the one we're watching more is not so much if restaurants and other things get closed. I think as long as our stores stay open and the elderly people feel comfortable with the safety measures, I think we're in a good place here. It's a lot of pandemic out there. So I think if in 4 to 6 weeks, we see people don't move at all anymore, it's obviously a different discussion. We haven't seen that yet even in the markets who are already in tighter lockdowns in Austria and Switzerland. I think from a pent-up demand perspective, I wouldn't say we intended to say that the pent-up demand is completely consumed. It's very hard for us to estimate that. I think in reality, what we did see is that everybody was taking down the marketing investment and so new consumers were not activated. I think we did see that the ones who were ready for the second round of a hearing aid, everybody was reaching out and bringing to the store. To answer your specific question on the more expensive side, I think we have seen good ASPs, which clearly indicate not just a good mix with regard to certain geographies but also no reduction in ASPs relative to what we had before. So we're watching out for that. We haven't seen any compression to lower price points of products in the market overall. On the Paradise to Marvel, I didn't want it to be so overamplified in what you have perceived. I think being at the same conversion rate, 9 weeks in, of people who have said goodbye to the Marvel and took a Paradise, and that's in the more complex way of introducing a new product when we can't have big events as we had them before, where people could test the device the moment we exposed them to the features from the voice over, I think, is a pretty strong signal. I think I talked about a few percent points lower purchase in the second week. I don't see this as a big change to the trend line here. I think overall, Paradise is a strong product. The metrics are pretty much the same to the Marvel. Keep in mind, the Marvel was a strong brand like -- on the back of a weaker product because we were struggling in the last year. So we're quite excited about the numbers we're seeing on the chart. That's, I think, an important message.

The next question comes from Patrick Wood from Bank of America.

I'll keep it to 2, please. The first would be, I know there's a lot of noise in the data between wholesale and retail and geographies, and it's incredibly hard to parse out. But first question is basically do you feel you're consistently taking share in each individual channel with Paradise relative to competitors? And how do you feel about share gains overall? And then the second question is just for sort of scenario planning, let's imagine a situation where people don't really want to go back to the retail establishments or, for whatever reason, they become more cautious. Do you have flexibility to manage the cost base if it turns out that you have to keep the stores open but fewer people are going there? Is there -- are there other levers you can pull, whether it's shutting a couple of stores or reducing spend here or there just to manage the cost base during that time period if that were to happen?

Patrick, thanks for the 2 questions here. I think we see consistently a strong performance of the Paradise in the different channels. Obviously, there's no VA numbers posted yet. It's early innings there. But if I look at the independents in all the different markets, we see good performances amongst the independent channel, and this is where we launched in all markets at the same time. We see a good pickup in our own Audiological Care, but that's obviously something we control to some degree. But I think on a higher level, good performance in all of the different channels where we've launched the Paradise already. It may be that some LRAs are a little later on our schedule. Also VA coming later here. But particularly on the independents, where we launched right away, we're doing well in all different geographies. From a scenario-planning perspective, I think if it would take longer, I think there is levers, and you've seen us being effective using levers in order to adjust our cost base. It is not our highest priority at this point of time because with the structural improvements, which are well on their way, as well as some of the things we learned where we can prevent certain indirect costs, which we had historically, I think we're feeling pretty good, as you can see from our outlook on the bottom line. And so we would rather, as an initial reaction, flex more towards more lead generation. But if need be, I think we've proven in the last 6 months that we can manage our P&L.

The next question comes from Michael Jungling from Morgan Stanley.

Great. I have a few questions. Firstly, on the doubtful debt provision that you had raised in the second half of CHF 20 million, did you need to reverse anything for the first half of this year because you didn't need it? And if so, what would the benefit to EBITA have been? Secondly, on the share buyback program, what are you looking for to reinstate that? And then thirdly, if I look at some of the patent filings among some of these technology companies, and this includes Facebook, launching patterns on earplugs for improved audiology, et cetera, I'm just curious how you're thinking about the next 2 to 3 years, whether you feel that the risk is increasing that some of these technology giants are moving into your territory and want some of your business.

Michael, we didn't reverse any of the CHF 20 million to the P&L, so there is no P&L benefit from that provision in the first half year. Share buyback, there is at this point, no, let's say, decision that would predetermine anything, but I believe everybody knows well in what pattern we were before, which was share buyback to return cash to shareholders, unless there would be acquisitions or other forms of growth investments consuming cash, and then up to a leverage of pre-IFRS 16 1.0x, corresponding to 1.3x leverage post-IFRS 16. So that's a situation that we are in. Certainly, there is some, let's say, gravity to the history, but it's not time to make that decision now. Arnd, do you want to take over on the patent?

Yes, I'll take number three. So yes, there are more people who are working on technology to improve speech and speech understanding. I think it's a broad field, which is relevant for everybody who has an earpod or something in the ear, but also can improve hearing for people who may struggle in certain situations. I think 2 comments here, Michael, on your specific question. I think it's most relevant for a space which is today significantly underpenetrated, which I would call more of the situational hearing and probably the mild segment. And that's certainly an interesting field, which we're eyeing and which other people are eyeing. So I think that will be an interesting field to watch, but it's mainly a new segment, which is not served today. The other one -- and the reason why I say it's limited to that, if you want to get to real good hearing performance improvement for somebody with a more severe hearing loss, there's many things you need to do above the, let's say, algorithms on existing type of chipsets. And that also puts the time line into perspective. I think from somebody getting closer to what is our customer base today, I think you're talking longer than 2 to 3 years. And I think in that regard, you ought to also assume that we're working on technologies, no matter if IP-protected or not, which are kind of trying to set us further apart.

The next question comes from Veronika Dubajova from Goldman Sachs.

I have 2, please. One is just would love to understand on the cost side, sort of how much progress you had made throughout the quarter or throughout the half year on the structural measures that you have in place. And I guess in particular, any comments you have on the store closures and to what extent there is any kind of remaining risk to revenues as you move into the second half. That would be very helpful to understand. So if you can help us get, one, what the realized savings were; two, what else is left to do; and three, how you're thinking about the revenues. I guess that's my first question. Fairly broad. And then my second question is just a quick one on the OTC guidelines in the U.S. I noticed that there was a letter over the weekend coming out from a number of senators to the FDA requesting them to comply with the law and issue the OTC guidelines. I'm just curious what your expectations are timing-wise at this point in time, and if you're hearing anything on that front.

Yes. So Veronika, we are moving in a very effective satisfactory pace in our restructuring program. As Arnd has said, you can see from the restructuring provision that we have consumed more than CHF 20 million. I would say we're working faster than linear between inception of the program in July and kind of conclusion in end of Q4. And so that is that. And that would also apply to the store closures. In regards to revenue losses from store closures, very minimal. The concept is to assign the customer list and the relationships to nearby other stores. And so really, losses are really just the exception and not the rule.

On the OTC, Veronika, this is not the first time there's a letter. I think there were at least 2 requests from different senators over the last 6 months. That's as much as we know. I think assuming that the regulation comes in the next couple of weeks, if this is the case, I have no evidence, that you would still expect something like 6 months to 8 months until final rules are in place because you're going to have the stakeholder input period. So I think it's in minimum, that kind of an order of magnitude. And I think given that the government is currently also busy with other things, it may be the one or other months more.

Understood. And Hartwig, can I just follow up? So what number of stores were closed at the end of the first half? And I guess what was the saving that you realized in total in the first half of the year from the structural cost savings program?

Yes. We don't go down to the dollars and the cents here, if you don't mind, Veronika. But it's, as I said, it's a slightly more than linear realization. And in terms of store closures, we are around 150 to 200 mark in terms of what is realized.

Next question comes from Kit Lee from Jefferies.

I have 2 questions, please. So the first one is just on the Paradise launch. Can you just talk about how much of the Paradise order came from your competitive accounts, i.e., accounts of which you are not the biggest supplier? And then my second question is just on your sales and marketing expenses. I think it was down quite a lot in the first half, even after adjusting for government support or the restructuring savings. Just how sustainable do you think that is going into the second half and also into the next fiscal year?

Thank you for the question. On the Paradise launch, I think the majority in the early weeks and months comes more out of your existing customers, but that's more an element of the launch strategy where you're making sure you're "converting" those and create a groundswell of positives. I think we're now moving into the more competitive side of the house. Therefore, it's going to be over-proportional on the old ones, but really by design. I think it will be easier to answer the question in 2 months when we're through the whole launch. We do see good appreciation of the product. And as you may imagine, the new product is always an intriguing thing for somebody to try. So we have no doubt that we're able to get attention in the competitive accounts as we did with other product launches. On the sales and marketing cost, without giving an exact number, I think there was the government subsidies, there was also significantly lower marketing spend, which we will and have already ramped up in the Q2. But if you look at the first half year, we had very low first quarter. But there are savings, not so much in frontline people. We're not reducing the number of frontline people. But clearly, with the store reduction as well as some other things we do in back offices, we expect that a good share of the savings sticks and is obviously, given our cost structure, part of the operating profit improvement.

The next question comes from Oliver Metzger from Commerzbank.

My first one is on your structure on higher-priced sales to independents. So you mentioned explicitly in your comments that you had a good ASP development asset benefit in September, which comes most likely on a Paradise launch. So would you describe the value growth in the months before as significantly higher than the volume growth? Also in particular, if you exclude the big-box retailers, also the larger government channels, that's on a like-for-like comparison independent channel? My second question is a short one on understanding the underlying momentum with regards to this second wave. So if you compare it to similar markets like Austria and Germany, so both have similar market structures. So do you observe already a decreasing sales momentum in Austria even ahead of these tighter measures compared to Germany? Or -- how would you comment on that? And the last one is also a quick one on Cochlear Implants. So I recognize system sales were only slightly worse than the upgrades and accessories. So I would have expected a more differentiated performance between both the subsegments. So could you give us a few comments why also the upgrades were hit so strongly compared to the new systems?

Oliver, thank you for the questions. On the price, if I look at the September where we said in HI, we had mid-teens growth, I think there is a substantial part of that being value growth. But I would go as far as to say that the unit growth was a little higher than the value growth side. But I think it is the 2 things you're saying. There's a Paradise element in there and then the other one, keep in mind, it's not the only product we sell. So Paradise did better than the average with the other product together, but it is also -- there's a mix matter with regard to certain accounts as well as certain geographies. But clearly, both pretty strong in the month, but a good substantial value growth component above the unit volume. On the momentum, if I look at Germany and Austria, I go off memory. I have not seen, when I looked at the numbers last week, a significant difference in the 2 markets. It was good to see that the no-show rate was pretty stable. It was good to see that we were able to generate new leads. I think obviously observing with carefulness and not even knowing all the things the Austrian government is planning to do, I think it took them a while to put everything in writing. We will need to see what -- how strict the lockdowns are. But I think in a territory like the German lockdowns are probably a little bit more severe, we're not seeing significant increases on no-shows at this point of time. On the CI side, yes, we were surprised too, I think, when we were following up. I think it is true that if you sell an upgrade at the end, you need to fit the processor and all those things. And in many of the scenarios, that's done either in a clinic environment or hospital environment. So our interpretation is that they were careful with all elective things they were doing. We would have expected the upgrades being more resilient, certainly something to watch over the next couple of months.

Next question comes from Markus Gola from Stifel.

Just one left from my side, and it's on your Cochlear Implant business. You mentioned that decisive steps were taken to adapt cost to lower sales volume and to implement structural improvements. So could you dig a bit into what measures have been implemented and what to expect from the structural improvements?

Markus, thanks for the question. I think we have revisited the organizational structure. We looked at all different elements you would look for if you're trying to get to a more lean structure, no matter if that's your -- what you can do on a back-office side, what this is with regard to leadership spend of controlling the elements like that. We tried to keep the R&D structure as is. You could imagine that we're going to be a little bit more careful right now with investing into innovation rather than product development. There's not significant, let's say, site complexity from which we can live in this case. There's more runway in the HI side. I think there's a couple of elements where we have actually counterintuitively taken some money into our hands where we had significant size components where, through redesigns which may take us a year, we can get to significantly better cost from the outside. Yes, so clearly, a set of measures but none of them being a big site closure. Also, we don't have that many sites in CI, but clearly being beneficial to our cost structure there and allowing us to getting faster back up to the pathway we wanted to be on the profitability side.

The next question comes from Maja Pataki from Kepler Cheuvreux.

Hello? Can you hear me?

Yes, Maja.

Okay. Sorry. Arnd, I was wondering whether you could talk about the difference in wholesale growth and retail growth. Is that due to the fact that you have a slightly different geographic expansion or is it due to the fact that you're seeing some sell-in and the sell-out isn't following? And -- just to understand where the difference is coming from. Then the second question, Hartwig, I -- apologies for asking, but you mentioned during your presentation that even excluding government subsidies, something was better than last year, and I couldn't hear it. The quality of the call wasn't too good. And then the last question is related to a -- your Cochlear Implants as well. I mean it appears that it is not recovering as fast as you might have hoped beginning of the year. Could you give us an indication where you think what is taking longer and where you were anticipating to seeing a faster turnaround?

On the wholesale versus the AC side, I think one thing to keep in mind, depending on market, you can have on the AC side, you have 4 to 8 weeks longer time until you can recognize revenues because consumers have the right to bring the hearing instrument back and to not have to pay. Germany would be the one on the 8 weeks. So that's just a structural difference when you see the S-curve going up. I think the other one, it's fair to say that the Paradise has a stronger positive impact on the wholesale side from a share-gaining perspective. I think regionally, I think the bigger "headwind" we have on the AC side, as I was pointing out, is the U.K., which is our second-largest market. We also don't have regional exposure to the Asia Pacific as much on the AC side. So I think there's a regional element. There's clearly the Paradise impact which is expected to be higher on wholesale. And then there is that timing issue. When we look on this thing -- on the individual markets, we're feeling good about how we're doing on the Audiological Care side relative to the market. And in many markets, we do get published data when we factor in this 4- to 8-week period. So we're not sitting here feeling we're losing share on Audiological Care, but it's really -- you need to dissect mix elements and these timing elements.

And Maja, sorry if the line was muffled. I was saying that the second quarter EBITA was above -- adjusted EBITA was above prior year, even if I take out government subsidies.

Perfect. And the cochlear implant?

Yes. I'll pick that up, Maja. On the CI side, I think there's 2 things at play here. The one is regaining trust and confidence, I think, is easier done when you meet in person and can talk things through and that in many hospitals, since COVID started, not allowed in any shape or form. They're just not allowing vendors to come in, right? So that's probably an incremental challenge we have, which we didn't see coming in the February time frame. I think the other one is, in all honesty, it's the choice of the customer. And on a broader basis, we have, from the get-go, good buy-in in the way we explain what we did, but there are certain larger accounts which really take longer to be convinced that they did the right things and that the new product is good from the quality perspective. Hard to take the two apart, the one, can I meet them in-person versus how resilient is kind of the need to be convinced. But I think that's the 2 elements which kind of are playing against our expectation in February. I think the trend line is positive from each month to each month on what we're seeing on the share we have in those accounts. So I think overall, we're feeling good about being able to overcome this, but it's probably taken us longer than we had expected, yes.

The next question comes from Chris Gretler from Credit Suisse.

Still 3 question left actually. So the first is on retail Germany, Geers. I think you called out that wholesale did particularly well in Germany but not so much on the retail side. Could you maybe kind of comment on the Geers performance, in particular, will be the first question. Second question is on CI in China. You mentioned that, that has seen a very strong performance. Is this actually tender-related or kind of this kind of private clinic -- on the private clinic side. And then the last one is on gross margin. I'm still very impressed by your gross margin performance half year over half year, FX adjusted. Could you actually comment a bit more on kind of what's driving that? Because I guess there has been a lot of deleverage given kind of the volume decline year-over-year. So maybe obviously you could talk a bit on mix, costs, et cetera, unit costs and so on.

Chris, thanks for the question. So on retail Germany, we have taken the last step with regard to the brand alignment in Germany over the last 6 months, actually in the Q1. You may remember, we had about 200-plus stores which were still branded Vitakustik, and we've now concluded them being to merged into the Geers brand. A, this is work. Secondarily, the way the German regulations work, you then have a period in which you don't have a registration and you can't sell in that store. So we had to work through this. This is a couple of weeks' worth of revenue in this 200 stores in the Q1. So that's more of the background there. I think in the Q2, we did see a good performance in lead generation as well as in revenues across these now more than 800 Geers stores. And the performance there was good for us when we compare with the market growth in general. On the CI China side, it was more the private market side where we've seen a nice pickup. You may remember, that's the part which is also higher margins and the place which you really strategically would like to penetrate in China. So it wasn't a particular tender. I think on the tender side, the hospitals continue to implant but the pickup was more on the private market side, encouragingly. On the gross margins, Hartwig, do you want to pick up?

Yes. No, it's true, Chris, that there is an ASP pillar to that what we have done on the gross profit margin. There's also, however, cost improvements that we are doing. And we are benefiting from measures that we started last year, both on the structural side and continuing, as you see now on the structural side, but also in areas that we just call continuous improvement that we are, quarter-by-quarter, getting more refined on. And then there is a little bit, but it's really a smaller element also of government subsidies.

The next question comes from Falko Friedrichs from Deutsche Bank.

I have 2 questions left, please. Firstly, on Cochlear Implant, I think one aspect we didn't discuss yet is the competitive landscape. And you called it out in your press release as a headwind. Could you maybe provide us with a little bit of an update whether there's anything new here that is either concerning or actually supportive of your business going forward? And then secondly, on the U.S. market, could you just provide us with a bit of an update as to what is still driving these lower deliveries into the VA channel and also into the large retail chains and sort of what your outlook is here over the next few months?

Yes. Falko, thank you for the question. On the CI side, I think it's noted by everyone who follows the market that cochlear has launched a couple of product improvements on new products in this summer, which obviously were helping them to some degree here from a momentum perspective. I think they're also living off this, let's say, us working through the confidence side. I think from a base-product perspective, if it comes to the implant with a 3D MRI, which, as you've seen, drove a lot of growth for us in the first half year until we started to see the impact of the field corrective action, is still a strong solution, and we would call the 3D MRI still stronger, and it's still an important element. So in that regard, I think we have a good solution on the implant side. We have good processor technology, taking advantage of some of the Phonak brand. So as much as cochlear came out with some new things, I think we have a robust-enough product offering. And for us, the priority is really reconvincing the ones who are not that convinced yet. That will be my read there. On the VA side, the VA has taken a rather conservative approach to allowing people back to the clinics. By the way, this is not centrally managed, but it's pretty much clinic by clinic. We're seeing a significant, let's say, increase over the last couple of months. I think still some -- probably 10% or so to go. But it took them just a lot longer to feel comfortable to allowing people back into the clinics. On the large retailer side, I think there, we're a little bit dependent of potentially other priorities they have in their overall store. We've seen that at the beginning of the COVID pandemic, where for a retailer, food and other things was in so high demand that, that kind of shifted a little bit of the focus. We see this off and on here a little bit, but I think we're on a good pathway to get to the normal, let's say, share contribution in the market of that large retailer. So I think we'll see that normalize and then get back to a good year-over-year growth in the second half of this year.

The next question comes from Tom Jones from Berenberg.

Two questions. The first was just on guidance. Back in September, your H2 guidance specifically excluded any significant COVID impact and now it includes the effect of some moderate lockdown restrictions, yet the guidance is unchanged. Is that just because the restrictions have not yet reached the threshold for what you would call significant, although not really having an impact? Or are they having some impact and the underlying business is just performing better than you expected at the back end of September? So that's question one. And question two, and this kind of goes to judging sort of pent-up demand versus new customers. Could you give us some indication of how much of your revenue in your AC business is coming from existing users, how much is coming from people that renewal database but weren't kind of users and how much is coming from new leads or new customers? And I'm not after specific percentages, but just an idea of how that's trended over the last couple of months and where it sits versus last year.

Yes. Tom, thank you for the question. I think on the question on how do we think about the outlook or guidance, I think it's fair to say it's the latter. I think there are and we have to assume that there is some impact. It's moderate impact on the number of people coming to the store, but I think there is some impact. There will be probably some more cancellations. But we're also having a better momentum. So I think at the moment, those 2 level each other out, right? And we need to see, as I said, if we stay at the same level of, let's say, lower momentum in the market as we're seeing over the last couple of weeks, we're good with that for the time line somewhere until December. But it's clearly the better momentum we have from the Paradise, I would also say on the Audiological Care from the leads we're generating through the marketing activities that we're able to balance that out. On the question on the mix of sources for the leads on the Audiological Care, I think while it was, in the first quarter, pretty much a database in existing customers, we have come a long ways towards it being almost similar to before, between the 3 segments you're talking about. I think there's still a few percent points which we're living more out of the existing database. And I think we're doing a good job activating that. But the new customers have almost come back to the same ratio. And it really is pretty linear with the money we spend. So if we're driving the spend up, I think we can get to a normal balance here.

Okay. And just on the lead generation, are you noticing it becoming incrementally harder to generate new leads, either because of COVID or because everyone else has now joined the party and kind of ramped up the marketing expenditure on the new lead generation side?

I think on the lead generation side, the first comment here, we have very different sources of leads. You start somewhere at the ENT, which makes up 25%, perhaps up to 30% and it really is a corner where we depend on the ENTs being under full load. I think when we talk about lead generation more from a, let's say, digital or TV channel type of generation, that's what we need in order to then fill the remaining percentage points we have space in the stores. Those I think have, over the last 2 to 3 months, become more expensive. When you go back into our Q1, it was really cheap relative to any comparable time because nobody was investing, not just in hearing but across the board in many parts of retail. And I think people have started to reinvest into lead generation across the board. And so we've seen costs going up for placing things, no matter which channel. But I would say we're probably in a normal zone, perhaps a little higher than a year ago, but not substantially.

The next question comes from Jessie Kirby (sic) [ Issie Kirby ] from Redburn.

I just have 2, please. On the new store format, World of Hearing, appreciate you only have a handful of these currently open. I'm wondering, are you seeing any material difference in the rate of recovery in your new World of Hearing stores versus your traditional stores? And how are you thinking about opening these new stores in 2021? And then secondly, could you possibly comment on the rent reduction that benefited you in the first half, both in terms of the size of the savings, how long do you expect these to last and whether this was in the Audiological Care business? If so, do you think you will have any further room to negotiate with landlords going forward given the more fragile market for retail space, particularly in markets like the U.K.?

Issie, thank you for the questions. On the World of Hearing, I think from the last review, I do off memory, we've seen a similar recovery, not something which would be jumping into my eye that the curve was very different. I think we're living there from lead generation, but then also footfall traffic coming in. But pretty much similar, not black and white different. I think from the opening, we have no plans to change our plan, as we shared on the Capital Markets Day. I think for us, this is a very successful format. It brings significantly more revenue per store, obviously has also some more infrastructure cost. But it also has a very positive impact on the stores around from a pure, let's say, branding as well as specialization you can have in the store and then move more difficult patients there. So no change from COVID to the plan. We're going to push this. I think Christoph was up with the numbers there. I don't want to go off memory, but they are published in the material we had for the Capital Markets Day what our intended number of openings are over the next 12 and 24 months, but no change to the plan.

And then quickly on rent reductions. The geo portfolio that we are looking at with the larger markets, I mean, we have this over-indexing in Germany, in particular, led us to -- even though we drove it very hard, to not overextend there. And so I believe our action was mostly towards wave 1, and there is a lasting effect of this. But what is definitely still out there is, as you call it out also, that as the retail market, just generally in terms of real estate is softening out, that this is some more opportunity for us to kind of go do a second flush after the first flush of this idea. So we are not yet all done with that. I hope that helps.

Last question comes from Daniel Jelovcan from Mirabaud.

Just a question on -- I don't understand the performance difference between your own retail in the U.K. and for instance, Benelux or Netherlands. I mean both regions are in tough times. Why is there no recovery in the U.K. with similar lockdown profile as, for instance, in Belgium? And the second question is maybe long time, not heard, Lyric. I think you have launched Lyric4. Is there something to tell on that or is it just remains a very niche product?

Daniel, thanks for the question. So on your own retail, the U.K. was more, let's say, limiting in the first lockdown on what you were allowed to do from a sales perspective. So the guidance in their first wave was about not proactively selling hearing aids in the store. So you really could do service, but you were not allowed to sell hearing aids. That was different in the Netherlands. At this point, I think the U.K. lockdown was a pretty long one, given the challenges they had with infection rates and mortality. I think in the second one, they're taking a different approach there. So I would expect the U.K. in the second wave to be more behaving like the others. But the first was particular in hearing aids in some countries made certain decisions more draconian on the hearing aid sales. On the Lyric4, it is an improvement. We have made it smaller. We've also improved reliability, which is, at times on the Lyric, a little bit of a headwind over the years. It remains to be a product which has loyal consumers and people who really want to afford the extra price and take the advantage of the invisibility as well as the easier use because for 2 months you don't need to change your hearing aid. But it tends to be a small segment of the consumers. Therefore, we like the product. It's profitable in our portfolio, but it's not one we would expect to get, by factors, large enough.

I think it looks like there's no more questions, at least what I see on the screen from the operator. If that's the case, then I would say thank you for your interest and the time you spent with us for many good questions, underlines the interest. I wish everyone a good rest of the Monday and then a good work week and stay healthy and safe.

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.