Sonova Holding AG (SOON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sonova Holding AG Full Year Results 2021/2022 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Thomas Bernhardsgrutter, Director of Investor Relations. Please go ahead, sir.

Welcome, everyone to the full year 2021, '22 analyst meeting and conference call. My name is Thomas Bernhardsgrutter. 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, 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 2. And with this, I would like to pass the word on to Arnd.

Thank you, Thomas. Warm welcome from my side, 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 the 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 there's 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 build our strategy and march down the strategy. We 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 time frame, 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 2-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 they are particularly note around the higher store opening from a greenfield perspective but also from an M&A perspective. Clearly, a strong progress on the cochlear implant side. Unfortunately, we had a field corrective action 2 years ago. But I think it's fair to say with the numbers published, we're regaining market share and 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. And at the same time, getting the margin expansion equation right. We took a decision that we continue to drive our growth initiatives 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 their 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 the question of a 2-year CAGR of 9.7%. If you would put the market at 4% to 6%, which is our historical, you would say that's winning share. We should know that last year, not all markets have fully recovered. We were not yet at the 4% to 6% over 2 years at the market level. You see even a little bit more market share gains. EBITDA adjusted CHF 39.3 million in local currency. I talked about the balancing we have to do. If you look at the 2-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 from 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. We see if it works. Good way to measure if it works is if your performance is good from an outperformance of market top and bottom. And we haven't found significant flaws in our strategy. Therefore, we continue to drive down the strategy. You 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 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 a different tech and a different sales cycle. So in 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. I want to tap into 2 strategic priorities of ours briefly with a quick update leading innovation, most important for the cochlear implants and our 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 want it to look as much as a hearing aid. You can also see the Phonak Audéo 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 environment. 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 the expansion of the Audiological Care network, keep in mind, we're driving an omnichannel strategy, meaning we're building the capability to reach people in a lead generation world digitally. We also offer for whoever wants access from a remote fitting and second and third fitting environment. Although the vast majority of people want to have all interaction with a 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 these opportunities in the different markets. So you can see, in addition to the Alpaca, which was 220-point of sales in 1 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 OpEx 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 and 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 3 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 and inclusion side. So getting to the results here. I talked about the 29% on the growth side, it's unpacked by the different businesses. You see the 39.3% that is AC 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 slowing 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 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 went in the other direction. So if you 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 more on the balance sheet to significantly paying back. So hearing instruments, you can see the growth rate here at 25.4% and probably 1 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 VA 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 implant side on the hospitals. On the consumer hearing side, we are super happy that we closed the Sennheiser acquisition first of March. March as a month wasn't the strongest. You will not be surprised different than in 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 it 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 have a chance to look on this chart here, we were putting this in to help you because some people talk about 1 year or 2 years' growth rates. We talk about a 2-year CAGR. I find a 2-year CAGR, the most relevant number. You can see we were nicely growing in 2-year CAGRs 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 2 years ago by 160 basis points and you see the OpEx leverage here driving the 180 bps on the EBITDA margin over 2 years, 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 2 relevant information. The one, the fastest growing over the full year was the U.S. for us. The first half year is pretty strong. There was some pent-up demand coming to the market, but we're also doing well in 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. Now, everybody was in the 14% to 16% ZIP code here. But again, some markets, I voiced them over already, still had a headwind in the first half year or in the second. So I think still a little bit more to be done to fully recover. That comes to 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 here, and there was quite some dynamic here, right? You've seen the full year results. Now if we go down the second half year, you can see good top line but 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 the lead generation costs 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, but those 3 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 gross side. I want to go quickly into the hearing instruments segment. That's the segmental view. Good growth here, 9.4%; EBITDA at 19.2 % or 2 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 the profitability is pretty much self-explanatory, including the voiceover I have done. Looking on the hearing instruments segment, the sustained momentum of the Phonak Paradise have expanded further to the Unitron brand with the launch of Unitron BLU, which we've done last year, now bringing it to further form factors, including the ITE and now with the Slim and with the Fit. Good performance, as I said, on the private label in the U.S. and the VA side. On 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 a consistent ERP system globally. We are reaching more and 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 their journey. There were some capacity constraints in January and February, but they have normalized by now. 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, and 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 we are merging 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 3 weeks ago, that's the next generation of the 2 wireless with an active noise cancellation and get 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 2-year CAGR driven by the upgrades given that brought new processes out. We also see us regaining market share on the system placement side. But obviously, there still some more work to be done. On the profitability, I think I voiced most of the points over. With that, I want to ask Birgit up to share the financial slide, and I'll be back with a comment.

Good afternoon. So let's go to the financial highlights. But as you have seen Arnd already talked a bit about the P&L. So I'm going to make -- to try not to be too 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 franc because we had favorable FX impact, although small. Here, you can clearly see that the fundamentals of our industry remain strong, and that we see a sustained recovery in the global hearing care market. And despite the gross profit headwinds that I talked about in supply chain, we still are improving 90 basis points in local currency, and you also have seen the 2-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 costs and some pressure on ASP, and we can also discuss that, 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 CHF 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 slides. And this is despite this gross profit headwinds are all of our growth investments that 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. The EPS adjusted is CHF 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 CHF 764 million, and that is up 26.8% per year. You need to bear in mind that last year, we had a patent infringement award included in the numbers, which you see here in terms of the growth versus prior year. And then in terms of dividend, you will have seen that CHF 4.40, up 37.5%, and this represents a payout of 41%. This is also well in line with the EBITDA adjusted development. And then we completed the CHF 700 million share buyback and we announced a new 3-year share buyback program of CHF 1.5 billion, which started in April '22. 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 0.4x, and we are targeting 1x to 1.5x over time. There's the bridge that is well known to you. So with our EBITDA and EBITDA margin components. And so here, you see the CHF 240 million added through organic growth. And you also see that, 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 0-point -- then the margin decreases with 0.7%. Then you see the adjustments that we have there of CHF 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 the -- again, the 39.3% solid growth. And then when you -- 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 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 of 15%, 15.5%. Then on the 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 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, and here and you also saw it in the 2-year slides you see here, you also see the 2-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 2 years. So with a 5.6% increase over 2 years in the compound annual growth rate. And you also see that we keep on investing in R&D. You see the 2-year CAGR at 19.3%, but this includes the step-up in amortization that I already talked about. But if you take that out, then we still grow double digit 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 2 years. And this includes all of our investments in network expansion, also lead 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 1 -- I mean it's relatively flat versus 2 years ago. And then here is the bridge between the reported and the adjusted EBITDA. So you see the part relating to restructuring costs of CHF 13.5 million and then CHF 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 CHF 16 million, of which the majority is a settlement agreement in principle with the U.S. Department of justice. And then the rest of smaller part is ongoing patent litigation in the CI segment. And then on the earnings per share here between reported and adjusted, you see that is a slight positive impact from -- related to tax reform. Then if we go to the operating free cash flow. So in here, I remind you, the CHF 602 million, that includes this already explained patent infringement award. 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 working capital. So despite our higher safety stock. So we were clearly impacted due to the supply chain constraints, and you also see a 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 the DSO improving by 4 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 capital employed, that is mainly due to acquisition effects. Our return on capital employed improved obviously driven by strong profit growth. And then here you see our net debt standing at CHF 1 billion. And this is translated into a 1x 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 CHF 70 million to CHF 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 bolt-ons. And then including Alpaca and Sennheiser, that's what you see there is CHF 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 a 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. While there are certain headwinds, we assume they stay at about the same level, meaning, yes, there is 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 -- particularly on the revenue side from the Sennheiser and Alpaca and 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 franc by 1 percentage points to 2 percentage points on the top line and 2 percentage points to 3 percentage points on the bottom line. Now one thing to unpack this 17% to 21% and the 12% to 18%, I think clearly, in particular, the Sennheiser acquisition at the beginning is decretive to the profit margin. But we still look at both acquisitions -- good acquisitions because, a, they allow us to reach more consumers with the Sennheiser that opens a new adjacent segment we're playing in and can bring the Sennheiser and the Sonova strengths together. And over time, there's a good prospect for further margin improvements coming out of that underlying base. You look to 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, 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 said relative to the midterm targets, which were 7% to 11%. We think there's 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 and some of the things improving, which we had as 1 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 2 together, that basis 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 we got to what we see as a guidance. Obviously, there is quite some dynamic. Therefore, the ranges are a little broader than we normally use. So normally 2% or 3% are on the top and we're 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 prepared remarks, I'm asking Birgit to come back, and we would open it for Q&A. Thomas, can you briefly re-explain how we want to handle questions in the room and on the phone.

Yes. We will 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.

It's Oliver Metzger from ODDO BHF. First question is about your basically announced variable hearing aid which will come most likely under Sennheiser umbrella. So if we talk about the whole OTC opportunity. Bose has the initial start of the whole OTC campaign or if the idea basically has withdrawn from market after -- not more than 1 year after first launch. And the only offering we see right now is GN's 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 1 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 GN 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 more financial question, but it's also related to Sennheiser. So can you comment on the marketing spend for the Sennheiser consumable business? Because data suggests that there is a ramp-up of at least Internet-based marketing over the last 1, 2 months? And what does it mean for your marketing expenses next year?

So first on the OTC side, we have always said that hearable form factor for situational hearing, call it 2 to 3 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 enhance hearable, right? It's less challenging for people to buy a device, which is a great hearable. And then, 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, 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 and 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 and 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 regulation, it's about does the device offer benefit and can I self-fit. And I think that's where you've seen the Bose's and others working on. I think technically, we're able to do those kind of things. So you could even imagine we have some pilot somewhere, right, we do. But we did 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 learn 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 day-type of self-fitting device is at the end, anyone has a technology and a segmentation and are targeting where you can make it economically viral, right? Therefore, our focus at this point of time is the speech enhance hearable, also not as conflicting to our channel. We're 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 2 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 a full year, what is normal in product launch cycles, you'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 the off-line, you leave a lot in the channel. So we're over time going to shift to more online. So you will see more on the external marketing spend. It is ultimately substituting what you otherwise pay to the best price and others.

I 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 our H1 versus H2, maybe the key building blocks, you mentioned pent-up demand, kind of et cetera.

I think from a pent-up demand perspective, this is kind of a gradual curve, I think a 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 headwind 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 remaining blocks you would call out, pent-up demand?

Yes. For the rest, it's 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 of the October, November, towards 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 the 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, CHF 280 million to CHF 300 million revenue, probably not as dramatic. But otherwise, relative to our normal seasonalities, I think the second half will be somewhat stronger on the new product side.

Okay. And then I have a question on pricing. Some of your competitors also commented on hearing devices that they are increasing prices. Maybe could you share your thoughts on pricing and particularly also discounting and maybe differentiate 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 relatively captive. So I think that's the place where we can increase prices, probably not with a currently quoted inflations, but probably somewhat in that direction. On the wholesale -- on cochlear implants, we were doing fine on the back end of our technology. We were putting it up on the list prices right now. On the hearing 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, adjust list price is potentially a second round. New product probably will aim to a higher delta versus the prior product than we would have done historically. Historically, we would have said it's about 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.

The discounting pattern. Has that changed in the last few weeks since 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 discount 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 see 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?

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

The first one, maybe on the 2 product launches Audéo Fit and also the Phonak Slim. I mean pretty interesting is that you changed the design factor and also introduced basically sensors. Is that something we could imagine as becoming more standard also with your new platform that you introduced both things in 1 new premium device? And then adding up on the question on price increases, I mean, a good part of your business is also done with governmental health care systems and insurance companies, how is the pricing going there? Because I would 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, we have much greater pricing power.

Thank you for the question. So on the Slim, that's certainly a unique form factor, which we hope will be like the lot and help us to bring new people to Phonak. I assume it will be meaningful that all of our VOC 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 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 miniaturization 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 functionality. I think we will learn more as we go and 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 1 step at a 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 time line for which your price has been 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 independents, smaller retail chains, we can have it in our yearly or every 2-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, yes. But in general, the reimbursement will not be adjusted because of the inflationary pressures on what the consumer gets, we can still increase if we deem to do that, they're co-pay or they're up here.

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 that assumption?

Yes. I think it would be difficult to assume that the large accounts can move the price in the next 6 to 9 months easily and then it gets a little short in your time window here, right? As 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 more agile.

The next question is from Maja Pataki from Kepler.

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 a strong Christmas period. But could you -- 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 at Sennheiser for the rest the year? And then my second question is related also to the product launches that you've announced a couple of weeks ago, really interesting products, really bringing something new to the table. It -- I'm just wondering, 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?

On the Sennheiser side, I would put the first calendar quarter into, this is always a slow quarter, and we did struggle on the component availability side. January and February was on the "balance sheet" of the prior owner, much was on ours. We have seen very meaningful improvements from 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 3 were struggling with some component issues. We didn't speak that 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 Life for all consumers a couple of weeks ago, which is the waterproof technology for the hearing aid. And then on the Fit and the 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 chargers. So no competitive discussion. We would have launched -- liked to launched them 2 months earlier than we would have our normal spring season before the fall season. Now we're 1 or 2 months late, but it's really internal matters/supply availability. The Slim and the Fit, we have always planned to launch at the back end of 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 on to a finishing, you're Slim and finishing your Fit. And given that they are relevant, but not as big from their revenue contribution, we tend to bring these line extensions at the back end of the new platform. So don't read anything competitively in there. That was the plan, probably 2 months late because of component issues.

The next question comes from David Adlington from JPMorgan.

Maybe just quickly on the cochlear business. I just want to hear your thoughts on Demant's decision to exit the market and whether you thought that was an opportunity for you guys? And then secondly, sorry if I missed it, but on the consumer business, the month that you have the business, have you disclosed the loss that you made within that month.

Yes, we did disclose it. It's in the annual report. It's about CHF 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 CHF 9 million, and you normally would be running at -- take 12% -- take 8% out of CHF 250 million or so, right? So it's not a concern on the OpEx level. It wasn't a concern on the margin or on the profit contribution side, it was a pure volume matter. But that's in our second half year profitability. And on the Demant decision, I think ultimately, if you look at the playing field there, we were 4 players in the cochlear implant space. One was coming "even later than the Advanced Bionics team" because that was the 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 get that the small market share they had and then a field corrective action, they have to think about how much longer do we support this -- and how much time line do we have? And can you even follow the 3 larger ones from that small position. So that I think must have been their thinking. I think for us, on the cochlear implant 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 base is with somebody else's implant, we at least first have to develop a process that you can put on that implant because they're technologically so different. So on the cochlear implant side, not such a higher traction to take over 10,000 or 15,000 people who have an implant. If that scale is too small, even struggle developing the processor from a cost perspective there.

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

Thanks, Thomas. I was a bit surprised that you mentioned Germany was a bit subdued because your other bigger competitor was quite positive on Germany. And also on France, you haven't talked a lot and France was -- in Q1 calendar was better than everyone expected because of the base effect. So I wonder how you developed in those 2 countries.

Yes. 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 far larger market share in France. So they have over proportionately benefited from that lift, but we also did see the lift. Now on the Germany perspective, looking at the data from GSK, but 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, particularly in the first half year, while the government and I talk our first half years are 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., U.K. 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 from the -- retail, yes, but wholesale is, you're quite big. Just to be sure.

That's true, yes. And we had good growth in France. So I wouldn't -- it's not an area we worry, but again, I think if we -- it's probably become more from when we compare with other people, they are relative France shares larger than ours, especially the ones we have a meaningful retail footprint. But the market was obviously very strong, and it did tell us.

And the second question, you didn't talk about U.S. own retail, which is now being boosted by Alpaca but you 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 call the golden belt and so on. So would that bring your margin in own 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 subsegments 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 because U.S. has very strong regional TV channels in case you want to go TV there, even from a digital, you can obviously target, right? So in that regard, we think about the U.S. as a very large country, with many subsegments 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 we held on after our restructuring. We did some bolt-ons in Florida last year to dense -- a greater, 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, but 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 towards 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 profitably 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 slimmed 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 a good operator in the U.S. if we 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.

Any other questions.

Looking just at the geographical distribution of sales, we see that APAC is still relatively modest to the other regions. What are the challenges that you need there? Do you have plans to expand, let's say, retail? Or do you prefer to go omnichannel because these are countries with relatively big populations and density?

I think on Asia side, it starts with an average for 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 awareness creation in a Tencent environment, in AliHealth 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 a digital front end that you can at least experiment with the back end, right? So call it 15 stores, one of them being a 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 company store revenue per store because they're 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 high appeal and intrigue, I would say, in 5 to 10 years. It's a market where you have to be with the right footprint on the retail side. And now we need to find a way.

[Operator Instructions]

It's again Oliver Metzger from ODDO BHF. One question regarding your hearing instruments. So currently, you're in the 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 the 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, our is 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 hearing instrument phasing the described weakness in H1 is less profound than it was in previous cycles.

Yes, 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. As you can see from the 2-year CAGRs and from the 1-year growth rate. So in that regard, I think it has a good place in the market. You see also us doing some line extensions at least with a 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 side. It's been very vocal that audiological leadership is a quite tenet of us, translated ultimately into algorithms and other things. So I think is 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, you come up with a 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 rather debate with me 6% to 9% is too high or too low, but just the relative side, I would say what AC has done Audiological Care and incremental bolt-ons and greenfields should be helping to have incremental growth above market to a similar degree as the new product comes 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 here, I would think new product cycle has an impact in our world.

Sibylle Bischofberger, Bank of Vontobel. 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 CHF 15 million to CHF 20 million a year, how much is included there in the current year?

Go ahead, Birgit.

Yes, I can answer on the adjustments. So -- so it's difficult to foresee, of course, on the legal side. So -- but we currently foresee -- so we have a provision in this fiscal year that you are presenting that you have seen. But for next year, we, of course, do not plan anything further at the moment and in the restructuring, it's the same kind of amount as what you saw for the fiscal year that we've presented. And then your other question was, sorry?

From these cost savings of CHF 15 million to CHF 20 million, you expect to reach from 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?

Yes, I would think we probably have half of impact to the other 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 organically in wholesale and retail, exactly the same in the second half. So is it fair to say that -- when I look now at the quarters within the second half that you had some issues of the components more in the first quarter of the second half, right? So in Q4 calendar. So probably Q1 calendar, there was a notch weather. So I'm looking for the exit rate. So I guess the run rate at the moment is still quite strong, right?

I would say it's -- in the sum, 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 we're stepping up second half. I think on the hearing instruments side, launching the Life and the Fit and Slim comes to a good time to help us a little bit. They were not in March. The Life came in just 2 weeks ago, the Slim and the Fit as we speak.

Operator, are there any more questions from the phone?

So far, there are no more questions from the phone?

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

Thanks again. Thanks, Birgit. Thanks, Thomas, for helping me here. Thanks for your interest in 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 2-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.