Sonova Holding AG (SOON) Earnings Call Transcript & Summary

Good morning, good day, everyone. We know it's a busy day on your end, given that many of you will follow Straumann On Demand, and then we also come out with an ad hoc announcement here on top of it. As you can imagine, we would have liked to have a better news on our market, but we still felt compelled to give you in due time an update here. So on that regard, thank you for joining. With me is Birgit Conix, our CFO; and Thomas Bernhardsgrutter. I'm planning to voice over the key elements of the announcement we did with a couple of, let's say, background infos, and then we would expect questions to come our way. So we have announced this morning an interim business update outside our regular reporting schedule. From a high level, we're seeing slower than initially anticipated hearing care markets which are adversely impacting the sales, but also the profitability because it's mainly the high-priced markets, namely the U.S., which are significantly slower. We also have seen additional headwinds on higher component and transportation costs than what we had expected. Therefore, as you have seen from the numbers, the impact is more meaningful or more significant on the profitability side than the revenue side. Allow me to put this briefly into context. And with regard to the market, when we came out with our full year guidance, that was in May, we had certain assumptions about how the market evolves. I think we're all aware, this is a very dynamic environment, if you want to call it that way, with regard to a war in Europe, with regard to significant inflationary pressures from many different corners and continued supply chain issues, not just on microelectronics, but also other things. And so it's really hard to predict, while we're in such a high inflationary environment, which we haven't seen for many decades, what ultimately the consumer behavior in our industry is. We knew the 2008, 2009 slowdown in GDP, but that wasn't linked to high prices. So what we have seen over the last couple of months that in reality, there is more impact to the consumer confidence probably also fair to say that we didn't plan with such high inflationary pressures. I think the other one to keep in mind, and that's particularly true for the U.S., where our target group depends a lot on 401(k)s, which are directly linked to share prices, the first half of the year was a quite dramatic reduction in average share prices in the world, impacting what people have in their pension funds. So in that regard, I would say, it's probably more severe from the response, but also from the parameters driving the behavior than what we have thought 3 months ago, therefore, I think we see a slower demand, particularly in the U.S., and we find it appropriate to reflect on that and then share back what we think about the first half year because that's coming up soon. But -- and secondarily, also what our best read on the second half year is. Highlights of the messages here, subdued volume growth and the higher price tier in care markets and distribution channels. What we mean with that is that particular on the independent local open market in the U.S., we have seen lower revenues. But in other channels, we've seen continued good growth for our business. And with that, the private market in the United States is the highest price part of our revenue mix. I think it's also fair to say that when we looked at July, and here I'm commenting on market data, which in some of the markets we see on a monthly basis, we have seen a further decline in momentum in the U.S. but also in Germany, which is publishing currently on a monthly basis, and on Canada. So clearly, July was a softer month than the -- our Q1 was. We don't know if this is a onetime effect. We're looking at a better momentum right now for the May, but it certainly raises the question of what's the trend line for the remainder of the year. I commented on continued headwinds from a transportation component cost perspective. I think it's also fair to say, if you look at EBITDA year-over-year, we have not so much against our change here. We also have a higher wage inflation, which is weighing on the profitability. So we expect for the first half year growth in consolidated sales of approximately 16% to 18%. Keep in mind that does include the lift out of the Alpaca acquisition and the Sennheiser acquisition, and then adjusted EBITDA to remain largely unchanged versus the prior year, and both measured on constant exchange rates. Now reflecting on the results we expect for the first half year, which clearly are below what we had expected coming into the year. But also our sentiment that the momentum will remain somewhat lower than what we had assumed at the beginning of the year, we're adjusting our full year guidance. And that led to the numbers you already have seen where we expect a growth in the range of 15% to 19% and an adjusted EBITDA growth of 6% to 10%, both measured on constant exchange rates. In my eyes, that outlook implies a sound sales performance in the second half because, as you can hear between the lines, we assume that we see slowing of the market momentum from the first half year to the second half year to a degree, given that the July was lower than the Q1. I think if you then look at the numbers, and you factor in that we assume the momentum in the market will be lower from a year-over-year growth than in the first half year, you can see that we have a good confidence in our ability to drive our own agenda. I think to a large degree, this is based on our knowledge, which we have shared today with you, that the new platform launch which most of you have expected is imminent and will help us, particularly in the second half year, potentially also slightly in the first half year. And we talk about a new platform, I will not share what will be in the release when we launch the product, but you have to assume this is a significant step of innovation, elevating the hearing performance by a meaningful step probably comparable to what you've seen on the Paradise or a Marvel level. The stronger performance in the second half year also implies the typically higher seasonality in the consumer hearing business. Why is that relevant from a year-over-year? Because we acquired the business new, and so the inorganic component lifts off the Q3 -- our Q3, so the Christmas season in the consumer hearing business to be significantly higher than all the other quarters. We have a strict cost control in place, which we put in place over the last couple of months. We have also implemented pricing increases. We've done a second wave in July 2022 after first wave in the first half of the year, we do expect that to benefit us on the EBITA side. And so when you unpeel the full year guidance versus the first half year outlook here, you can see that we expect a better year-over-year EBITA performance in the second half year. Obviously, the new product launch, the consumer hearing business on a higher level, the price improvements, and then please keep in mind last year's second half was from a comp basis probably softer than our first half year, where we were still on a low cost base coming out of COVID. So that's what we have announced with some incremental color here. Alice, I would now open for questions on the line.

Our first question comes from the line of Chris Gretler with Crédit Suisse.

Thank you, operator. Good morning. And I just wanted to quickly ask 2 things. First, on the cost side, could you maybe break out the different elements, kind of the product mix and the general increase in cost that you experienced in terms of no impact?

There's 2 cost components, which were not helping. I think the first one is in the hearing instruments business where we have a margin level which is below what we had expected, which you can put, call it, to 1/3 into additional transportation cost and component cost, but 2/3 really come out of channel and DIO mix. Keep in mind, we have significantly different price points in the independents in the U.S. So on the gross profit side, hearing instruments really more of a price mix matter. But also the logistics cost and the component cost. I think the second one, we still have seen in the first quarter in order to generate the momentum on the Audiological Care side whilst we were still running at a higher-than-expected and higher-than-historical lead generation cost. I think that's starting to come down, but not as fast as we have thought.

Okay. And the second question is just you mentioned the U.S. specifically as the market that tends to slowdown. Is there any other markets that you would call out? I guess, France has a pretty high comp. Is there any other markets where you see more of a relevant slowdown?

Yes. Let me comment on the U.S. side. I think you're talking for the 4 months of our fiscal year at a low single-digit negative unit volume in the market. But stronger in the July. You need to see how much that's a specific for this summer versus more of a run rate side. France was weaker in the -- our Q1, so the calendar Q2 in the high single digit as a market, to some degree, expected. What we also see as softer is the U.K., the private market. So that's kind of the story for the -- for our fiscal Q1. We've seen, and that is really July, we need to see how that evolves. We've seen also more softening in many other European markets, but we also heard people argue, it may have been the heat wave, it may have been other reasons, perhaps people went early on vacation after COVID. So I think the jury is out on the European markets, and our cautiousness with regard to the second half year. But measurable in the Q1 U.S., U.K. private market and then, let's say, France, not unexpected.

The next question comes from the line of Maja Pataki with Kepler.

I have 2 as well. First, just to understand a bit, Arnd, your commentary around the cost side. I understand the channel mix impact on -- or the geographic and channel mix impact on margins on the hearing side. But could you elaborate whether the transport costs and cost for components and wage inflation have changed dramatically since your release in May? Or it's basically more like, okay, it's on elevated levels, we didn't account for the margin impact from the mix, the change? That's number one. And the second question is, I am aware of the fact that you don't have a crystal ball, but arguably, we can say, yes, inflation is high, but we possibly haven't seen the biggest brunt of it hitting consumers when we enter winter season and heating costs, electricity costs are really going to take a dramatic toll. How negative is your assumption for the second half of the year? Or could you just elaborate a bit what you expect from a consumer sentiment? Do you think it's going to deteriorate? Do you think it's going to stay at par? Just to have a bit of a level.

Yes. So with regard to the cost here, I think the freight was a continued negative surprise. To give you an order of magnitude, we've seen year-to-date freight costs being about 40% higher than last year. And I think that's clearly tied to more challenges with regard to more supply chain matters in the world, probably not only the microelectronics, but we've seen China closing their harbor, which makes a huge difference when from China you have to go a lot of air traffic, and everybody does. I think you'll also see the impact of the higher fuel prices, which immediately get translated into surcharges, right? I think on the component side, we have some on the microelectronics where people are still using the opportunity to increase prices on long-term contracts. So I think these are the surprises. I think the wage increases, we knew, we had factored in. This was more a comment if you look at the year-over-year. I think from the outlook for the second half, I think we're muted. I think our assumption in the -- baked into the numbers here assumes that the second half year is collared by a low single-digit less positive from a growth perspective globally in our market than the first half year. And I think that is credit in our eyes, too. There seems to be not an easy solution to the inflation. Yes, there's people who are concerned about the energy prices. I think in our market for the U.S., the share prices, I do believe, play a big role in the 401(k) for the elderly population. And I wouldn't expect that to dramatically change. So assume under our numbers that our growth staying flattish relative to the growth we had in the first half year, the market being softer, we do expect for the new product to win some share.

The next question comes from the line of Veronika Dubajova with Citi.

I just want to follow up on a couple of things. One is just to, Arnd, maybe understand the magnitude of the price increases that you've taken in July. And I guess how you're thinking about that. As far as the competitive position that you have is concerned, are you seeing other players follow suit with similar price increases or not at this stage? And that would be the first one. And I guess just related to that, that 2-point reduction in the revenue growth guidance. Maybe you can decompose that? Is that 4% in unit terms and a 2% incremental price against that, if you can just give us some flavor for how significant that price increase is? That would be my first one. And then the second question just for housekeeping. Any implications you would expect this to have on the midterm guidance that you've communicated?

Thank you, Veronika, and good to have you back on the call. From a price perspective, it is public because we shared it with the customer so I can share this reasonably well. I think from a list price increase, we have guide in anything between 5% to 6% -- 5% to 6.5% for different geographies. But you need to keep in mind that only 50% of our revenue is places where we can go up by list price and then see an impact because others are under long-term contracts. From a competitive perspective, competition by and large, has followed suit with their own price increase announcements. That really becomes a question who is pulling those through and who allows that to go away by promotions and others. And there, we don't have any insight. But at least, we collectively totally uncoordinated, as you would expect from a compliance perspective, but one after the other have increased prices, list prices by about 3% in the first half in Jan, and then about 6% in the July time frame. In that regard, I would expect a meaningful fall through. But again keep in mind, you have 2 elements, only 50% are addressed by list prices and the rest is really big contract negotiations, which are not very easy. And then the second one is there is some leakage here. Now translating this into the growth equation. I must say, in the first half when we gave the guidance, we already had the plan to make a change on price in September. So I would say all of the reduction we're doing on the growth expectation is an assumption on lower market in terms of unit volume. Now the third question. I didn't -- oh, from a midterm target perspective. Honestly, no impact. I think we're having to go through this inflationary environment as a world. I think some will argue, after which, there may be some pent-up demand. Others will argue, no, that's not as linear. But we don't see an impact to the viability of our industry and business and the interest of our target audience to ultimately get better hearing help. So no change on the midterm.

Understood. And if I can squeeze in a quick follow-up, if that's all right. Just on the mix development in the second half, I guess I understand, obviously, you've reduced your volume growth expectations, but what does the guidance assume for mix? Are you assuming mix sequentially remains unchanged? Are you assuming it deteriorates further? And if you can give any quantitative expectations around that, that would be great?

Yes. I think our assumption was that the mix by DIO stays directly as it was in the first 4 months, so also baked in into our expectations for the first half year. I think our opinion is, this is only an opinion, and this is the first time in a high inflationary environment as a company, at least with the analysis we tend to do, is that probably Europe is less hard hit because our thesis about the U.S. is the link to the 401(k) in addition to higher costs. But I don't -- we don't have reason to assume the mix is going to now change. I think in all places, you're going to potentially see people be a little bit more careful while the inflation stays high.

The next question comes from the line of Oliver Metzger with ODDO.

Yes. The first one is on your comments regarding the patient's behavior. So as you said there are some reluctance. Historically, during economic crisis, we saw more of a down-trading towards lower-priced devices. Now basically, you say that they are more reluctant with regard that they just don't buy the hearing aid. It's interesting because this we have seen only once, and that was 2 years ago related to the pandemic, and we all know that the purchase of hearing aids is something which you can postpone for a certain extent as -- but hearing loss is not better. So what -- if you just give your gut feeling, what do you think, is it a delay which might be more in the 3, 6 months territory and that you will see some subsequent pent-up demand afterwards? Or how do you evaluate this situation? The second question is also regarding your imminent product launch where you basically, it's quite clear that it will come soon. How sensible is it to launch a new product in a soft market, in particular from a volume perspective? During the corona pandemic, we saw a competitor which launched basically directly into the weak market, and it was most likely the worst launch we have seen over the last decade, it was a quite negative impact. So potentially, you can give a comment also about your launch strategy as it might be sensible even to postpone a launch after basically volume development has normalized to a certain extent?

Oliver, thanks for the question. Yes, it's uncharted territory with the hyperinflation and the strong compression on the share prices if you compare to a 2008, 2009 recession. It's perhaps closer to COVID, at least what we see in behavior, but by no means at the same order of magnitude, we're talking about a couple of percentage points lower demand. And you can see we had a good growth in the first half year to translate it, it would be around the 5% organic growth year-over-year. So we're talking about not the same problem in size as with COVID. Why do we think -- and by the way, just actually looking through all the numbers, we have not seen a meaningful downtrading, even not in the U.S. So it seems to me, more a binary decision than in a recession a la 2008, 2009. And I think that comes probably because of the numbers being a lot bigger if you have an inflation of, call it, 8% to 10% and then it gets published every day in the news. And then on top, you lost probably 40% in your 401(k). There may be some people who say, I really need to think about my money, including what I have for the remainder of my pensions as long as the share prices are this low. And I think that's very different to there's a recession and the GDP doesn't grow, but my pension is not that much impacted. And I don't have 10% and perhaps 20% in your real inflation if you only look at energy and food, right? So I think our thesis is this is here more if somebody wants the hearing aid and they think they have enough money somewhere on the side. Then this is a good time to do it. We haven't seen the down-trading. But I think there are more people holding back. That could trigger some pent-up demand. My only word of caution, half of our volume, order of magnitude, is new customers coming to the industry, half of the volume is people who are looking for a replacement of an existing device. I always believe the pent-up demand is more the people who know they're up after 5 years. It's hard enough to convince people to come to the category. I think if they can fund for a year, you still have the same work in investment to do to convince them. On the product launch, we don't think there's any link between the market being at 3% growth versus 5% growth to when we launch. I think launching is super important in a competitive environment. Keep in mind, we launched our Paradise at the second quarter of COVID. And we had people asking what's the threshold? How much does the market need to be back? And we said 70%. Fortunately, in that quarter, we had 100% of prior year. And we had a very successful Paradise launch. So in that regard, I don't think at this order of magnitude of the market growing somewhat slower and a little bit more strongly in the U.S., we would hold the launch. It's just: a, it's important to get the product out. It's important to be in the right position against the competition. We want to take full advantage while the technology is new.

The next question comes from the line of Urs Kunz with Research Partners.

Questions, I have 2. First is, would you imagine that there could also be some people holding back from buying hearing aids in the U.S. because of the imminent OTC regulation launch? And the second question regarding exchange rates. You said they have now a negative impact on sales and EBITDA. Could you elaborate a little bit how much you see that is if the currency rates stay at these levels?

Let me cover the first one, and I think Birgit will comment on the FX here. On the OTC, certainly, not on the order of magnitude of the slower U.S. market. I think OTC is something which we watch carefully. First products are in the market. Bose had launched a product just a couple of months ago. They now have decided to not sell themselves anymore, but there are offerings out there. Eargo is out there, and they have a small share of the market. So I don't think this is going to impact the order of magnitude of a change from a call it, mid-single-digit unit growth to what I said, a low single-digit negative right now. I think that's really more economics. Birgit?

So on the FX, so when you looked at our full year presentation, we said we have a low single-digit tailwind in -- on the revenues. And there, you could expect a low single-digit headwind so that, that would reverse. But it's difficult to quantify at this moment because given the high volatility in the currencies in the recent weeks. It's really difficult to make an explicit statement on this. So -- and we do provide sensitivities in the investor presentation as you will see and also for reference, the euro and the U.S. dollar each represent like 1/3 of the revenue base.

And on the operating level, it's about the same?

So it's -- no, if you look at the EBITDA, it's a higher impact than sales, than what we typically see. So there, the headwind would be -- would have a more -- an overproportionate impact.

The next question comes from the line of David Adlington with JPMorgan.

Most of them have been answered. And apologies if you said this earlier in the comments, but I think you talked about July being slower than expected. Do you have any early data on August?

Yes, August is more back to what we've seen in Q1, David, fortunately, but we're only in, what now, 2.5 weeks. So we're trying to wrap our head around was there some timing difference on how people were coming to stores based on vacation and weather and whatever else. But I think July was low, August is getting better, but only in line with what we've seen in the Q1.

The next question comes from the line of Daniel Buchta with ZKB.

Maybe a follow-up question on pricing. I mean, you mentioned the other 50% of your revenue base where you cannot adjust prices swiftly. I mean, can you share a little bit more insight how the price discussions with VA, with Costco and similar players are going? And then also maybe if we look into the year already a little bit, I mean, we see now the headwinds you see due to inflation. Hopefully, you can pass on now over the course of the year more and more of that. Would you expect that next year, you have an incremental margin benefit again from the higher sales prices? Or how do you expect this to be the case then going forward in -- from next year and afterwards? And then you mentioned the seasonality in the Sennheiser business. I mean, is the rather soft first half you see with Sennheiser just seasonality? Or with Sennheiser now being a little bit longer within the Sonova setup, is there anything else than that, that may worry you a little bit more, the competitive environment, for example, or things like that?

Daniel, thank you for the questions. I would like to not comment too much about big account and pricing there. I would simply say the ones with significant growth year-over-year are in a better position to put that into a conversation on pricing. There are at least one larger one, which is very significantly growing on the U.S. side, right? So one needs the fact that is in there. But overall, we're doing our best in order to make sure people understand the value we add. And secondarily, that we do have factor cost issues or input cost issues. On your question with regard to next year, I think not giving a guidance already for the next year. But if you think it through, you would say, some of the cost increases should normalize back again. Now the timing is a little hard, but when you have lockdowns in freight systems and logistics, normally, when that is out of the system, it takes 6 to 12 months, but then normally, the freight costs are going down again. right? You could argue the same on microelectronics, at least if you come to a world after everybody increases capacity. And we know that the companies are busy on that. At the end, it becomes a buyer market. Right now it's a supplier market. So I think that will have a positive impact. I mean, we will most likely not be able to claw back the wage increases. I think you're going to see continued wage increases over the years to come. From a seasonality perspective on the CHP, I must say we are encouraged by the first couple of months from CHP on the top line side outside of the nationality, but we didn't know that seasonality when we planned the year. We've seen a successful launch of a product called Momentum 3, which is the new true wireless, and it has been received very well. You can see this in the ratings the product gets on the online marketplaces. And just a week ago, we launched what's called Momentum 4, which is the new flagship for the over-the-ear headsets. And again, very well received in the market. We also see this in the initial sales numbers. So I think from a product road map perspective, the team has gotten their product out. In the first quarter with us, there were still supply issues on the hearing product ranges. They have TV listeners predominantly in there. That is getting better. We had planned with that. We knew that. So in that regard, I think 2 successful product launches for the 2 largest products, which we expected measured on revenue impact. I think it is really seasonality. I think what is important when seeing seasonality through and also the EBITDA here, because the business is only in that mid-single digit, and we're moving it up as we go. You have to assume that the first half year was negative, if you assume that, call it, 40% of your revenue happens in Q3, right? So a little bit of help also when you do the EBITDA bridge from first half to second half year.

Ladies and gentlemen, that was the last question. I would like to turn the conference back over to Arnd Kaldowski for any closing remarks. Mr. Kaldowski?

Yes. Thanks again for taking time on short notice. I hope we gave you good chance to understand not just how we're doing, but as much as we can on how we look at the market. I know this is a tricky environment for us as well as for you. So it was our intent to give you a heads up when we feel we should. Thanks for your interest. And now I'll let you go to the other places you need to go with the busy schedules today. Thank you.