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. I would like to remind you that all participants are in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Thomas Benhard Schroeter, 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 and A session, we kindly ask you to register under the link provided on our homepage under the IR section. There you will receive a dedicated dial in 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 Kaldovsky, 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 Gravenau, 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 and 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 hit 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 with the intent to giving us enough flexibility with regard to the ability to provide meaningful profitability, but at the same time, freeing up capacity 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 Cinnova 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% NLC, 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. A good EPS performance, by the way, EBITDA 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 has reported as 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 marble to the Paradise, but also in the price realization we were able to realize. Now coming to the outlook session, certainly a point of interest here. I think a 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 stores 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. I want to go a little deeper into the Phonak audio paradise here and just voice over what the consumers like about it.
I think the biggest positive we hear is around unrivaled sound quality. 3 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 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 environment where we made a big step forward.
And then thirdly, if 2 individuals are moving next to each other with the accelerometer, 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 a new tap control, due to the accelerometer in the product, we allow for easier interaction with your 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, you describe a product and then the audiologist or hearing care professional really wants to try it. And that's a little difficult in a 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 1 by 1, 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 independence 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 2nd week already bought the next versions, which is a good indicator for how what feedback do they get from the initial fitted devices from the consumers. That number is in the same range as the marble.
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 thirds seeing the Paradise as being next level relative to the Marvel, in our eyes, also is a high number. You can see the end 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.
Sales side on the group level, close to prior year in the second quarter, high single digit growth in September. You see on the EBITDA line a significant FX headwind, which I'm sure Hartwig will talk more about. And then you see the EBITDA margin adjusted, just being shy 190 basis points of prior year despite the low volumes here in the Q1 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 Q1 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 two 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 that time and how they reach customers was a plus for us here in the 1st 6 months. I think on the Audiological Care side, a good gradual improvement month over month. We are returning to mid single digit growth in September. We have 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 it 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 work and seeing the improvements step by step.
So a solid performance in light of COVID-nineteen. 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 benefits by €50,000,000 to €70,000,000 by end of the year. We're making good progress. The things we had 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 Adelaide out here. The team is doing a good job on the execution. You've seen the restructuring cost was €21,900,000 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 and 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 percent last year. It's even closer if one adjusts for LC. I think the other one's worthwhile to note, EPS at a good number given the smaller size of the business, with quote unquote 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 francs to LHC 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, falling by business segment as well as line item in the P and L. There's 2 effects. The €21,900,000 and then you see the line in other income and expenses, the €99,000,000 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 impact here on the right hand side. Page 14, the growth rate 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 Ultra3d 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 and 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. EBITDA components, you see the organic downer here at €77,000,000 Keep in mind, the volume was €301,000,000 So therefore, you can see when you compare those two 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 hearing instrument side, I think worthwhile to note on the EBITDA, and this is wholesale plus Audiological Care, that we were pretty good in countermeasuring the volume loss of almost 20 percent and, quote to quote, just losing 80 basis points on the EBITDA 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 the Phonak Audio Marvel. And when the Paradise came in, it helped us to accelerate from there. It's also worthwhile to mention that Unitron and Hansatron launched new products at the end of Q1, which are helping those two 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 obviously, more difficult P and L here. Talked about the obviously, more difficult P and L here, talked about the slower market recovery and the continued headwind from the February voluntary field corrected action. Despite this being a negative EBITDA, I think if you see that we're almost €50,000,000 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 here, 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 environments also from the processors, we've seen even their appointments not being scheduled. With that, I'm through to the business side.
Hartmut 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 a 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's great 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 Q2, then I can tell you still the profit was over prior year.
You have seen that on cash measures, we are But let me flip forward to Page 26 to just quickly draw your attention on 1 or 2 things here. The gross profit is on a reported basis as a 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've seen in the bridge early on that Arndt took you through, stayed on EBITDA. The local currency is down 190 basis points, while reported 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 EBITDA 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 payoff numbers, we have in the prior year a stiff €150,000,000 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 CHF1 is a bit different to the growth rate or declines on EBITDA. 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 €40,000,000 just over €40,000,000 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 just flip forward to the net profit EBITDA to net profit bridge, identifying to you that aside from the adjustments, the acquisition rate 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 €99,000,000 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 as a positive of €49,000,000 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 a 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. For MEMO, we already obviously had an impact in March 2020 with revenues dipping in and out very, very high months traditionally at Cinnova. CapEx very low, getting us to the €252,800,000 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 a 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 20,000,000 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 EBITDA. 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 gone down. I give back to
Arnd for the outlook. Arndt, thank you. So coming to the outlook page here 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 or we had a pretty good October, pretty much in line with the data momentum we've seen in the 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 this higher infection rates, we do see some impact, but by no means anywhere close to what we have seen in the Q1. The ones we look on seen in the months when the infection rates were lower. We also look at the ability to create leads of new customers, which I could argue 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 point 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 points. 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.
The first question comes from Daniel Bucha from Societe, Kantonalbank. Please go ahead, sir.
Yes. Thank you very much. From my side. The first one on the guidance, which you just elaborated on. I mean, it's, 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. 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? Then the second one also in 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 and 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. 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?
Tanja, thanks for the questions. So with regard to stricter 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 their safety measures, I think we're in a good place here. It's a lot of dynamic 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 the pent up demand perspective, I wouldn't say we intended to say that the pent up demand is completely consumed. It's very hard to for us to estimate that. I think in reality, what we did see is that everybody was taking down the marketing 2nd round of hearing aids, 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 marble, I didn't want it to be so over amplified in what you have perceived. I think being at the same conversion rate 9 weeks in of people who have said goodbye to the Malden and took a paradise and that 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 voiceover, I think, is a pretty strong signal.
I think I talked about few percent points lower purchase in the 2nd 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 product 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 that chart. That's, I think, an important message.
Okay. That's very helpful. Thank you very much, Arnd.
You're welcome.
The next question comes from Patrick Wood from Bank of America. Please go ahead.
Perfect. Thank you for taking my questions.
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?
Thanks.
Patrick, thanks for the two 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 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 cost, 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 and L.
Super. Thank you for taking my questions.
You're welcome.
The next question comes from Michael Jungling from Morgan Stanley. Please go ahead.
Great. Thank you and good morning, good afternoon all.
I have a few questions. Firstly, on the doubtful debt provision that you had raised in the second half of €20,000,000 dollars 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 EBITDA 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 amongst some of these technology companies and this includes Facebook launching patents on earplugs for improved audiology, etcetera.
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? Thank you.
Michael, we didn't reverse any of the CHF 20,000,000 to the P and L. So there is no P and 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 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, 1.0 corresponding to 1.3 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. Haan, do you want to
take over on the patent? No. I take number 3. So yes, there are more people who are field, which is relevant for everybody who has an ear pod or something in the ear, but also can improve hearing for people who may struggle in certain situations. I think to comment 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 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.
Great. Thank you. Very clear.
You're welcome.
The next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead.
Good afternoon and thank you for taking my questions. 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, 1, what the realized savings were?
2, what else is left to do? And 3, 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 curious what your expectations are timing wise at this point in time and if you're hearing anything on that front. Thanks, guys.
Yes. So, Veronica, we are moving in a very satisfactory pace in our restructuring program. As Arnde said, you can see from the restructuring provision that we have consumed more than CHF 20,000,000. 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 lists and the relationships to nearby other stores. And so really losses are really just the exception and not the rule.
On the OTC side, Veronika, this is not the first time there is 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, 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 other things, it may be the one or other months more.
Understood. And Hari, 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. 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.
Understood. Thank you both very much.
You're welcome. Next
question comes from Keith Lee from Jefferies. Please go ahead.
Thank you. I have two 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.
Kit, thank you for the question. On the Paragite launch, I think the majority in the early weeks 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 owned ones, but really by design. I think it will be easier to answer the question in 2 months when they're through the whole launch.
We do see good appreciation of get attention in the competitive account 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, you had a very low Q1. 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.
That's very helpful. Thank you.
You're welcome.
The next question comes from Oliver Metzger from Commerzbank. Please go ahead.
Hi. Thanks a lot for taking my questions. My first one is structure on higher priced sales to independents. So you mentioned explicitly in your comments that you had a good ASP development as a benefit in September, which comes most likely on the 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 or like from the independent channel. My second question is just 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 this tighter measures compared to Germany or how would you comment on that? And the last one is just also 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 sub segments. 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 AGI, 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 products together. But it is also there's a mixed 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 two 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 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 showers 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 process and all those things. And in many of the scenarios, that's done either in a clinic environment or a 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.
Okay, great. Thank you very much.
You're welcome.
The next question comes from Markus Gola from Stifel. Please go ahead.
Hi, and thank you for taking my question. Just one left from my side, and it's on your Cochlear Implant business. You mentioned that decisive steps were taken to adapt costs to lower sales volume and to implement structural improvements. So could you dig a bit deeper into what measures have been implemented and what to expect from these structural improvements? Thank you.
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 the back office side or what this is with regard to leadership span of control and elements like that. We try to keep the R and 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 sized from the outside. So clearly a set of measures, but none of them being a big site closure or so 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.
Very good. Thanks.
You're welcome.
The next question comes from Maja Pataki from Kepler Cheuvreux. Please go ahead. Mr. Takay, your line is open.
Hello, can you hear me?
Yes. Hi, Maya. Hi,
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? Just to understand where the difference is coming from.
Then the second question, Hardwick, 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 cochlear implants as well. 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 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 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 2nd 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 high on wholesale.
And then there is that timing issue. When we look 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 weeks period. So we're not sitting here feeling we're losing share in Audiological Care, but it's really you need to dissect mix elements and these timing elements.
And Majer, sorry if the line was muffled. I was saying that the 2nd quarter EBITDA was above adjusted EBITDA was above prior year even if I take out government subsidies.
Perfect. And the cochlear implant?
Yes. I'll pick that up Majer. 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 2 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.
Thank you.
You're welcome. The next question
comes from Chris Gretla from Credit Suisse. Please go ahead.
Yes. Thank you, operator. Good afternoon, Arnd, Hartwig, Thomas. Still three questions left actually. So the first is on retail Germany, Gels.
I think you called out that wholesale did not particularly well in Germany, but not so much on the retail side. Could you maybe kind of comment on the guest performance in particular? Will be the first question. Tender related or kind of is 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 now given kind of the volume decline year over year. So maybe, obviously, you could talk a bit on mix costs, etcetera, 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 Vita Acoustik. And we've now concluded them being to merge into the Geras 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. We had to work through this. This is a couple of weeks' worth of revenue in these 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 gear stores.
And yes, 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, 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. Please go ahead.
Thank you and good afternoon. I have two questions left, please. Firstly, on cochlear implant, I think one aspect we didn't discuss yet is the competitive landscape. And you call 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. Feikel, thank you for the question. On the CI side, I think it's noted by everyone who goes to the market that Cochlear has launched a couple of product improvements or new products in the summer, which obviously we're 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 3 d 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.
It's still a strong solution, and we would call the 3 d 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 brands. So as much as 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 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 really pretty much clinic by clinic. We're seeing a significant, let's say, increase over the last longer to feel comfortable to allowing people back into the clinics. On the large retailer side, I think there were 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.
Okay. Thank you. You're welcome.
The next question comes from Tom Jones from Berenberg. Please go ahead.
Good afternoon. Thanks for taking my 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 or they're not really having an impact?
Or are they having some question 1. And question 2, 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 were in your 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 on the Paradise, I would also say on the Audiological Care Form, the leads we're generating through the marketing activities mix of sources for the leads on the Audiological Care, I think while it was in the Q1 pretty much a database in existing customers, we have come a long ways towards it being almost similar to before between the three segments you're talking about. I think there's still 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 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. So you start somewhere at the ENT, which makes up 25%, perhaps even 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 Jessica Kirby from Redburn. Please go ahead.
Hi, guys. Thanks for taking my question. I just have 2, please. On the new store formats, World of Hearing, I appreciate you only have a handful of these currently open. But 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 the 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? Thanks.
Hi, I see. Thank you for the questions. On the world of hearing, I think from the last review I gave 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 foot fall 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're published in the material we had for the Capital Markets Day on what our intended number of openings are over the next 12 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, 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 reaction was mostly towards wave 1. 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.
Great. Thank you very much.
The last question comes from Daniel Jelofsky from Mirabu. Please go ahead.
Yes, good afternoon. 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 UK with a similar lockdown profile as for instance in Belgium? And the second question is maybe long time not heard Lyric. I think you have launched Lyric 4. Is there something to tell that or is this just remains a very niche product? Thanks.
Daniel, thanks for the question. So on your own retail, the U. K. Was more, let's say, limiting in the 1st 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 the mortality.
I think in the second one, they're taking a different approach there. So I would expect the U. K. In the 2nd wave to be more behaving like the others. But the first was particularly hearing aids and some countries made certain decisions more draconian on the hearing aid sales.
On the Lyric 4, it is an improvement. We have made it smaller. We've also improved reliability, which is at times on the Lyrica 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.
Okay. Thanks.
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.
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