Ladies and gentlemen, welcome to the Half Year Results 2018/2019 Conference Call and Live Webcast. I am Sarah, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Arnd Kaldowski, CEO. Please go ahead, sir.
Sarah, thank you very much. Good day, everyone on the call. Thanks for making the time to listen in here on the first half year results 2018/19. I am together with Hartwig Grevener, our CFO, and Timo Spanu, our Head of IR. We will go through the presentation as we voice over, and I trust that you all follow the webcast and will see where we are. Just a standard disclaimer here, which I am aware everybody understands. Moving on to the agenda, we want to cover the Sonova Group results of the first half year, then the hearing instruments and cochlear implant segment specifics we give. I will take care about the first three points, then Hartwig will come on and share financial information in more detail. Then I will comment on the outlook and open up for Q&A.
We target to spend about 35- 40 minutes on the presentation so that we have ample time on the Q&A side. With that, on the highest level, when we look at the first half year of this year, we look at it as a solid first half year. On the top line, in line with the indicative top-line guidance we gave. We do not normally give a guidance for the half year, but we gave you some heads up that the first half will be somewhat slower. As you can see from the financials, a good double-digit EPS growth. Most important to think the second half of the year through and with it the full-year results, obviously the launch of the Marvel product, which I will comment more in detail. One good news at the beginning here, we are launching the product this week to end customers.
Just a couple of weeks ahead of what we said in the May full-year results. Just a couple of comments pretty quickly with regard to our market and the strategic frame on page six. As the ones who had a chance to come to Capital Markets Day heard me say, no change in the principal strategy of Sonova. We like our vertically integrated business model. We like our strong position on the product hearing instruments as well as on the cochlear implant side, and we believe that is a great starting point for this industry. Then to continue to broaden our consumer access ultimately, obviously through a strong wholesale business, but also an increasing retail footprint. From a market trends perspective, an attractive market, good demographics with the aging population and now the baby boomers growing into the age where hearing help is relevant to them.
Continued bifurcation on our channels, which makes us serve the independents with a different product offering than the large retailers. Particularly with the emergence of the connectivity in the industry and the emergence of made-for-all-phone connectivity with the Marvel, an opening window to leverage the Internet of Things more in our industry now and going forward. A quick recap on the four growth drivers we shared at the strategy discussion. Clearly, leading innovation is critical in our industry. There are still many things we can make better on a hearing aid with regard to audiological performance, but also the consumer experience, and that is at the center of our strategy. Secondarily, not just the expansion, but also the optimization, and I will comment on some progress there as we go through the results of our Audiological Care network.
For the wholesale and the Cochlear Implant side, the continued expansion of our multichannel partnerships. One new one as we have discussed, the managed care business in the U.S. as a new growth vector in that market, but also driving for continued improvements of the commercial execution. As a last point, participation and significant investment into the high-growth developing markets. Before we get later into the numbers, just a little bit, our reporting as well as organizational structure. We're structured in three businesses, but they're sitting in two segments. On the Hearing Instruments segment, we have the Hearing Instruments business.
Think about it when we talk revenue as this being our wholesale business, the Audiological Care business, which is what we historically have called retail, and then the Cochlear Implant segment, all three driving the individual innovation elements, the Hearing Instruments business and the Cochlear Implants on the product side and the Audiological Care business on the service delivery. An important one to think the year through is where we stand with regard to launches of innovative products. Also, obviously, something to make sure we deliver on this part of the strategy. As I said at the beginning of the call, we're proud and happy that we're in the position of launching the Marvel at this point of time. It has been shipped to the selling units, and tomorrow we will start shipping the product to end customers. What is the Marvel?
For the ones who are closer to us, a recap. For the ones who are not that close, hopefully, some news here. The Marvel is really combining what many of our customers would call all the features they're looking for in a hearing aid. That means a high audiological performance with the Marvel improvements on our algorithms to improve first-time fit relative to the generation before. The strong lithium-ion rechargeability offering we have with incremental improvements relative to what we had launched two years ago, and then the Made for All phone connectivity, which is a unique differentiator for us still in the marketplace, and now enabling all of the different protocols you need to connect with the different devices to enable binaural voice streaming and get to the best audiological performance. We have launched the product at EUHA. We had strong response from the audiologists there.
We've seen an unprecedented high number of pre-orders at EUHA. We also have seen in the following launch events in all the different countries we are selling in, significantly more people coming than for the Belong Platform, which is the last big platform launch two years ago. We see very positive reactions of the markets to the Marvel. For us, it's relevant, obviously, to get a step up with regard to the growth on the hearing instrument business side. The Marvel comes with our first broader set of eSolutions launch to the marketplace. Elements like remote fitting and a couple of other applications relevant for the audiologist, and to cater our independence in a cloud-based model so that they're able to use those technologies relatively seamlessly. It also comes with a couple of consumer-centric applications like the speech-to-text translation, which we have integrated.
Really an ability to improve the hearing of somebody with a more severe hearing loss while they get a telephone call. That's on the hearing instrument side. Another important one for the cochlear implant side, we have received FDA approval in September for the HiRes Ultra 3D implant, and also the CE mark now in October. The HiRes Ultra 3D implant allows people with a cochlear implant to not worry about an MRI scan to be done. You don't know if you need an MRI scan down the road, so this is a real concern. Cochlear, as well as we, didn't have that functionality. With this product launch, we have that capability and have adjusted the way our magnets function so that they're not a pain, nor do you need to take any precaution measures when you go for an MRI.
That late launch will obviously have an impact into how we think about the second half of the cochlear implant business. Moving on to the summary of the first half year. I'm sure most of you have already jumped to that page or read it before the call. I'll voice over some of the bullet points here. On the sales side, the 4% in CHF, there's a benefit, obviously, from a currency perspective. We've seen a 2.1% in local currency and organic 2.6%. I'll get to Hartwig later to explain that a little bit more. On the EBITDA side, 3.3% growth in local currency. Looking at the hearing instruments business, a strong performance from a growth perspective in the audiological care business. Last year, we were organically growing at 1%. This now stepped up to 5%.
Lots of improvements, clearly on a good path and good momentum. On the other hand, a slower growth ahead of the Marvel launch with the Belong Platform being two years old, and some headwinds in significant markets from an ASP perspective, which ultimately had an impact also on the segment profitability here. Cochlear implants, a good half year, 6.7% in LC growth. If in both years you leave out the China tenders, which we always argue is a one-timer and also a low gross margin, you actually look at a 10.4% growth in LC, which is clearly above market, and an EBITDA of CHF 7.7 million. After a slight loss last year, there is a Vendor B element in here, but also a very good organic step up of the operating profit for this business. Going a little deeper on some developments by segment and by geography.
Audiological care, strong double-digit growth in many of our major markets we're playing in. You can see here Germany, Canada, France, Brazil, New Zealand. At the same time, also an improvement in the two countries we've discussed in length, the U.S. and the Netherlands. We've completed our network restructuring in line with what we said earlier this year. We've now seen in both markets low double-digit same-store growth, which was the litmus test we wanted to use to see if the restructuring was successful, and we're now getting back into a growth phase. Overall, pretty good showing here of our retail business. Looking at the HI side, a couple of positives and some negatives. A high single-digit volume growth driven by Europe and Asia Pacific, and that puts us in unit volume at market, slightly ahead of market, actually.
As you can see, we're spinning this out here mid-single digit ASP decline, partially real price erosion, partially a mix effect. People were buying also on the back of the basic product introduction, lower-end product. The U.S. particularly challenged. We interpret this as a competitive environment. We interpret this as a market where innovation is important. We're also seeing in the VA us losing some share given the product launches we've seen in the VA from our competitors. CI, double-digit growth outside of North America. The product launches, as you are aware, the one I want to highlight, which I haven't spoken about yet, is the third bullet point here. That will help us in the second half in North America. We do launch product in Costco later than in the independent channel.
It hadn't launched a B-Direct version nor any rechargeability in Costco. Wanted to be careful with regard to the momentum in the independence that had its impact on the top line. In the Q2, the second half of the Q2, we launched both functionalities and have seen a strong pickup of the Phonak product line in Costco, clearly also helping us in the U.S. for the second half of the year. On the key financials, I don't want to take all of the thunder from Hartwig. Just two comments from my side here. If you look at the sales, I voiced it over.
If you look at the gross profit, we were able to keep the gross profit margin stable despite of the ASP headwinds, which, in my eyes, indicates that we had good improvements on manufacturing productivity and in procurement, but not enough to show an improvement on the gross profit relative to the ASP headwind we had on the HI side. On page 14, you can see the breakdown of the revenue. You can see that if you take the organic and the bolt-on, which is normally the growth rate we would have reported historically as operational, because we didn't divest businesses, we were able to get to 3.8%. You can see that we had a 1.6% headwind out of the divestments of our HearingPlanet business in the U.S., as well as the stores we sold or closed in the U.S. on the retail side.
Getting to the geographical focus or the split here, quite different or different perspective by geo. If you look at EMEA, Americas, and Asia Pacific, that's at market, probably slightly ahead of market, particularly for EMEA as a growth rate. Then you see us with a significant decline in the U.S. That includes the divestments, which were all in the U.S., but still a negative development in the U.S. from a revenue perspective after the divestments. In EMEA, all of the three businesses have done well. You can see mid-single- digits, high single- digit, double- digit on the CI side. If you look on APAC, Australia is a singular case where we had some operational issues which we're in the process of fixing, but the rest of Asia Pacific, all double-digit growth.
If you get to the U.S., you can see that we're still having some headwinds in the various businesses for different reasons. HI, the aging platform, including the VA being behind the competition with what we have available in the VA, did put some headwinds against us. On the retail side, really the divestments, as I said, low double-digit growth in same store. I think we turned the corner there. On CI side, we had a low single-digit decline, but if you unpeel the onion between systems and upgrades, on the system side, we've done well. The upgrades had a very strong year-over-year comp, north of 50% growth in upgrades last year in the U.S. based on product cycles there. We weren't surprised because we knew that last year we had a very strong showing on the upgrades.
The growth rate by segments on page 16. Not a lot more to say to what I have already said. Probably the only one, if you add the 1.8% divestment effect back into the HI, that will be at 3.5% and the total Sonova, as I said, is 3.8% operational. Getting to the gross profit side. The reported gross profit margin flat year-over-year, but that helped by the FX side. If you look on the operational picture here in the middle, while we have seen some absolute organic improvement in gross profit, you can see that we lost 90 basis points, and that's really the balance between the productivity gains but also the ASP headwinds on the HI side. From an EBITDA perspective, reported EBITDA margin improvement of 70 basis points.
Contributor to that, the one-time costs, which we didn't have, after last year, that was related all to Arnd Kaldowski and then FX impact here. On the operational side, pretty much, the 4.3% of an EBITDA increase. Diving a little bit deeper on the hearing instrument side, lots of the bullet points are kind of repetitive. Let me comment on the one here with regard to ASP in a little bit more detail under EBITDA. This is really half a mix issue with us on the one hand selling more of the basic product which we have launched newly, but secondarily also a trend we tend to see when a product gets older in the product life cycle where people go sometimes the level lower and then your whole mix shifts.
The other half is real price where we had to give price no matter if this was in a large retail account or whether this was in an NHS or whether this was in an independent. From a new platform launch perspective, Marvel obviously important. Our expectation on the Marvel from a price perspective is mid-double-digit price increase, and we have good positive feedback from our teams and the market on that. That is relative to the runway we're coming in with from the first half year. For the ones who are running the numbers in the back of their heads, Marvel is about or the segment we're serving with Marvel is about 25% of our hearing instrument business. Talked about the Costco pickup, as well as the availability of the Marvel.
Just quickly on the next page is a little bit more color, which we provide with regard to the growth pieces in the hearing instrument segment. The first page is the hearing instrument segment, so wholesale and retail together. You can see the composition of the 1.7% growth, 2.3% organic, 1.2% through acquisitions and retail, and 1.8% through disposables. If you go to the hearing instruments business here, you clearly see the impact of the lower volume and the price on the hearing instrument side, where we globally just had 0.5% organic growth and a significant divestment impact from the HearingPlanet business.
If you go to the retail, you can see the composition of the strong growth we had on the audiological care side, where we had 7% in total, 4.9% organic, 3.1% through new acquisitions over the last 12 months, and then -0.9% from the disposals of stores in the U.S. Let me move on to Cochlear, many things said already, talked about the top line with the 10.4% if you correct the China central government tenders. Strong system sales growth, which I'll get to on a following chart. Spoke about the CHF 7.7 million EBITDA, which is an EBITDA margin of 7.1%. There is an impact of a Vendor B reserve, which we took out or released.
If you take that out, we have a year-over-year 130 basis points improvement mainly driven by productivity improvements with regard to manufacturing, also purchasing and some restructuring we've done in order to streamline the organization. A good first step towards the goal of getting this business to mid-teens profitability, and then the launch here of the Ultra 3D. I think the next page we can flip over, that's numbers we've shared already. A quick word on system sales versus upgrades and accessories on the Cochlear side, 8.8% on the implants growth. If you again take out the China tenders in both years, we actually grew double -digits in the system side, which is a strong signal for the competitiveness of the offering and the execution of the sales team because that's really convincing new recipients to take our products.
On the back of that, over time, we can capitalize with regard to the upgrades. Then, as I said, the U.S. lower from a year-over-year performance on the growth in the upgrades on the back of a very strong campaign, but also a favorable position in the product life cycle of the upgrades. With that, I want to hand over to Hartwig for financial comments.
Thank you, Arnd, and good day, everybody. I'm on page 29. As usual, I will talk a little bit about the reported numbers on and below EBITDA balance sheet. Then give you also some more visibility on how the functional cost categories have developed. You have seen that the reported EBITDA in CHF was up 7.6%, and the reported margin up 70 basis points for the group. The earnings per share was up a good 10%, reflecting the EBITDA growth and also helped by a little bit lower tax rate. I'll get back to that in a few moments. Very good and continuing high level operating free cash flow, CHF 166 million, up 8.3%, and the cash conversion pretty much on prior year level with 66% based on operating free cash flow over EBITDA.
Balance sheet continued to be on a strong level with a leverage ratio of 0.5. A little decrease on the capital employed of 5% to now CHF 2.6 billion. I'm moving on to page 30. You have seen most of those numbers. Return on capital employed is one that I haven't yet talked about. It's up 180 basis points, helped by the decrease also on the base here, which again, is also a little bit helped by accounting. I'll come back to that in three or four more pages down the road. Let's move on to page 31, about the functional cost build up. The R&D cost up 1.1% in local currencies. It's a lower growth rate than what we had in earlier semesters, but it is in the realm of normal fluctuations that you can have in regards to capitalization or the realization of third-party R&D support.
Sales and marketing up 3.4%. If you normalize that for the prior year one-time cost for AudioNova, a larger part of that is in here, that actually is 3.8%, and that's entirely related to the mix shift that we have from a higher growth rate of the audiological care business versus the hearing instrument wholesale business, as the audiological care business has a higher sales and marketing or generally OpEx ratio. G&A, a pretty good picture, reported down 6.6% in local currencies, normalized for prior year one-time costs, a decrease of 3%, and that is a mix of true cost containment efforts and to a small extent, lower debt cost.
The other income and expenses, Arnd mentioned the cochlear implant product liability release of CHF 3.8 million this year. That is on the same level with a capital gain triggered other income and expense that we had also in the prior half year, in the first half of 2017-2018. That related to, as I said, to a capital gain of the disposal of AudioNova Portugal to Amplifon at the time. If you tally this all up and take out the impact of the one-time cost in the prior year, you're looking at a 2.1% OpEx increase. Moving on to page 32, just to quickly go through on what is from between reported EBITDA and net profit. You see that the margin increase is around the 60 basis points and 70 basis points mark. There is a bit of rounding involved here.
We rounded this on multiples of 10 basis points here. We have a small improvement on acquisition-related amortization, given that some of the cochlear implant, Advanced Bionics acquisition-related amortization has matured. Financial result, not moving the needle here. Income taxes at CHF 30 million. I said early on that we have a mild positive impact in terms of net profit from the income taxes coming down from the mid 14% to a mid 13%. That relates to the on-plan progress of the integration of the AudioNova businesses also tax-wise. We are, for now, settling in to pre-acquisition levels here. Moving on to page 33, where we go through the operating free cash flow. I said early on, it's nothing unusual here, +8.3%, largely reflecting the reported net profit and EBITDA flow. You see the different elements here, profit before tax, obviously a strong driver here.
Income taxes paid a little bit of a help here. We paid less, but that can fluctuate from year- to- year. Then a little bit more CapEx, which is also including capitalized R&D, but mainly this is coming from true CapEx, including that we are putting up a new building in Switzerland in our wireless communication business in Murten in western Switzerland. Else, this is in the realm of normal fluctuations as well. Let me flip forward to page 34. You see here that we have made mild progress on trade working capital items, DSO and DIO, both trending favorably year-over-year. We're working on both of those, and we will hope to be able to sustain and further improve that. Capital employed, there is an accounting change also triggering the balance sheet here.
We have, just as many others listed companies, you will have seen that implemented IFRS 15. That is giving us a level of magnitude of CHF 125 million, an improvement here on capital employed, which is pretty much explaining that variance here. Underlying, it is stable net debt. Decreasing, given our strong cash flow performance, from CHF 490 rounded to CHF 290. I should say decrease, but improved net debt balance. That links me over to the share buyback, confirm on page 35 that we are now progressing and have launched the share buyback as announced. You will see the net debt going up again. The frame of the share buyback as you know, is up to CHF 1.5 billion over three years, geared towards a 1x net debt EBITDA leverage.
I make the extension here under current accounting because next year we will have the adoption of IFRS 16 lease accounting standard. This will increase our reported net debt, but very much in line with adjustments that are already now being applied by debt analysts on our current pre-IFRS 16 net debt. With that, I return back to Arnd. Thank you very much.
Thank you, Hartwig. Let me comment on the outlook. We can open for questions and answers. As you've seen from our press release, we are leaving our guidance for the year unchanged. That's driven by the good momentum we have on the audiological care business, as well as the good momentum on the cochlear implant business. The Marvel, which we're certain to release to customers tomorrow, in addition with the strong positive response we've gotten from many customers around the world on the product. That should set us in a good position to achieve results for the full year in line with the guidance here. If you go to page 38, just a recap of the most important top-line drivers.
If you think from a first half to second half year sequential, the four months or a little bit more than four months contribution of the Marvel. The benefit of the expanded product offering or the renewed product offering at Costco, which is an important channel for us, which came in August and September in two steps. The Marvel, as I said, we have a high expectation with regard to price, but not unusual relative to other platform launches we have done. We're comparing here mentally with the Belong launch two years ago. I think an important one to keep a little bit in the back of your mind is, if you think about our growth rates last year, first half versus second. Our first half was stronger. The second one has somewhat of an easing comp base.
The last point, the launch of the Ultra 3D implant, important for the cochlear growth momentum. With that, we're through with what we wanted to voice over here on the slides and would invite you to questions which we will try to answer.
We will now begin with the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you've entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from the line of Ian Douglas-Pennant, UBS. Please go ahead.
Yes, thank you very much. It's Ian Douglas- Pennant at UBS. The first is, I think as you anticipate on the guidance, I think you just helped us a bit understand how you get there on the revenues. But could you also talk about margins a bit and your expectations in the second half? It seems like with launch costs for Marvel's house and insurance, we should expect those to decrease, or does price offset that? Secondly, to go back on the revenue guidance, is the top end of the revenue guidance realistic at this point?
Ian, thanks for the questions here. Let me first comment on the bottom line guidance here. I think if you think through the fall-through required out of the incremental volume from first half to second half, and add on top the price expectation I have shared, I think we have good line of sight for that profitability lift here from the first to the second half. That's in line with our, let's say, normal fall-through ratios, which we've seen at this kind of volume lifts. I think you need to assume something around the 60%-65% fall-through, which I think is doable in our business. I think with regard to the guidance, we do not give guidance, upper or lower end. I think you hear that we're confident about our Marvel as well as the 3D and the Costco product.
I think you see a good performance here on the two businesses, audiological care and cochlear. I think we're in a good position on the top line for the second half.
Okay. If I could just quickly come back on the margins. Are you not expecting significant If you say 60%-65% fall-through is normal, should we not expect less than this in the second half given the investment costs? Or because the price uplift is-
No. If I think our investment cost through for the launch and the preparation of the launch, I would not see that having a significant impact here in the equation.
Okay.
I'm looking at Hartwig, he's nodding. Yeah. No, no. There is launch costs in the second half, it doesn't have a significant impact on the fall-through, given the generally high gross profit margins that we have here in the business.
Okay. Very clear. Thanks for your time.
The next question is from Daniel Buchta from Vontobel. Please go ahead.
Yeah. Thank you very much, gentlemen, for taking my two questions. The first one on the hearing instruments. Can you give an indication on how the volume growth in that particular business has been versus price, versus mix? We have seen 0.5% organic growth here. The second one on the same business, EBITDA progression. The margin was down 60 basis points. I would assume that this means that hearing care was probably up and you still have synergies to reap from AudioNova. It on the other side would mean a significant margin contraction in the traditional hearing instruments business. Could you help me on that side to understand? Thank you very much.
Hi, Daniel, and thanks for the question. Yeah. On one page earlier, we actually, in order to explain the dynamics, spelled out the volume and the ASP effect. We have a high single-digit volume increase in hearing instruments, in the hearing instrument business, so the wholesale side of the house, and a mid-single-digit ASP decline. Now with that, I think if you do the math, you can see that that ASP decline was a minimum, the key driver of our challenges on the gross profit and the operating profit. If you look at the other line items with regard to synergies out of AudioNova, but also being tight on the spend side and driving productivity in the hearing instrument business, we're all feeling good about that.
It is really the ASP side here at the end of the product cycle.
Okay. Thanks very much.
The next question is from Lisa Clive from Bernstein. Please go ahead.
Hi. First question, just on your U.S. wholesale growth trends. Given the decline in that channel, could you just give us an indication of what the split was between volume and ASP? Then in light of your comments around the decent growth in Costco, can you confirm that it was really just the independent sale where your sales must have been notably down? Second, on those new stores in the U.S., on those greenfield store openings, how long should it take to reach volumes, versus a sort of fully up and running store? Hello?
Ladies and gentlemen, the connection with the moderator's line has been lost. Please hold the line.
I think. Can I barge back on?
Ms. Clive, can you please repeat your question? Many thanks.
Sure. Yeah. The first was just on the growth in the U.S. market. If you could just give us an indication of what the trends were split between volume and ASP in your wholesale growth in the U.S. Also just in light of your decent growth in Costco, just confirm that the independent sales were negative, which I assume they must have been by quite the margin. Last question was just on the new store openings in the U.S. How long does it take to ramp up those stores so that they reach average run rate volumes for your store base?
Yeah. Thanks for the question. On the U.S., wouldn't go as specific to give you exact numbers on the price and the volume, but we had price headwinds given the product life cycle, but we were also struggling a little bit on the volume side. You commented on the Costco. I did not imply to say that we were growing in Costco, to say that carefully here. I think as you heard me say, we have relaunched or launched a newer version of the product. We were at the end of a product life cycle here within Costco and had some competitive pressures. The independents actually performed, I'd say in line with the independent market in the first half year for us, to think in terms of somewhat of a flattish, slightly up business on the independents side.
With regard to the store opening and what we expect from those, normally we say 18 months is about a time until which you are at the normal revenue run rate. Don't overthink the U.S. store openings or acquisitions. You are talking single-digit stores. Our bolt-on acquisitions, which you see in the numbers, are predominantly in Europe, and then there were some in Brazil and in Canada.
Okay. Thank you.
By the way, I have to make one correction. I was corrected by Hartwig. Sorry for people having to go back to their notes. I misused the term mid-teens on price.
Double- digit.
I used high double-digit for the ASP increase we expect for the Marvel, and I should have used the term mid-teens. Please, if you correct that in your notes, it's still a good ASP increase, but please plan with mid-teens.
The next question is on the line of Yi-Dan Wang from Deutsche Bank. Please go ahead.
Thank you very much. Just to follow on your comment about the mid-teens ASP increase. I mean, that's certainly very attractive, and you also mentioned that you've been taking unprecedented pre-launch orders. Can you give us some sense of how big the pre-launch orders are compared to your prior generation product introductions, and also comment on how much of this mid-teens ASP uplift do you think will stick, and the basis for that. The last question is, Hartwig, can you comment on the impact of FX on sales and margins in the second half of the year, and also for the next year, if that's possible? Thank you.
Yeah, thanks for the question. On the pre-orders, this is really an early indicator because the thing we can measure is what is ordered at EUHA. If I compare that with last product launch Belong two years ago, our last platform launch, you're looking at something like 40%-50% more in units. Again, this is not all the growth we need, but it is a clear indicator that people had a pretty high excitement from the product on the booth. With regard to the pricing side here, just one caveat. The mid-teens, as I said, ought to be deployed to the relevant product segment, which is about 25% of our hearing instrument business.
Our experience is that when we come out with those kind of prices, you can keep that price for a couple of quarters, and then over time, as other people bring out new product, you start to see some erosion against the price. Certainly, feel good about that price for everything which is relevant for this fiscal year. Yi-Dan, on FX, obviously, if I would be able to predict the FX, I wouldn't be sitting here, but I understand your question, kind of what the read is on current spot rates. We are kind of almost in neutral territory year-over-year overall, in regards to top line and bottom line impacts, if I take the average of the last, call it 60 days.
That would mean, in any case, that we would not accrue further benefit in the second half, but it could also be that we actually eat up a little bit from the benefit that we have seen in the first half.
Okay. Thank you.
The next question is on the line of Tom Jones from Berenberg. Please go ahead.
Oh, good afternoon. I had a question about the non-U.S. business, really the dynamics in wholesale versus retail. I know you've given us those figures at the group level, and you've given us some color on what's going on in the U.S. wholesale versus retail. The growth was quite a bit stronger than I expected in the non-U.S. part of the business. I was just wondering if there's any significant difference in the dynamics between the local currency growth rates in the wholesale versus the retail business. My second question was just on the double-digit, sorry, mid-teens price increase that you referred to for Marvel. I wasn't entirely clear as to what that was versus. Is that versus your current sort of selling prices for Audéo B-Direct? Is that versus your current portfolio of sort of advanced products? If you could just clarify, that would be helpful.
Yeah. Tom, thank you for the question. On the wholesale versus the retail dynamic, I would say there's not a spectacular difference between our wholesale and our retail organic growth rates in the different geographies outside of the U.S. I think we see good growth also in wholesale in many of the markets, to name France, to name Germany with good growth, to name Japan as one on the wholesale side. We have other ones in retail which are stronger. I think by and large, there's not a big systematic difference. I think the one where we still benefit a lot from an inorganic component on the retail side is in Germany, where we've acquired a larger chain with 50 stores, which was still fully in the inorganic side.
On the pricing side, when we do those comparisons, that's sequential versus what was our run rate for the half year before. This is really kind of helping to bridge from a step-up from where are we right now and where do we go to.
It considers the entire form factor that is
Launched, excluding the VA business that we have not yet launched it in. Tom, it's not just top of the line, but it's the entire portfolio of the RIC form factor.
Okay, perfect. Maybe just a follow-up question. Given that your product portfolio is kind of broadly similar, U.S. versus ex-U.S., and the competition is broadly similar, why do you think the stage of your product cycle was such a big headwind in the U.S., but seemed to not have too much of an impact in the non-U.S. business?
I think it's a little bit speculation here on my side. One thing we know that we have markets in which we have stronger relationships with independents, and that expressed in certain type of loyalty programs and things we do from a value-added services perspective to them. In those markets, we tend to be more immune against product cycles. One market to commend would be France, which we share more publicly about going well.
Sure.
That's one element here. I think the basic product we talked about, the Vitus, is not relevant for the U.S. market. That was a significant positive in markets like Germany and a couple of other European markets, which are more price sensitive. I think the other one is, and again, that's a little bit speculation or perception, I think in the U.S., customers tend to switch a little faster between different vendors than what we're seeing outside of the U.S.
Okay. That's very helpful. Thanks for all that.
The next question is from the line from Veronika Dubajova from Goldman Sachs. Please go ahead.
Yes, good afternoon, thank you for taking my questions. I have two, please. My first one is actually on the Marvel pricing. Sorry to belabor the point, but I'd like to understand, as you look at the proposed pricing that you have for Marvel, can you help us understand where it sits versus your competition? The mid-teens price increase seems significantly greater than the type of ASP increases that your peers are talking about. I'd like to understand exactly where you are, not versus history, but really versus your competition. My second question is a bigger picture question. I think, Arnd, you were quoted in the press this morning saying you are considering whether to participate in the over-the-counter market.
I'm curious, given that your two or frankly three large competitors all have a consumer brand that in one way, shape, or form interacts with the consumer today, is that something that you think you would need to acquire or develop to be successful in the OTC market, and how you're thinking about that from an M&A perspective? Thanks.
Veronika, thanks for your questions. On the Marvel pricing relative to the competition, I think we're going to be well-positioned and appropriately positioned relative to our main competitors on the high end of the products. I can't give an exact number because, A, it's not that easy to see all the numbers in the marketplace and have an exact number. Secondarily, it's very different by geography, but I think we would sit at a place where relative to the main products, we're at a slight premium relative to them. We would also sit at a slight premium relative to where we were with our Belong platform. From the bigger picture question here, we are obviously in a situation which we are thinking through what to do about an OTC market. Is that attractive? Is that not attractive?
In that regard, I was saying we're considering this, which you would expect from us. We have not taken a decision in any direction. There's still some time, but secondarily, also a couple of open questions. I think a big question in that is what is the right go-to market and what is the right branding? What we know is that technologically, we believe we have what it takes to participate and to channel and branding as well as even the final decision, would we go or would we not go, is still to be taken. I think if you listen to our customers, just as an incremental point here, meaning our independents, but also our own retail, they would love to have some form of an OTC product, and if it is just to upsell people.
That's certainly close to home, and you would probably do with some form of a brand from ourselves. If you go further down the road of more disruptive channels, you would probably think very differently about branding.
Okay, thank you very much.
The next question is from the line of Christ Gretler from Credit Suisse. Please go ahead.
Thank you, operator. Hi, Arnd. Hi, Hartwig. I have actually two question. The first relates to your retail business. I was impressed by some of the growth you reported. However, it looks like you didn't discuss U.K. and Australia, which I guess those now that are not developing so well. Maybe if you could spend a few words on that. The second question relates to your CI business. We noticed that you changed management there. Could you provide some background for that decision? And also maybe what kind of expectation you have now with respect to the new management in place.
Yeah. Christ, thank you for the question. On the U.K., I think we have some headwinds. We spelled that out here. I didn't voice it over as much, but I think it's a combination of, in general, a slow consumer spending level in the U.K. I think we also see more of the marketing moving to more of an online lead generation site, not the predominant part of the market, but an important part, and this is where we have to do more work and leverage those kind of online leads more in our channel, which is a great channel from a foot traffic perspective.
I think our Australia wholesale business is really more of an operational matter, where we lost a couple of people, particularly on the sales front, and we just need to make sure we have the right people in the positions in order to drive our business day in, day out. Nothing magic from a market dynamic perspective in our eyes. On the management side, on the cochlear implant side, I think after five years of leadership for the cochlear implant business being, sitting here in Switzerland, which I think was a good choice given the quality issues we had way back when, and our interest to get the product roadmaps tightly aligned and using as much Phonak technology as possible.
We're now at a point where I think those things are executed. We're getting back to how do you accelerate your innovation roadmap. We're getting back to the question on how do you conquer the U.S. market, which is going in systems fine this year, but not as much in upgrades. I think we all know the size of the market as well as the price attractiveness. Ultimately, if we want to grow significant share against our largest competitor, we need to win in the U.S. That just got us to the read of, look, while we like the progress of the business over the last years and also the last 12 months since I'm here, I think it's just strategically better to have that in the U.S.
Take from their continued strategy on innovation, tightly integrated between product management and the R&D, close to leading customers in Europe as well as in the U.S. Also a continued focus on the operational execution as well as the go-to-market execution in the U.S.
Okay. Maybe I have one follow-up on the retail side. Could you actually discuss the margin performance of that business overall? I know you don't disclose now, but maybe directional-wise now, given the strong performance in some of these business, I was just wonder whether there has been also some margin leverage to the business. Thank you.
I think not too specific, but in general, you have to assume that the retail business, given the relatively unchanged footprint to the size of incremental volume, was a net positive contributor from an operating profit expansion the end of this half year.
Great. Thank you.
The next question is from the line of Michael Jüngling from Morgan Stanley. Please go ahead.
Great. Thank you. I have three questions, firstly on the VA. You kind of surprised us on the October data. You suddenly regained share despite no new products. What drove that reversal, and do you feel that reversal is sustainable for the next six to 12 months? Question number two is on the audio headset market. Is the CCUS market an area of interest to you, and would you consider a material acquisition? Then thirdly, on management changes, are you happy with the appointments that you've made so far, or do you feel that additional changes are required, to get Sonova back on track into a market share type gain mode? Thank you.
Michael, thank you for the questions. On the VA, we were pleased too that we had a little bit of a pickup on the market share side. I would wait for three months to say if this is a positive upward trend here. We think that the cards are laid right now from a product perspective. Unfortunately, and I think we were pretty clear on that when we talked about Marvel in May, and at the capital market, we will not get the Marvel into the VA contract at this term. I would say from here around the market share, steady would be good and maybe other new products coming into VA, which may give us some more headwind, and we need to make that up in the commercial market. On the headset business, not something we have any particular interest at this point of time.
You never know what comes down the road, but certainly not top of mind for us at this point of time. On the management changes, I think both changes were done for good reasons and will help us, including the transition periods we have with the current leaders there. I don't foresee any significant other changes on that level. I think it's fair to say that over the last 12 months, we have made some new assignments on people who are leading countries, which I think are also important positions you have to think through when you think about how do you get to growth uplift in certain geographies when you are struggling with growth relative to, let's say, the benchmark within the group.
Can I just follow up on the management side? If you look at the last five or six years, the organization has continuously sort of seen a slowdown deterioration to an organic growth number in wholesale that really is quite surprisingly low. Why do you feel it's not the right thing to replace the talent more broadly? Because what's happened over the last five years is a function, I guess, of the people who are leading the organization. I'm just curious as to why you think the management team is the right one to have as it is today. Thank you.
I think it's the right one because I'm working together with it since 12 months, and we are putting changes in place, which I think are the right changes on certain country head positions, but also the right changes with regard to how we want to drive marketing and sales from a commercial execution perspective. I feel good about the things we've done over the last 12 months and the people I have to help me drive the changes we want to do on the approach and the processes.
Great. Thank you.
The next question is from the line of Oliver Metzger from Commerzbank. Please go ahead.
Yeah. Hi. Thanks a lot for taking my questions. My first one is about your turnaround of the German business. Was this double-digit growth achieved also for GEERS in particular or for the overall German business only? My second question is a more clarification one. Would you describe the restructuring of GEERS retail completely as done right now? My third question is also on the VA market, from your positioning. Are there any measures, what you can take to reduce the negative momentum you currently experience, or is this just purely product-driven that we have to wait until May? Over.
Oliver, thank you for the question. On the retail improvement, given the sheer size of GEERS in Germany, which is almost three-quarters of the whole number of stores, with the strong momentum we've seen also on the organic side, obviously GEERS also needed to contribute, and it did. I think we've seen a good change in the mindset of the team there and a better work on lead generation and the store productivity. We have a new leader in place since January in that business for retail Germany overall, and we're seeing good progress there. With regard to the distraction from a branding, I think we had a couple of markets where we were particularly hit. The U.S. always came up, particularly around Costco, Germany, I would venture to guess your question was more on the Germany side.
I think we're at a point where we're in steady waters and a good product and a good execution of the team can convince customers to come back or buy more from us. That's what we're seeing right now. We've seen some improvement on the wholesale side in Germany. We do expect Marvel as a great opportunity to open a couple of more doors which were closed, there is no heightened negative vibes in the discussion and in the marketplace at this point of time. On the VA, yeah, it's not just product, VA is particular product-centric, given that the people who are fitting the hearing aids are mainly focused on the technology, don't have to worry about commercial terms.
There is things you can do with regard to making sure you serve them well, making sure that you see them often enough, and we have some measures in place in order to drive that, but I wouldn't expect that to now swing the market share significantly. I use that more as a quote unquote "countermeasure" in case somebody comes up with another new product.
Okay, great. I just want to follow up on GEERS. In the past, it was commented a couple of times, that the big bottleneck are audiologists, which are hard to get in Germany. Given your first 12 months of experience, would you say that this bottleneck has become smaller or the situation has eased?
Yeah, we have done two things in GEERS and in other markets, but particular in Germany where we have the large footprint. First, we focused on reducing the leakage in terms of attrition. We've been able in Germany as well as in U.S., where you may have heard us say that we have a significant attrition issue a year ago. We have significantly improved not losing people by driving classical talent engagement measures. That helps us not lose people. We have intensified our recruiting efforts and our recruiting capacity. We're now in Germany at a place where we feel we don't have a significant number of vacancies. A year ago, we had that. The second step is something we decided to do to change structurally here.
We have announced recently that we're building an audiologist academy in Germany, which is a training center in which we hire apprentices and then train them and train some of them up to the Meister level. We do that in collaboration with the local association for acousticians. That will help us to be ultimately always having enough talent and potentially even net contributor to the talent pool.
Okay, great. Thank you very much.
The next question is from the line of Maja Pataki from Kepler Cheuvreux. Please go ahead.
Yes. Hi. Thanks for taking my question. I have two. I'm aware of the fact that it's a bit new with the management changes that you've implemented at the Cochlear business. Can you help us think about margin progression in the medium- term? We're looking at a couple of years where margins, if they were present, were really hovering around the mid or low single digits. Last year there was some improvement, but this year, you've been helped by the release of some provisions there. What needs to happen that we can actually for once see sustainable margin above 10% for the Cochlear Implant business? The second question is regarding the VA.
I understand from talks with some of your competitors that there is sometimes an exception with the VA, where if you bring a significant product, you can actually enter the channel outside of the two dates. With Marvel and with the launch of the remote fitting and your project that is running with the VA for the remote fitting, I was wondering whether you think that you could introduce Marvel at an earlier stage. Thank you.
Hi, Maja. Thanks for the questions. On the CI side, allow me to have a little bit of a different perspective. If you take the Vendor B releases out, we still have shown 430 basis points EBITDA margin improvement from last first half year to this first half year. Keep in mind that the volumes are different between the two halves. Our simple thinking was from starting point last year, if for three years in a row, we get us to 400 - 500 basis points, we get into that mid-teen range. Clearly we're nowhere near to that number, but I would say at least the first half year we were measuring, we made a good improvement here outside of the Vendor B release. What needs to happen?
I think we need to continue the work we have started to improve our product and manufacturing productivity by 5% plus per year. That's one component. We have to be driving share winning in the U.S. because that's the highest price market, and we need to charge for innovation as we are actually currently doing with the MRI, where we get a significant price premium over the non-MRI solution. I think we've run that numbers and obviously at the growth rate, volume will play a little bit of a role. I don't like that to be the excuse for not driving productivity. I think if we do those things, and we have seen all of those at play in the first half of the year, I think there's a path towards the 15%. On the VA, I was looking at Thomas here. This is news for us.
Hopefully our U.S. team knows that, we will certainly go after your hint here. We would love to get an exception. I think the product is very good, which we have, and we also have done our pilot there. We are not aware about such a process, we will certainly go after it.
Okay, thanks.
The next question is from the line of Daniel Jelovcan, Mirabaud. Please go ahead.
Yeah. Hello from my side as well. I just have a question on the Vitus launch. Is it fair to assume that this accounts for most of the ASP decline, which you mentioned before? Where was Vitus more launched in emerging markets like, or let's say, in other countries like Brazil and so on. That's my first question. The second question is, unless I have overlooked it, is it true that you don't disclose any more any segments, excuse me, any segments in hearing aids? If so, why not? We have seen that for the past 10 years at least. If you don't provide that segment, I guess it's quite logical that you lost in the premium segment and you substantially gained in the low-end product category segment, probably flattish in the mid-range kind of product segments. Is that a fair assumption?
There are two questions.
Daniel, thank you for the questions. On the Vitus first from where, it is more the emerging markets, but it is also certain price-sensitive markets based on reimbursement. A big part of Vitus plays in Germany, where it is for the type of product which are paid all by the reimbursement.
Okay.
It is not a product for a market like the U.S. or so. On your question on the price impact, the Vitus was a component to the price bridge, but not the majority. There are some other mix elements, as you are indicating, that we've seen in general a trend downwards here at the end of the product life cycle. There's a couple of channel mix issues in our pricing bridge. Vitus wasn't the majority. On the segment reporting, I'll hand over to Hartwig.
Daniel, absolutely, we stand in here for good transparency and do not want to reduce that. You might have seen that we have now become a bit more vocal, in any case for this semester, where it played a particular role about volume versus ASP trend, and we find this more helpful than providing you the by-product category information. As you might recall, the by-product category information was a mix between wholesale and retail, and it's further clouded now as we have introduced IFRS 15 by that the separation lines between associated ancillary revenues for warranty battery programs and the like and the core product are becoming more and more blurred. That's why we have chosen to no longer represent that. I can tell you that in fact, yes, the Vitus had a particular supporting effect on the standard products. That's true.
We had by no means not any particular weakness in the two other categories. There is a Vitus impact, but nothing else beyond that.
Can I follow up on Germany then? It was a good point that Vitus is also in Germany. In the press release, you mentioned double-digit increases in the retail business in markets like Canada, Brazil, France and Germany. Specifically for Germany, you mentioned in the slides that actually retail had high single-digit growth and a bit in Germany as well. I'm a bit puzzled maybe between, I guess, retail and Sorry, acquisitions impact and probably organic growth with different sources here, if you can clarify on that.
Daniel, the Vitus did not play a significant role in the retail business in Germany. We're not that aggressive at the customer grade level. I think what you see on page 15, the high single-digit growth is for all of EMEA. The double-digit was on the pages before for the specific countries, including Germany, spelled out. In Germany, I think it's fair to say we were in the mid-single-digit from an organic perspective. The rest was the ISMA acquisition.
Okay. Great. Thanks. Thank you.
The next question is a follow-up from Yi-Dan Wang. Please go ahead.
Thank you. I was just looking for some historic data on the ASPs, given that we're losing the disclosure on the segmental reporting. Hartwig, are you able to give us the changes in ASP in the wholesale hearing instrument business for the half ended September 2017 and half ended March 2018? That would be helpful.
We signal you by the terminology that you have heard from Arnd. We had a mid-single digit headwind on ASP, as we said, in this semester under reporting. In prior periods, you might maybe read between the lines, and I would confirm that we generally had pretty stable ASPs, and at times when our competitors had ASP declines, we had still stable ASPs. We had through the rechargeable launch through the 2016-2017 year, let's say, a level lift in ASPs from just the higher product content from rechargeability. I hope that's helpful.
Thank you.
That was our last question.
Thanks for calling in, and thanks for the questionnaire and the interest. With that, we conclude the call and wish everyone a good rest of the day. Thank you.
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