Sonova Holding Ag (OTCPK:SONVF) Q4 2013 Results Earnings Call May 21, 2013 7:00 AM ET
Thomas Bernhardsgruetter – Head, IR
Lukas Braunschweiler – CEO
Hartwig Grevener – CFO
Chris Gretler – Credit Suisse
Oliver Metzger – Commerzbank
Florian Gaiser – BZ Bank
Lorenz Reinhard – Pictet Asset Management
Hendrik Lofruthe – HSBC
Good afternoon, everybody here in Staefa. And good morning, or good afternoon for those of you joining us on the webcast or on the conference call. My name is Thomas Bernhardsgrutter. I’m the Head of Investor Relations here at Sonova. And with me today is Lukas Braunschweiler, our CEO; and Hartwig Grevener, our CFO.
For those of you on the webcast or on the telephone conference, you should have received instructions about how to ask questions. You can submit the questions via the interface of the webcast. Now the webcast will be available for 48 hours, following the call.
Now, before we start, I’m sure that you bear with me for the disclaimer, just to make sure the presentation serves marketing purposes and constitutes neither an offer to sell nor solicitation to buy any securities.
And without further ado, I’ll pass the word on to Lukas.
Thank you for joining us here in Staefa. I’m sure it was not the letter bringing up you through up brand of Lake of Zürich, but hopefully some news from Sonova. We’re going to cover today quite some information on the group, then specifically on the two segments – hearing instruments and cochlear implants. We go a little bit deeper than we have probably gone in previous years, so in our endeavor to really increase transparency and have to get meaningful discussions also on their own.
Then Hartwig will take over for some more details on the financial review, a lot related to our balance sheet cash flow, capitalized R&D, et cetera, I will get them back to you with a few comments on our outlook for the coming fiscal year 2013-2014.
You know our strategy. We have been discussing in depth a year ago on our first Sonova Investor Day. I would like to remind you on one thing, which is very much here at the very end of the table, we have a five-year target set out that constant currencies be want to be back at the 25% on the EBITDA in the year 2016, 2017, and we want to bring back our return on capital employed above 30% threshold in the same timeframe.
The other thing to mention is we are structuring our group as follows. We have two reporting segments today, hearing implants and hearing instruments. On the hearing instrument side, we have the three businesses, the Phonak wholesale, the Unitron wholesale business reporting into that, that’s the bulk. And we have our retail business also reporting into hearing instruments.
So whatever we discuss basically keep in mind we’re talking about the true businesses. The CI business is basically the advance bionics today as two years ago we decided to get out of acoustic implants and by that it’s CI. The only thing reported under the CI segment.
A few words to the Sonova Group. Let me start, how did we do in the year 2012-2013. Overall, we can say, we had a solid year, we had a solid growth in sales and earnings. We are on course for our midrange target, I can explain to you in a few minutes. Solid growth and new record in sales showed CHF 1.8 billion. We wanted to crack the CHF 1.8 billion but at the end we didn’t make it happen. We are up 10.8% in reported Swiss franc, that translates into 7.4% in local currencies. Good news, all major geographic regions contributed to that result.
EBITDA as a consequence grew nicely with a solid margin expansion. When we talk about normalized for one-off costs, EBITDA was at CHF 386 million, that’s up 22.6% in Swiss francs and 15.4% in local currency. That brought our margin back to 21.5% on the reported base. That compares to 19.5% the year before. So in expansion of 200 basis point and the bulk of that is not from currency. The bulk of that is really from operational improvements.
Both segments contributed to the results, so it is by far not just the CI show last year. Especially in the second half, our HI business came back nicely, especially the wholesale part. I’ll get back into that. We continued a high rate of innovation; in fact, the last half year was very exciting for us. Phonak embarked on the largest rollout of product in its history.
Within six months, it will replace the complete product range across all formats, across all price, that was the only segment where format remaining is the pediatric segment, which we will add this fall. And we have a very exciting full pipeline of CI product. They are partially launched. Some of them are not yet launched as we haven’t received FDA approval.
Good news and that’s usually a sign of quality, the company, it’s kind of an ATM that would say here in Switzerland. I think we could generate a lot of cash. In fact our operating free cash flow was up 33%, returned back to positive net cash position. So we are virtually debt-free here. Technically, we still have a debt with some of our dear friends here in the room, but we are virtually debt-free here on a net cash basis, not driven by that, but also by that the board is going to propose to the General Assembly to increase the dividend by 33% to CHF1.60 and we assume overall that the General Assembly will accept that.
Normalized growth came back to 22.6%, another expansion of 3.4% nicely in line with our mid-term targets. Historically, the fiscal year lines up nicely with what we have seen. The good news is, it looks now finally after some years of investment in heavy current impact on the negative side we have now, a turn – kind of turn up the pickup again in the EBITDA margin, 21.5% nicely in line with our longer-term target up to 25%. So that’s good news as well.
Now, let me get back into the number. First, what we report of course – or we have to report; that’s the result including the one-off special charges of CHF 203.6 million. That’s why the reporting numbers show a sales of CHF 1.8 billion, with corresponding to 10.8% growth in Swiss francs an EBITDA of CHF 182.8 million, which would be a minus, but that include that special charge.
Going forward in that presentation, we’re going to show only normalized numbers. So we exclude that special charge, and then the situation looks like follows, and reflecting really the fiscal year, because the one-off charge are not in relation to the past fiscal year. We have CHF 1.8 billion in reported Swiss franc. We have a margin, which expanded to 69.1%, nearly 1 point up from last year. We have an EBITDA of CHF 386.4 million, up 22.6% reported. And we have EPS of CHF 4.62, nicely up another 24.5% from the previous year on a normalized basis.
Now how does the year look like more from a dynamic perspective. We’re going to show you a series of slides always made up of first half, second half and then the full year rates, purposely changed to that format so that we can have a better discussion and understanding of the dynamics of the business.
So in reported Swiss francs, our first half year as I would recall was 14% up a little bit north of that with an EBITDA growth of 37%. The second half looks like slower. So we came in with 7.7% and on an EBITDA growth of 11.3%.
The margin was slightly lower in the second half than in the first half. The reason why basically the second half looked slower are the following three. First, we had as much smaller positive currency impact, we virtually had nothing in the second half, 0.8% on the group level comparing to about 6%, over 6% in the first half. Then we had of course a base effect from the CI business. The CI business grew 17% in the first half based on a very low business in the US previous year before where we were not yet backing the market.
Second half, the CI business grew only 30%. So that has definitely kind of a swing what we expected. And then we saw on the OpEx side somewhat more OpEx in the second half mainly related to investments in our very expensive product launch.
Looking at the constant currency picture, that of course looked a little bit different. So the two course looked much more comparable here. We have in the second – in the first half, a 7.9% sales growth and in the second half 6.9%. We have a gross profit expansion in the second half compared to the first one mainly due to very good cost control on and purchase material control on the cost of goods sold. We had very good mix control and especially a very good handle on our average pricing. So average sales price has moved pretty nicely throughout the year, and finally, that also reflected in a very robust gross profit margin.
Then EBITDA, 21% up in the first half, 10.8% up in the second half, still nice leverage from sales into the bottom line; finally give us the year of 7.4% sales growth in local currency and a 15.4% EBITDA growth.
When we set out guidance a year ago and then confirmed the same guidance in November 2012, we assumed that the relative growth contribution from the CI business will be lower in the H2, that’s pretty clear. And we also assumed that our HI business would sequentially accelerate. In fact, we achieved both. We saw, sure, a relative reduction of the contribution of the CI business, and we saw an acceleration of our HI business.
However, frankly, we expect that our HI business would grow about 1 point faster in the second half, or in other words, coming about CHF 10 million sales higher, which would have given us another CHF 7 million of EBITDA. And that’s the reason why we basically came in rather in the lower end of our guidance closer to the lower end than in the middle.
And the reason for that is; a) February, March were slower months, shorter months – we had only three working days left in the previous year, and that affected mainly our retail business; and the second reason was that our sequencing of the product launches was in Phonak BTE first, the ITE first and the RIC, which is the most important format came only now in April.
So we didn’t – we had nice pickup on the BTE and the ITE, but of course, people were somewhat waiting for the new Audéo Qs, which are now available and enjoy actually a really nice boost. So these are kind of the factors we saw about, nevertheless, what we pointed out acceleration of the HI business in the second half and that they materialized nicely.
So looking at the growth components, in local currency and the other components you see, in the second half, notably the currency impact nearly went away. It was 6.4% in the first half and only about 0.8% in the second half, still for the full year of 3.4% wind fall from currency, but definitely organic growth dominating over that this year – a healthy change. If you remember two years in a row, we had to report that the currencies go against this; now finally, we see, we enjoyed at least for the full year, a nice currency contribution.
Hearing instruments, first half slower growth, second half accelerated. That doesn’t show really the full effect of the wholesale acceleration. It was kind of them or action really by the fact that the retail business didn’t really accelerate in the second half. That has to be mentioned here as HI here on the segment reporting includes retail. And then, as I mentioned before, the CI business, 70% gross in the first half, about 30% still – 31% still in the second half. And that’s compared to a second half the year before, which we were fully back to the market. So the 30% is not a bad number.
When we talk about regions, I must frankly say, and I will come back to that briefly on my comments on the hearing instruments business, we are amazed that Europe hold up nicely overall, given the fact that we had a couple of markets which were really heavily against us. And that’s mainly France.
We had a down year France, so fully in line with what you read about France from some of our other partners in that market. We had headwind in the first half in Italy, good luck that eased up in the second half. Switzerland was last year for us really hopefully the last bad year.
We see now signs of improvement clearly, how they OQ, especially starts to really boost the sales. But last year, Switzerland was bad and we had a couple of Nordic countries like the reimbursement change you see in Denmark and the tender format adoption in Norway, which didn’t help either. And we had a Super Run till about December and Holland, and with their reimbursement changes finally that flipped of course into a pretty dismal business in January, February, March.
So that’s on the negative side. On the other side, we always have had some very good news in Europe as well. We had a overall strong business in CI. We had overall a very strong business in the UK in all our businesses, in all our channels, particularly in the retail David Ormerod. And we had Germany, a comeback in Germany, in a market which is critical. We know that we gained last year about 5% market share and are again up above the 25% in that particular market. So besides some bad news, some good news in Europe.
When we talk about North America, we have to say that slowdown came mainly from the effect of the CI business. We had 120% growth in the first half in the US, which is another impact. We had only couple of percentage growth in the second half and that was a slowdown mainly in January, February due to some changes on surgery procedures.
They were demanding that people have to go under certain vaccinations before surgery, not only kids but also adults, that delayed certain surgeries more into the end of February and March, which then we still are going to pick up. But the underlying HI business particularly in the US was very encouraging in the second half and we accelerated by about 6% to 7% sequentially half year over half year.
Asia Pacific, nice acceleration in HI as well as CI. I said that to our management team this morning if we can get accustomed to 25%, I will take it. This is about the numbers we would like to see in Asia going forward because we see that as a very, very strategic part of the world for our business down the road. So again, Europe holding up, US with a slower CI business, but the nice acceleration in HI, and AP in general accelerated into the second half.
In summary, I said before, a solid result of the group, very much in line with what we have set out for the next five years. I hope you’re not extrapolating the first year already here and there in the curve, the curve would point to something like that. Now, if we look at that in years we know where the good start with 200 basis points brings us a little bit ahead of the curve of what you’re going to have in five years, but we go step-by-step trying to expand our margin about 100 basis points on average per year.
With that, allow me to make a few comments on the hearing instrument side. We had, we could say solid growth beside some difficult markets, nice acceleration seen in the US and in AP markets in the second half. Very nice to see that our premium product accelerated strongly in the second half as a consequence of our new launch procedure and definitely the new product into market. I mentioned before there are some spots in the Europe which still need be carefully watched and are kind of a concern to us. I mentioned a few markets but we have also definitely very bright spots in Europe which we should talk about and mention as well.
We didn’t forget to invest into future of our business last year, one big focus was Asia. As a consequence, we have now an Asia management team on the executive board level. We have an executive board member which is Asian and which is operating out of the region. We will propose that the general assembly to have a board member, board of director member from Asia and we have changed our management teams in China to adopt much more customer end progressive dedication to that potential market.
So in Asia, we really mean it and we took certain decisions and have taken certain investments. Then in the UK, in order to secure the long term relationship with foods, we changed our David Ormerod retail outlet which was running so far, has been running the foods shop and shop concept into two joint venture 5,149 with foods. We control it. But they are partnering it and by that we in turn we got a 20-year contract which is securing that business to the long term.
The Connect Hearing Group has acquired a lot of businesses especially in the US in the last few years. We are now in process to really integrate those on the one roof, one banner called Connect Hearing. And then as mentioned before, that had an impact somewhat on our operating expense line as well as our EBITDA line – one of the broadest product launches in the last six to eight months. Just imagine 150 new Phonak products launched, all on that new platform, and that was a big endeavor. And we are very proud about it, and especially very happy that customers in the market are also bullish about it.
Now the result of the HI business also fits very well. The track record, of course, being 90% of the group’s business at least. What you have seen for the group is kind of reflective also what you see here on the hearing instruments.
Sales up 4.9% in local currency for the full year, and we had somewhat a better performance in the second half. On the whole, it clearly even faster grow as mentioned before. It was kind of hold back by a rather flat sequential performance on the retail business.
The margin expanded. We got leverage, nice leverage in both half years, though we invested quite heavily on the OpEx line in the hearing instruments side for our launches, mainly on the Phonak side.
Overall, year-on-year 100 basis points margin improvement. EBITDA growth impacted somewhat, as I said before. Retail acquisition integration concentrated launches, and we’ll get back to that further investment into later.
But on sales growth components, we have a chart for you here. I don’t want to go too much into the detail, but you see also here, clearly a reduction of the currency impact in the second half, acquisition contribution relatively stable over the year in the order of 2%. And as said, the organic growth doesn’t fully reflect the fact that the core part of the business, wholesale, starting to accelerate nicely in the second half, as we thought. But I also admit we expect it about 1% growth overall in the hearing instruments in the second half or another CHF 10 million.
Now, the picture about the products. I said before, very pleased to see that the premium product together with the standard had a stronger second half. Sure, sometimes you have some base effect half year on half year, but sequentially a nice picture. And you think it is to pouring our approach we have taken now and adopted that we have very bold launches, usually one format across all the price points and that did that all kind of leads to down-selling in the opportunity we heard, again and again from our part of saying, hey, that’s much easier for us, we can play on the full piano much easier and they have a chance to sell up.
Probably the only lesson to take from here for us is the key format we have to launch for us in future is not the BTE, the traditional one, it must be the RIC, as it is 40% of the total turnover of the Phonak range or even reflective of the market. We know that we wanted to change that, but we couldn’t, because we had to slate in the R&D quarterly many years before. So good news and definitely that supported the further margin expansion in the second half nicely.
A few words on the pipeline, I now most of you have been or many of you together with us in California, so don’t want to be too repetitive. We have now on the Phonak side a complete range. We are just missing the fifth format. This is the new pediatric line, which is slated for EUHA in October. The BTE, ITE and new RIC and new POWER line, we have them across all performance levels, which are relevant to these respective products, we have with new features, new housing, we have the whole Phonak Binaural VoiceStream Technology features available across the whole range.
So second to none, and that’s what I hear from our organization, they say, well, that’s what we needed, that’s what we like, this is really a very, very strong product range to fight in the market.
Lyric, we’re a little bit quiet about Lyric in the last 12 months I heard from some of you and I admit that, but we were very happy with the progress of Lyric2 which was the new format we launched a year ago much smaller, fixed and economic rate up substantially, and we see that that product range is growing quite nicely.
Now I get a lot of questions, what I said is Y-axis is looking like, what does it mean? As we are not disclosing usually the size of the products, but I give you one number. We’re producing that instrument now in Vietnam and we produce last year over 220,000 of those unit.
Now I leave it up to you to divide by a factor to get to the number of years behind it and I contract, but the number is something between 2 and 10. And we kind of – kind of total, so we want to keep like that for a moment. But probably given out of that, we see this as the substantial business shaping up here and we made very, very nice contracts, very nice product.
ROGER was launched and announced in Anaheim, it’s our new wireless communication standard, which is going to replace the FM kind of standard which Phonak has built over the years in the market. We are really bullish about it as it is really covering the most difficult youth case.
It’s the long-distance, bidirectional, parallel voice and data kind of communication, delay-free. It is comparable with clip-on radios, comparable to our range backwards, it is sideways to our competitors, it is also a comparable with our CI processes. So a very important standup from which we will derive our other future 2.4-gigahertz base wireless communication solutions.
Unitron had a very good year last year. They grew faster than Phonak. Though Phonak came back very strongly in the second half, the parallel double brand, we wouldn’t call it the baby brand any more, but that brand had a very good year. And it was definitely driven by a lot of the new product, which have been launched in the last 18 months, clearly showing that with great products at hand, they definitely have a much easier stance in the market.
The latest is the new RIC design they brought into the market is so-called Moxi Kiss. It is already in a new form factor design Unitron is going to adopt down the road. And we completed the new flex concept – in Phonak, which is not only the trial one, we brought in the upgrade one. So what you can do, you go in a store, you try your own instrument, you try it for a couple of weeks, get back eventually, you want to increase your performance and you can on the fly with the soft grade, software upgrade also changed the performance of the instrument tool at next higher level.
It’s nicely received by younger audiologists. It is also very good, door opener and talking point for Unitron as it is unique and we have no plan so far to really take it back into the Phonak channel as that helps clearly to differentiate the two brands from each other.
Finally, retail though we have kind of even growth across the year, we’re a little bit held back, and mainly in the month of February, March, they had a good year. We achieved our budget level basically in our targets.
We had differences though, we have Marcus in Europe like France, which were a little bit more difficult but it other ones who compensate like the UK for it. Then UK was definitely driven by that concept, we have been pushing in the last 10 years together with Boots. And to give you a flavor, the numbers we have the UK started in that concept with 64 stores and are up now to 340 Boots stores where we have shopping shop hearing center concept.
We have over 20% of the private market in the UK covered by that one. The other big player is tax savers, which we are a partner of as well in the whole field. So a very, very well received modern concept. They are especially positive about it that we have secured that relationship now long-term with Boots and the question I would tell whether the ownership of Walgreens into Boots might finally trigger that they will take that concept into the US over time.
That definitely could become a game changer down the road in the US as well, it’s working, it’s well received and people like that they can go into the store and get full service. Have one advantage cost to pay with, have one patient database et cetera, et cetera.
A few words to cochlear implants, it was a new record year, the first year breaking even. That was our target, we achieved it, very happy about it. A very robust performance in Europe, an accelerated performance in Asia in the second half mainly driven by a tender which we could ship in China, 1,200 unit in one shop though at lower process, will get back to that briefly. We had a staler stellar half in the US, India also driven by a base affect. It was as I mentioned before a little bit slower in the second half but we saw that March again coming back and we’re pretty bullish that North America will continue to be next to Europe to core of our CI business in the next two three years.
Good news is really the pipeline and I will mention a few of those highlights in a minute. That chart looked a little but different than for the corporation or the hearing instrument side but we are proud about it. I mean that business has been growing steeply since we joined the group and especially what we like is not only the gradient, it is also the fact that here on the EBITA side, first time in the history of AB, we broke even on a operating profit level and that’s definitely very-very joyable to see.
Here is a glimpse into the P&L. You see that we didn’t have the same EBITA in the second half, that has two reasons. The first reason was, we shipped the China tender or we had the China sender shipment in the second half, that came in with a lower price with a little bit lower, relatively lower contribution from the North American business which has higher prices. So that gave us somewhat of a dilution of the gross profit.
And the second more important factor even in the first half, we capitalized more R&D than in the second half. We expensed more in the second half that had the order impact on the EBITDA line. We will see some of these swings between halves as we go, as that business definitely is compared and is not living yet on that high stable level as we are used to it in the hearing instruments side.
Currency impact also diminished quite substantially in the second half, so the 30% growth is more or less real growth, organic growth and healthy growth.
Now a few words to the pipeline. It’s amazing. We have a chart – I’m not sure whether I showed that to you in past quarters. It could be. We have a chart historically going back about 15 years, and you see the product launches of AB and you seen now that the ones since they have joined the group, this is like kind of an exponential acceleration.
When I want to say with that, it does manage between Phonak on fee and AB on the R&D side is start to paying off. And you can see now the first baby after marriage called Naída Q70 and that thought process is really a fraction of the fact that between the two companies and businesses there are tremendous synergies.
We launched the new HiRes 90K advantage implant which is a stronger impact mechanically as well as electrically. We launched in Europe and in Canada the new HiFocus Mid-Scala electrode. It is a shorter, pre-band softer electrode. It is for protecting residual hearing mainly for adults, which has a natural hearing less progression throughout their life, and far beyond using the Naída Q hearing instruments.
So they are usually candidates to step into an implant, with those patients you have residual hearing in the cord organ and you don’t want to, you don’t want to touch it, and you don’t want to destroy that one. That’s why doctors in touch moments tend to use electrodes which will prevent, softer and shorter and that’s the Mid-Scala electrode.
Now the third thing is the Naída CI Q70 processor. We’re going to launch it in two days and the Congress in Istanbul, we’re going to launch it for the markets in Europe and Canada and we expect the FDA approval for the US in the calendar Q3. So we are ready, we can roll it out, and here we go, that is first baby I mentioned before with the DNA, part of the DNA screen, Phonak part of the DNA flu that is AB. We are very excited about that one and then of course future baby to come here.
With that, I hand over to Hartwig, who will lead you from the excitement of new products and the hard realty of the number.
Thank you, Lukas. Good afternoon, ladies and gentlemen. I try to point out the page number from time-to-time as you can follow the sequence of my comments here. Yeah, Lukas already alluded to a number of financials characterizing the operating trading of the company. So I will round up a couple of particular elements here, but then also expand on balance sheet cash flow and dividends and also get back on the one-off items in a brief manner.
So financial highlights, big picture is that we have good sort of growth in both sales and earnings in both segments. Let me point out again the gross profit improvement 69.1%, up 80 basis points. That’s a good indicator for us that the business is healthy, that the prices that we achieved for our product is healthy and that we stand in the market with high quality products in the eyes of the customer.
Normalized OpEx growth 5.4% in local currency compared to 7.4% sales growth. That’s the operating leverage that we are looking for and it is important for us that we have this – those ratios that work for us. Let me tell you that we still, however, do invest in R&D while we have those ratios and this R&D investment not only articulate itself in what is debited to the P&L, but more and more and I will come back to this in more detail.
We have capitalized development costs in the CI business, this year CHF 28 million that’s up CHF 12 million over prior year. And let me just say this is not just by our own choice and policy that is IFRS determining that capitalization and we handle it consciously and conservatively.
So normalized EBITA margin was increasing through 21.5% without the help of currency, which was rather moderate this year as it would have gotten to 20.9%. So almost 21%. Earnings per share up to CHF4.62, that’s a 25% increase, very important for us that we were able to show strong increase in cash flow. Operating free cash flow up 33%, is another important indicator for us as the business is healthy reaching CHF319 million. That’s important number for us.
And on the back of this, our net cash position or net debt position, however you want to look at it, has improved considerably. Now, we are looking at CHF 186 million of net cash comparing to CHF 64 million net debt a year ago. You will remember that we still carry CHF 230 million of a term loan from the AB acquisition.
I’ll ask you to skip page 43, which is showing the numbers that I’ve just mentioned. It just shows off in addition again the return on capital deployed, number of 22.6% on a normalized basis. This is, as we said early on, an important step in the right direction to our midterm goals, up from 19.2% the prior year.
Page 44 is giving you again the big picture of the EBITDA trend. Alluding to again that this year we have a good growth on EBITDA carried by both segments, it is predominantly organic growth. It’s a little bit of acquisition growth as well, $43 million organic growth, $5 million from acquisitions, and then another $23 million from foreign exchange, all coming from the first half year. Second half year was very much neutral in terms of foreign exchange.
This slide also reminds us that we had one-off costs showing in the reported results, reported results on EBITDA that was $183 million, including $203.6 million one-off items. I guess I have been articulated before there is one more slide that I will show with further details.
Let me come to operating expenses. It’s a little bit more, as I said, it’s important for us to watch operating expenses. The operating leverage game is really core to our management strategy. And you see the different ratios and their development here, you see R&D as a percentage of sales declining a little bit different from 7.2% to 6.3%, but really this is only showing part of the story as we have also capitalized development costs and I’ll have another slide on this in a moment.
Sales and marketing constant at 31.1% of sales, it is a number where some of you might have expected a little change to a lower rate, I want to tell you that we have been working recently successfully in terms of improving effectiveness and efficiency of our marketing and its approach. We really do, we really engage the new media digitalized communication tools and we leverage the scale that we have.
On the other hand side however, this year had a couple of factors that play, that didn’t play in the year before and some of them or most of them were already mentioned by Lukas is in one hand side the accumulation of all launches that we had that both the October launch obviously but also a big part of the April launch we are debiting in terms of the expenses into this year’s P&L into the 2013 – 2012-2013 P&L.
We had given another strong push also in terms of the direct to consumer marketing that we engage in to promote the Lyric product. So this is a product that requires the more significant marketing expenses. And as you have heard us saying that the product is very successful, we are very satisfied with how the Lyric2 product is received by the market and we have decided to support this also by accelerated direct to consumer marketing spending.
The last not least, we also have a little bit of mix impact here that generally due to the acquisition activity that we have, the retail business is growing a little bit ahead of the wholesale business and the retail business has a higher share of sales and marketing of sales.
If you look at G&A, increasing at 5.4% of sales that you see, the operating leverage at work. Also there, there are some special factors showing the – in absence of those factors, we would have shown an even lower G&A growth. We had a little bit of integration cost going into this year’s P&L from the retail activities in the US. But just as a message to you, we are extremely conscious and extremely control, sensitive, and when it comes to G&A cost in particular.
This slide shows a subtotal here as those are those different line items very much talk about the ongoing recurring activities. And then you see the other expenses on the bottom that identify for the year under review, the one-off items, and I’ll come to this in a moment – one-off items of CHF 204 million.
Just on page 46 real quick, the R&D spending shown here as the total of what has been debited to the P&L and what has been expensed or has been spend in terms of cash spending in regards to capitalized development cost. And you see here, that we have a total of $140 million for this year, which is about 8% – unchanged at about 8% towards the two prior years. So we’re still investing heavily in innovation, it’s important, its core also to our business strategy, and year-over-year the total spending is up 5.5% which is $7.4 million in absolute terms.
Page 47 now tell us again real quick on the subject of one-off cost. I don’t want to rest too long on this page. About three or three and a half weeks ago, we have informed all of you about the provision increase, preferred liability cases in Advanced Bionics relating to a recall out of year 2006 which was well before the acquisition of Advanced Bionics by Sonova. There is really not much news to report here. I’ll just take the occasion to confirm again that we feel very comfortable with this provision and – but really at the moment, there is not much more to say about it.
We have also included in the normalizations, the one-off cost for the restructuring of Rixheim. Rixheim has been the international distribution center of AB. So for the non-US markets over many years and however meanwhile we have local distribution organizations in most of the important markets and that function is no longer required and we will service the French market out of Lyon where we have other Sonova activities already. That’s why we’re going to close Rixheim and have made this focus reserve of over CHF 3.2 million.
Now Lukas mentioned the CHF 2.6 million, I believe in regard to settlement cost paid to a group of investors in regards to the late profit warning of March 2011. That was a charge that was actually already debited to the first half year, what we have said. In order to give a transparent picture on the full year, we have to included this in those normal picture.
Now, if you look at the line items below EBITDA all the way down to income after taxes, you see that not many of those items show very significant movements year-over-year, amortization and impairment very stable, financial result very stable. The only word that I would make here is about income taxes.
Also income taxes are moving by very modest amounts from $35 million to $38 million. If you look at the income tax rate, that could make you, you think if that needs an explanation. And so the comment that I want to make here is that the provision increase for all the product liability cases of Advanced Bionics; we have treated those – this provision increase for the moment as non-tax deductable.
This is just more of a conservative way of account for it. They are going to be tax deductable at the point of time when they become the cash-effective based on the US taxation system. But also then we will have still net operating losses carried forward. So it will take us a while until we really can make use of those charges, if they occur. So in terms of conservative accounting, we haven’t capitalized those, and that makes the tax charge remain we’re on a level where it was about $35 million to $38 million, and that makes us tax rate go up a little bit to those 25% that you see here.
Cash flow, page 49. You see that structure of cash flow analysis that you used to from our half annual and annual announcements. You see that the cash flow before changes and networking capital is about like CHF 56 million year-over-year that basically reflects the increase in normalized EBITDA of CHF 71 million adjusted by some non-cash items in particular in the area of unrealized foreign exchange items.
And from there you see that the changes in networking capital and taxes were negative, as they normally negative in our business that requires a certain level of working capital, as it grows. But those CHF 57 million that you see here in terms of charge to the cash flow is lower than we had last year, and it is an effect mix of things that on, on hand side, yes, there is working capital items that have increased, on the other hand side we have others, in particular operating accruals that have not increased. That actually have worked in our favor, and this is the result of this at this very moment of the 31st of March.
Operating free cash flow is up by 33%. We said this and this reflects that also cash flow from an investing activities, and that’s a combination of PPE investments and the capitalized development across is relatively stable at CHF 69 million rounded comparing to CHF 65 million in the prior year. And if you go further down, you see cash consideration from acquisitions down from CHF 83 million to CHF 56 million here, and this is under review.
And really you hear us, you’ve heard us saying on many occasions that we are investing on an ongoing basis between like CHF50 million and CHF70 million every year for both on retail acquisitions. There is no change in that, it’s just that the net realization on the cash flow that has certain fluctuations depending on when deals close and when earn out provisions become cash equivalent. So that gets us to the free cash flow. You see cash flow from financing activities, normally a negative number, also this year a negative number.
It considers the dividend and the difference between last year and this year is this both from a one hand side, we haven’t amortized anything under the term loan, which we did in the prior year and on the other side we had a higher effect from the use of conditional capital to satisfy our LTI program plan.
So that gets us to the ultimate, the number you have changed in cash and cash equivalents of CHF 243 million and that helps me to transition to page 50 on the balance sheet which articulates that as a consequence of the good cash flow, our cash position is now solid positive net cash of CHF 186 million and so it’s a very solid balance sheet that we are looking at the equity ratio of 61%.
Talking about working capital, we have, I must say a bit of a more mixed picture here, that working capital increased moderately but it has two different factors really that we want to comment here on one hand side, we are satisfied that DSOs have been relatively stable despite the fact that we are engaging more and more in non-industrialized or less industrialized. The economies where the DSO culture is a little bit more difficult than in the western world.
On the other hand side, DIOs have been going up from 122 days to 148 days. I want to tell you that we do understand that trend, but that we are not yet extremely happy with the trend and that we are working on a mitigation of those effects. As you will appreciate, the proliferation of products that we have seen coming in this year under review from those product launches on the HI side, but also on product novelties on the CI side, just proliferates the SKUs that requires us to have more on stock.
And we believe some of that trend will have to – will be there to stay on the CI side, but we will also work it as hard as we can on the HI side, and to break this trend and then comply.
That gets me to my last slide. On the dividends, as you’ve heard we will see the board proposing an increase by a 33% to 160 per share, that’s a payout ratio on a normalized basis of 35%, up from 33% last year.
It is obviously also thought as a signal to the shareholder base that the board and management is extremely confident about the performance and the opportunities for Sonova, including also that any cash-out that we can expect from the provision increase for product liabilities, as already been taken to account here and reasonably assessed. So the management and board is very confident and we found it appropriate to make the step towards the shareholder basis, which we assure will be very smooth.
That concludes my remarks. Thank you very much.
Thank you, Hartwig. I would like to warp-up this presentation this afternoon with an outlook. Looking into 2013-2014 brings you to a guidance. We are guiding as following: We believe we can grow our sales by 6% to 8% in local currency. So the whole guidance is in local currencies, including 1 point from acquisitions, with a nice leverage into the bottom line or 9% to 13% EBITDA growth, also in local currency measures, and that gain will get us a nice expansion of our EBITDA margin.
There are few assumptions behind that. First, it is as I said in local currency debt. We are not playing here with a currencies that’s too difficult for us, or probably for all of us. We are measuring that guidance again in local currencies. We are assuming – second point – HI market growth, but we are assuming that the market is probably growing at the lower end what it has seen historically.
Our regular database checks into those markets which we address – regularly it’s about 80% of the HI market showed at the market is probably in units growing somewhat in a very low single-digits. We think that we can do better in the US and in Asia. These markets will be above average also, and I think our performance there will be above average; whereas in Europe, we think it’s rather below average. The European markets are still somewhat difficult and we take here a more cautious approach when we plan our business. It’s mainly referring to France, Holland and some of the Nordic countries.
Third point, we assume that the CI market is growing in the order of about 10%, and we have plans to beat that again.
And the fourth thing is believe that we can see a continued acceleration of our HI business following the offer of our Quest launch, which was well received. I can tell you April was a good start into the year, especially on the Phonak side with a new platform, so we are pretty positive that we can really take some of that momentum into the new fiscal year.
The guidance is not far from what we guided a year ago, if you consider that last year we definitely had more contribution from the comeback of the CI business to its full extent into the market. So from that end, it’s very comparable, and if you peel it apart, you would say that underlying under the 6% to 8% there is about a 4% to 6% growth as you – total HI business, which is Phonak, Unitron, including retail.
The fifth point to mention is we think this year we’re going to see some recent seasonalization than what we have seen historically. When we looked at first half, second half last fiscal year, the one which we just concluded, we had about 49% of our EBITA made in the first half and there are 51% in the second half we see. In that new fiscal year rather at 47-53 split, and that comes mainly from the base effect of the CI business. CI will be anyway a little bit back-loaded, as we come with some of the new products rather this summer season.
Just to mention how the currencies have been looking for us in the last two years, you see the averages in fiscal 2011-2012 and 2012-2013 for the dollar against the Swiss and the euro against the Swiss franc. And I end to mention updated the sensitivities of our sales and EBITA to any kind of swings in the US dollars and Swiss franc are shown on the chart on 54 for again for your use.
That concludes our presentation today. I know it took a little bit longer than usual, but we really wanted to give you a lot of details and transparency, and give you upfront feeling how we look into that business. How we steer it and control it. Overall I think we have finished the year solid. We are on track for our long-term target and with that I would like to hand back to Thomas to lead us through the Q&A.
Yes. We will start with the Q&A here in the room for a few questions, and then we will move on to the webcast after that. So who has got a question?
Chris Gretler – Credit Suisse
Thank you. It’s Chris Gretler with Credit Suisse. I have four questions actually, and I think you’re already reporting half year that’s only two per quarter. So, I’m basically starting off the medium term, now basically this 25% target, could you translate that actually to current – now has been changed or effected by season so far? Second question relates to your Connect Hearing business. At what stage do you intend to break out more details and I noticed now that it has been a separate section in the annual report.
So I was wondering whether there is any intention or basically break it out by sales and hopefully profitability as well? The third question relates to gross margin and particularly in the split second half and first half.
And in second half I know it is we had a relatively slow growth in retail, and on the other hand and also basically now cochlear implant was totally affected is basically everything in addition to the increase we have seen basically due to the mix shift in hearing devices. I was just basically hoping you can discuss this gross margin by business and the mix actually effects. And the last question on this court cases, could you give us an update on these number. I think now you mentioned in the last call 27 in court, that has changed in any material way and where we would have to expect the next court cases and the next headlines to come from? That’s all.
Okay. Fair point. Thank you, I noted it down, I’ll start with the last one. We are usually not giving detailed updates on the kind of cases we have or definitely not divulging our legal strategy. But whenever you read that the court case has been called off or let’s say this casual court that you can assume that we settled.
So that’s what I can tell you. And definitely, our strategy is not to go to court, whatever we can avoid there is definitely greatly appreciated. We said this morning our core competency is not in court, our core competency is on the market and selling products, which does not mean that we’re going to settle for any amount, we will fight for every case but we want to make sure we have a reasonable approach here.
Coming back to your business questions on number one, Forex, yeah, you, as soon as we have a little bit headwind everyone wants to change me to five-year plan. I’d just say, look, we look at that other five year average we said a year ago assuming constant currencies. Now it could be that a year from now we’re going to get a little headwind again, so let’s take that on an average.
I’d say if we can get 25% on the average currency environment we have seen a year ago, then fine. The year ago then – if that currency environment would change over the next two, three years to our favor, we would change historically. Fair enough. Connect Hearing details.
Yeah, I know. You are not embarking to segment reporting at this stage, we haven’t decided or proposed to the border at all, but we communicated several times like last fall that our retail business takes about 10% of our unit volume for our own channels and we have about probably CHF 0.5 billion so for our own channels.
So that gives you an indication how big it is. But I don’t tell you how profitable it is or whatever kind of relative margin we’d have and that brings me to the third point, Chris. That’s in fact a very good question. I mean, all questions are good, but that’s a particularly good one.
You would conclude that given – that means you have to say retail maintained kind of its contribution on the growth to the total, but didn’t accelerate. So it didn’t just fall off. It was just a potential part of the HI portfolio. CI on the corporate level, not on the HI, that CI kind of diluted in the second half a little bit the cheap BSE Chinese order was booked or shipped. But that will conclude, and it’s in fact true that our wholesale business really did pretty well in the second half, on the top line as well as in the GP, and a reflection of that is the high-end range, which was nicely converted.
Chris Gretler – Credit Suisse
Thanks for taking my questions. I would like to speak up where you ended talking about your high end sales improvement in the second half of the year and ask maybe a bit of a provocative question saying, given the fact that you had positive feedback on the high end, stronger growth than in the other segment, do you still believe that the change in your loan strategy was the right way to go.
And second of all, if we look at the loan strategy going forward and we will see somewhat moderate growth rate given the sheer side of market share that we have, how much did you believe can you save on marketing and sales calls given the reputation of the brand? Thanks.
Yeah. Thanks a lot. First on the loan strategy. I mean we have been launching now in six to seven months, more or less the whole range of Phonak. We have a competitor of our overall 20% of the total rate. And I mean we are done and set and we have all product that tend and interestingly enough though many people were critical we see the high end growing.
So I would say that is probably good support of that approach. And as said, again, before it is the only think of our sales, we have to think of our channel partners as well, for them life is still much easier than and it paid off. So for us that thing is kicked off. You stick to it, but we will change into future is that we definitely always bring the Audéo RIC first.
Your second question was relating sales and marketing, at that point, we assume that our launch cost will be on a relative base lower in the next one and a half years, but then we’re going to prepare for the next big thing. But we will compensate some of that by more efforts in China to further develop our business there. So overall, I don’t expect that we will see a dramatic drop kind of in our sales and marketing efforts, but it will be a shift. Martin? All right, you are the here.
Yes. Another question on the high end. I know you don’t want to give us numbers on Lyric, but it looks like you’ve just about doubled in terms of number of trials, trying to extrapolate which showed on page 25. I’m trying to get a sense of that the relative contribution to the growth of the high end from Lyric versus the new product launches, just to give us that comfort that this high-end product launch has been successful.
There are two questions, first on Lyric. I give you a little bit more numbers. So if you divide that shipment cost of CHF 220,000 by about six to seven, you come to the number of years which contracted last year. Contract does not mean full year revenue, as we have the subscription model, but you see we have in the order of US$20,000 – US$25,000 contract to invest here on Lyric. This is a sizable amount. So that gives you a feeling that where we are. And we want to ramp up that of course further in the future, build solidly country by country. Yeah.
But in terms of national contribution to the growth of the premium products that you reported in the second half?
Yeah, that of course you can diluted down. It’s probably 1 point, I would have to calculate that, yeah.
Okay. And you say you are keen to make you launch the RIC close next time, I’m just trying to think given that you presumably converge every single form factor at the same time, you said you’d launch the RIC in preference to the BTE and ITE.
No, we couldn’t change casual anymore. It was internal. We had no chance. It was a long debate about a year ago when we said comps are really pushed and the RIC came two-fold and have the ITE later, but we couldn’t make it.
So you would just give some color next time around just to begin it – sorry, completely unrelated question. You highlighted that you’re the new process later this week at the conference, anything else you’re going to launch on the margin side.
Thank you very much.
Not beyond what we showed.
Oliver Metzger – Commerzbank
Oliver Metzger from Commerzbank, two questions if I may. First one is regarding your outlook. You mentioned an acquisition growth – rate growth of 1% for next year. That’s definitely below rate of last years. So first part of the question is which extend of growth is related to prior year? And second question is this probably more the change of strategy that’s or that probably less target especially in the retail segment available that you expect going forward lower external growth? Second question, is on the market growth.
If I look for the market growth or especially units of your Danish competitors – list as Danish competitors and also on you, I would conclude that probably the unit growth could be a little bit higher or do you see any player who really donates in a big extend market shares?
Okay. Probably to the second question what I did mention today is that our unit growth last year was smack on with our local currency growth on a – on the year. So it – that’s acquisition as well as organic. So that’s probably also pretty much indicative that our overall pricing was in pretty good shape last year.
So now to your question who donates, well, that’s always the same question, very difficult to say but when I look at some of the reports available to us, I would say that probably one or two definitely rather on the gaining end and there is probably one or it just a moment probably not gaining a lot from the reporting line, whether it’s unit wise, I can’t say.
I’m not or we are not confirming that the market is shrinking. Our data shows the market is growing, that sounds like a bomb. If you’re cut from calling, the market is – we think our data shows the market is on a unit level growing in the low single-digit actually, that was Q1 data. I mean color in Q1. Now, your first question was about contribution of...
Oliver Metzger – Commerzbank
Acquisitions, I mean, Barry, you see last year maybe you can say that we had.
Well, I will actually say we don’t want to really split this into year-over-year and new acquisitions because it isn’t in fact is a continuum. I mean in many cases, we buy minority stakes firsts and depending how earn outs and other things will come, this then becomes a majority. And so it’s not that we really can – really plan when those changeovers are taking place. So we take bonus, it’s say down as a percentage point, it can be bit more.
And your question regarding whether we are conservative with the pipeline, the moment the pipeline has no big fish it, a lot of smaller one round ups which we bolt on two of nine organizations or few organizations in the nine countries. So it might change in the next few months that we see a couple of speaker attractive one.
We are probably a little bit tougher these days looking at acquisition pricing or we can clear the road target for us into a wholly grave. And we don’t have these acquisitions being diluted when on the road. I’m sure not forever diluted on EPS. I mean there has been some fantasy prices out there lately and we are not following that.
Let’s take one more from the room and then we’ll move on to the webcast.
Florian Gaiser – BZ Bank
Thank you for taking my question. Florian Gaiser, BZ Bank, it’s about the dynamics in the implant market compared to they had some issues, plus that open up opportunities in terms of breaking into account how long do they take to convert to have meaningful volume? Is there more in-store here than we have seen now, because H2 has always been quite good?
Secondly on tax rate, if you could maybe help us with what we could except this year. There is a lot of ins and outs in the situation. And lastly, on the Alliance Boots situation that means the minority charges will go up this year. If you could help us if it’s a material number with a little bit of guidance?
Sure. The dividend of CHF 1.60 versus Sonova Group, and not to boot. We can come back to that question. And the – I hand over the tax question the minority interest to Hartwing Grevener. The dynamics on the CI market, I mean it’s a fair point to say that – I mean the market is made and dominated still by cochlear. Let’s be frank here. Two-third of the market is there’s and they have done a fantastic job in the last 20 years to really build the hospitals of and really followers.
So for us it is play our game and try to get acceptance and recognition in these centers step by step, country by country. Yeah, we get some doors opened and we get some approvals. Finally, in Switzerland, we are approved. We can ship into the University Hospital of Zürich and buy that into the other Swiss networks of ENT. So that’s an achievement. But I tell you, it takes time. And so to break into these (inaudible) for us, yeah, its work.
And ABS, fantastic product, but that’s not sufficient. We need to make sure we get into these hospitals and that’s ground work. So it looks like easy, but I think cochlear has covered their bases so well around the globe that to be me, the runner up. And by the way, our partner ENT, they are good as well. They all know this as well. So three, four middle players here in the market, two which really work hard against one big one. But it’s not about product only. It’s not about pricing. It is really about finally getting acceptance in these hospital, that takes time.
Now, I hand over the tax question and the minority interest to you.
Yeah, tax rate really first payment is the anomaly of a higher tax rate this year is a onetime effect. So next year we would expect the tax rate to be relatively stable where it has always be or has been lately, which is around 12% to 13% mark. It is true – in case that’s what you’re also referring to, up the severe falling was great amount of attention. What the Swiss Tax Administration does with the pressures that I imposed on the country by a variety of different tax restrictions. And this will have to be seen in the midterm.
You need to consider – in case you cut try of categorize Sonova in terms of its robustness, the robustness of the company’s tax regime that we are not a holding offshore to Switzerland – we are growing in Switzer land. We have R&D here. We have protection here. So we have by no means an aggressive tax evasion scheme here. So we feel in the universe of company’s headquarter in Switzerland we feel relatively robust. And however, in any case, any change in regards to the Swiss tax environment will take a certain long time.
In terms of minority interests, you will have to forgive me that any number that I’m giving you here now is going to be relatively specific then to EUHC. So that’s why I need to be a little bit vague here, it’s a small single digit, $1 million figure that we’re looking at here. So it shouldn’t really move the needle from a million.
Okay. I suggest we move on to some questions from the webcast. And I will start with a question from Romain Zana from Exane BNP Paribas. First question should we expect percentage of capitalized R&D versus total R&D spending to go up further? And the second questions is could you give us some more color on the lack on upgrading leverage in the CI business in the second half?
Okay. Hartwig, you take the first one and I take the second one.
Yeah. Okay. Well, it’s true, fair observation that the trend in regards to capitalized development costs of CI is going to be going up a little bit further as product developments are getting to the end of their pipeline. And the rate of increase that you had seen this year is probably a reasonable level of magnitude indicator of what we going to see next year, that’s my answer to that question.
Yeah. Second one, as I mentioned before, we had a dilutive impact on the CI margin, gross profit margin from shipping, the Chinese tender, that diluted the margin, the gross profit margin in second half in Europe 200 basis points. And we had and on the OpEx side more direct spend of R&D relation to capitalize than we had in the first half. So if we would exclude that or even now, it’s kind of rebalanced that R&D gain, we would probably have seen two halves of CHF 1 million each positive. So we are talking here really some minor swings.
The next question is from Lisa Clive from Sanford Bernstein. How has the Mid-Scala electrode being performance in the market so far, first question. And maybe we’ll just take it question by question might be easy here.
I can take that. Hi, Lisa. The Mid-Scala, what we hear from the markets here in Europe that has receiving it very well and one of our indicator market is Germany and we have seen that all the three CI centers we are working on predominant, the turnover to being in the – we’re very bullish about it.
One of those centers was even involved in the clinical trials, and that gave us definitely a headwind. So we’re very positive about the electrode and we all know the German market has a big population of existing as well as future adult patients, so seniors, and that’s what probably we also see a very positive reaction there.
Okay. Next question is, how has the performance of AB been in different major regions? I think you gave a few comments to that, but I think you want to give some color?
Yeah. I mean we have to take that part in the first half. Europe was pretty even, growing nicely double digits. Asia was lower in the first half, came back very strong in the second half and part of that growth was the China tender.
The US was – in the first part with only 20%, but we had a base effect of being not to the full extend in the market a year before. And then it came down to single digits in the second half. And that was mainly because January, February were very low due to new search procedures. By the way, when you read some of the comments and reports about cochlear, they were complaining about the same issue in the US.
I think we move to a question in the room. Okay, I guess, we’ll move onto questions from the webcast again. Next question comes from Veronika Dubajova from Goldman Sachs. Can you discuss your Connect Hearing rebranding efforts, why have you decided to rebrand all shops and what is the margin uplift that you are expecting from that?
A very good question. It sounds sometimes a little bit like a bold rebranding approach, we got very good pragmatic here. The concept and the whole marketing strategy for the total group is Connect Hearing. And we do – we respect the local brands which have grown over time. So we won’t change to Hansaton brand in Australia, we won’t change to Lappere brand in Belgium, I mean that’s a dominating brand in a country like that.
That’s why we will to there in these country rebranding they will optically visually adopt more and more to Connect Hearing kind of visuals, but use the name Lappere. In the other countries, US, Canada, Australia for instance in New Zealand we go really with Connect Hearing, but the US rebranding takes about 24 to 36 months to rebrand because we are not want to have this layout of cost too aggressively. We go as we go and we have some times certain shops which are pretty new, we don’t want to throw CapEx at it in one shot. So we go here with a clear strategy but really step-by-step.
Okay. And then a related question, are you worried that this rebranding might have a negative impact on your relationship with wholesale customers or independent audiology?
I’m less worried that the rebranding has a negative impact, but always when you have retail and are active in retail, there is a certain stress and strain where to some parts of your wholesale customers. A year ago we had the rollouts where we came out with it and said we are in retail we have your friends which was one of the non-disclose, we disclosed it. We had certain rumblings in the market which have more or less quite down now.
We see still some rumbling in the US. But let’s be fair, in the US, we have about 400 shops out of a market which have probably 15,000 point of sales. We have three major centers which is on the south, West Coast and Southern California. We are in the Midwest, around Chicago, and we’re in Dallas around the Jones acquisitions. I mean we’re not here talking about a big fight against our broader independent base. So we’re talking pockets and I think we can handle that but it is, but never retail is in the gain, people see as this partners about competitors that we have to mange that.
Are there any further questions in the room? Okay. So the next question is from Lorenz Reinhard from Pictet Asset Management.
Lorenz Reinhard – Pictet Asset Management
Did the decision to increase AB product liability provisions have any impact on the proposed dividend and now that the company is in a cash position to what level do you expect the payout ratio to trend to over time?
Fair point. We can say blankly the proposal, we made to the board, and the board is going to make to the general assembly was not touched at all by this decision to increase our provision.
The reason is the following, when we looked at the dividend we take a pretty broad long term TSR model, total shareholder return, which includes what we taking from our cash flows, operating cash flows, what we need with acquisitions, the range we use, what we then can spend on dividends, what we have to pay back commensally on debt and we look at that totally.
And when we did that, the remodeling based on the increase of the provision we saw that the payout eventually we have are spread so over so many years that it wouldn’t move the needle at all on the total cash position and the reset. We stay with the dividend proposal irrespective of that one. And Mr. Ryan, I’m happy to hear you, maybe I can see you at Friday afternoon, it will be nice, well I can confirm you even face by face that dividend wouldn’t have been higher otherwise. Don’t blame always the CI business.
Okay. The next question is from Michael Jüngling from Morgan Stanley, and I’ll combine those questions there regarding the guidance. What does your guidance imply for organic sales growth for the two segments? Does it imply a stronger – sorry, for hearing aids, do you expect a stronger 1H versus 2H and what does it imply for the market growth?
Yeah. I said before when we come to this seasonalization we had on the EBITDA level in 2012-2013, 49% of our EBITDA was made in the first half and 51% in the second half. We see a similar picture on the HI side for the 2013-2014, we see a little bit lower contribution still positive from the CI side in the first half and then a stronger contribution on the second half. That’s why we said overall display will be rather 47%, 48% of EBITDA contribution versus 52%, 53% in the second half.
Then we regarding the growth, on the – I said that we assuming that we can beat the market which will grow in the low single-digit we believe on the HI said and we should be able to outgrow the market on the CI side, which is in the order of 10%-ish. So that gives you an indication that we want to grow our CI business again in the teens, 0and we want to grow our HI business between 4% and 6%, excluding acquisitions.
Okay. And in interest of time, I think we’ll move onto the last question which comes from Hendrik Lofruthe from HSBC.
Hendrik Lofruthe – HSBC
Regarding in APAC, how much is coming from the Chinese tender and could you elaborate on the targets and approaches of your China growth initiatives?
Okay. The second half absolute number in China, you can read on the tablet there had about CHF 9 million from the China tender, on the CI side. The rest was all more – no, we had of course all the CI business there, but the bulk of course of the growth in the business is hearing instruments, yeah. So that gives an answer. And what was the second question?
Hendrik Lofruthe – HSBC
And could you elaborate on your China growth initiative?
Yeah. So as we’ve communicated several times that the initiative has been worked out a year ago, the board has decided upon it. Last August, we rolled it out. We have in the wake up that decided to install a management team in Asia in general, so there is an executive board member out there with the team and we have specifically geared up in China with pretty steep budget.
We make the moment to give you a feeling about CHF 25 million overall in China that were targeted to be at about CHF 100 million in four years. So that is a pretty steep target, but we know it is time to be really active and mean it in China otherwise the economy is to both then somebody else will do it. And probably nobody from our industry, but maybe somebody from outside the industry and we don’t want have that.
And I think this is all the time we have. For those of you who I couldn’t ask the question, feel free to give us a call and we’ll try to help you one-on-one. Thank you very much. And this concludes this conference call.
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