Sonova Holding AG's (SONVF) CEO Lukas Braunschweiler on Q4 2016 Results - Earnings Call Transcript

| About: Sonova Holding (SONVF)

Sonova Holding AG (OTCPK:SONVF) Q4 2015 Earnings Conference Call May 18, 2016 8:00 AM ET

Executives

Thomas Bernhardsgruetter - Head, Investor Relations

Lukas Braunschweiler - Chief Executive Officer

Hartwig Grevener - Chief Financial Officer

Analysts

Oliver Metzger - Commerzbank Corporates & Markets

Holger Blum - BZ Bank

Carla Baenziger - Bank Vontobel AG

Michael Jungling - Morgan Stanley & Co.

Ian Douglas-Pennant - UBS

Chris Cooper - Jefferies

Alex Kleban - Barclays Capital

Romain Zana - Exane BNP Paribas

Thomas Jones - Berenberg

Richard Biliczovsky - AB Bernstein

Peter Testa - One Investments

David Adlington - JPMorgan

Veronika Dubajova - Goldman Sachs

Ines Silva - Bank of America Merrill Lynch

Ladies and gentlemen, good morning or good good afternoon. Welcome to the Sonova Holding AG Publication Full-Year Results 2015 and 2016 Conference Call and Live Webcast. I’m Sheri, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time it’s my pleasure to turn over to Sonova. You will now be joined into the conference room. Thank you. Ladies and gentlemen, please hold the line, the conference will begin shortly. Thank you.

Thomas Bernhardsgruetter

Good afternoon, ladies and gentlemen. Thank you for those of you who made the way here to Stafa for the full-year 2015/2016 results presentation. I also want to welcome everybody on the line. There will be a presentation first and after that you will have a chance to answer – ask questions, both people here in the room, and we will then also move to the people on the phone.

So without much further ado, I just want to quickly point your attention to the disclaimer and just mention that this presentation constitutes neither an offer to sell nor a solicitation to buy any securities.

And with this, I would like to pass the word on to Mr. Lukas Braunschweiler, CEO. Thank you.

Lukas Braunschweiler

Thank you, Thomas, and good afternoon. Good morning to everybody. Thanks for joining us here in the room in Stafa and also on the line for our fiscal year 2015/2016 presentation. I will share the presentation with our CFO, Hartwig Grevener and we decided to do it as follows. I will cover the first three points, which are largely referring to the Group. He will then take over with a few comments on hearing instruments, cochlear implants, and wrap up with a few specific comments on some specific financial items.

I will first go through the Group on the past year, then I will come back on AudioNova, and then we talk about outlook, and we do it in two ways. We do an outlook for you, including our updated mid-term financial targets for the Group without an AudioNova, and then we give you another outlook and say, okay, if AudioNova happens, how would the subsequent 12 months look like? So we need to cover that in two ways.

Let me start with two summary slides. First, a slide on the year, how do we look at that? We can say and that’s referring to the chart on the top left, we had a substantial pickup in the second-half in both reported sales and EBITDA margin. We can say that business – the CI business returned to growth in the second-half. In fact, we reported double-digit growth in the fourth quarter, again.

In HI, we – sure, we were fighting the year with a transition impact on the retail strategy after the disclosure in Germany. That was for us a challenge up to about Q3 and then Q4 we saw the trend stabilizing in the return slightly to growth in Q4 in our fiscal year Q4 in Germany.

When I look at the top right chart and go back to what we told you in terms of our targets a year ago, I bluntly say, look, we missed our top line by about 200 basis points or 2 growth percentage points. And that corresponds to about CHF 40 million of sales. And if I dissect that, it’s very simple about CHF 30 million we missed out on the CI business in total and about a CHF 10 million we missed mainly in the second-half on Costco against our original plans, and I will come back on that later.

But the underlying business we can say was solid. We returned to growth in the VA North America we had the stable commercial market share I said before the Costco mainly due to the KS, that the discount channel we faced the couple off challenges in terms of our goals, which I’ll comment later on.

Europe solid growth overall as I said before after a pretty difficult comparison of course in the first-half and notably in Q3 we had done an easier comp again in Q4 and stabilized the situation. Asia had a good run last year broad based. Australia did very well it’s one of our top eight countries and they did very well Japan had a good year, China of course and Korea came back after a pretty lousy year two years ago where we had to undergo the restructuring of the company and change management.

But we also can say we’re pretty happy about our product and technology pipeline it’s getting fuller and fuller. We think it’s very rich and we’re looking forward to the next six to 24 months where we’re going to have in a series of launches product coming out into the market in various form. So that wraps up basically our assessment for the full year a solid year definitely not full to our expectations, but overall I would say the group homed the year in a respectable way. Subsequent events AudioNova is a fact and we’re going to talk about that later on these gives you just a summary what is really going to happen once we have closed the year and going to integrate it.

You see on the top left the impact on the total sales of the group and on the three businesses and you can see we got a step up from about CHF 2.1 billion Swiss business in one step up to about CHF 2.5 billion Swiss business on a full year basis and the light shaded blue there that’s a retail business. So retail business will expand from about 28% of our sales contribution up to about 38. So then we have a much more balanced situation in our business portfolio.

When it comes to the geographic place that’s shown on the right hand you see that Europe of course is stepping up to become the largest region and whereas the other two regions in terms of percentages make somewhat a step back. And I think that probably also pretty interesting consideration, when you look today we have a very exposed situation I think geographically we have one country one single nation where we make CHF 800 million of our business that’s the U.S.

And by that we in a way further balance our portfolio that’s one comment, and the second comment when it comes to pure retail the retail business is in Europe are more attractive than the U.S. retail business per se. We integrated from of course that doesn’t matter, but when you really look at the retail per se it’s more attractive to be in a retail today with a relative higher value added in the channel and in the U.S. So AudioNova is for us a good fit if a consequence move in essence of our go to market strategy it will substantially expand our professional service business and move us up to the number one position in Europe we will though and I will show that in the guidance afterwards, we expect some temporary negative impact collateral from some of the wholesale customers in Europe mainly in Germany probably again and in Italy.

Now let’s move and have deeper look into a 2015/16 on the group. We increased our sales expense despite the currency headwinds I’ll show you after this in a numbers what it really meant in terms of Swiss franc the currency headwind as a top line EBITA big progress the progression was further held back by several impacts one is of course the volume the currencies, but also the mix in terms of organic versus acquisition. We had a solid growth in hearing instrument these time very much supported by M&A we had an improving situation in cochlear implants and recorder our situation improved throughout the year we had growth in Q3 we had double-digit growth in Q4 so 6%, 7% overall in the second-half and we see that momentum further the building on the yields of new product we brought into the market.

The group once more reports strong cash flow, solid balance sheet, ultimately that A allows us to increase our dividend that’s what we’re going to propose at the general assembly and B it’s that kind of expect kind of strategic flexibility we have that we can move pretty fast and work on deals like for instance AudioNova. A few words now to sales and you see here the bridge we use pretty much the same slide, which we used in the half year. So very consequence to represent the group’s performance again, and we are try to be very upfront clear and dissect all these impact. You see we had a decent organic growth, sure we like a mid single-digit growth or nor better in hearing it in total that is for sure.

But about CHF 30 million took previous year were just headwinds from Germany, From Costco in the second half, we were about CHF 6.5 million in total lower than in the first Costco year and this year and we had of course more headwinds from Brazil in the second half. That basically accounted for about CHF 30 million alone of headwind to previous year.

So that shown in this green light shaded area with the right arrow. But of course realities, we headed on the organic side about CHF 51 million to our sales. M&I contributed sort of CHF 71 million to our sales. CI of course with the headwind, so total in local currency sales would have been in the order of CHF 2 million – CHF 2 billion and CHF 150 million and we estimate CHF 80 million impact, so as I mentioned before an CHF 80 million impact just from the currencies to finally bring us to the reported sales.

Gross profit margin, that was one of the issues we had to dissect by carefully and happier, situation clearly improved. Now in the second half, you’ll see some of the normalizations we took out in terms of these – on both bands on the last – and this year on this working capital Forex losses, but when you really look at it from an operational, normalization point of view – normalized point of view, you’ll see that we had an organic contribution basically no diluted – not diluted. So the organic business really maintains the margin.

The M&A piece was a headwind and the CI was some of the headwind. Now exacting that a little bit more detail as shown on the next slide. There is some interesting news on that. When you really look at the organic piece, we were able to slightly increase our margin in expanded and the driver for that was really ASP. The ASP was the good news in that year, that’s driven, a, by a good mix, definitely new products and a good discipline in the market.

We are really tried hard with our sales force to be now perceived the stabilized driver. We have a leading position in many markets, so it is clear for us, and market leader should work to keep ASPs in a decent shape and obviously we achieved that. We had some transitional effect. In the transition from the service repair center here from Switzerland, we build out the capacity in the UK then in the first year maybe the last six months efficiencies were not at the level as we going to see it down the road.

As I mentioned before, Brazil is a tough environment at the moment. If you are feeling Brazil makes about 300,000 instruments in total about 200,000 of those are government tenders and government business, we review the situation, we decided to take out the lower margin, the lower price businesses, usually also those, which have a hard time to be collected, cash wise. So we really take it prudent our portfolio and make sure that we have a better position going into this calendar year.

As we expected M&A has usually a diluted impact in the first year, here we had a special effect on Hansaton, as we were phasing out the old Sivantos product and brought in our new products, which of courses integrated in a much higher margin. The full extant of the margin benefit, we only see and this coming year we are about 80% to 90% transition, but of the course in the last fiscal year where we move for the condition, we still have any impact on the GP side.

And we had slight impact also from the CI side. So overall that’s how we decide on the GP – the group GP margin, when it comes to the dissecting percentage dilution we have seen. So the good news is the core business, especially on the organic side performed well. You can’t say that the group having – should have ASPs in the same, that’s an important statement here.

EBITA, very much like what you have seen on the GP, we come back to that in numbers to this – to see that on the organic side, we had even on the low growth of only – 2.5% we had a margin expansion. So we added CHF 50 million of sales in – trending about CHF 50 million of EBITA reflects good mix, good price of this.

A contributed about CHF 4 million of EBITA and that is what I mentioned before in the first year, we should receive not a full impact yet on the bottom line and especially this year with product transition on Hansaton that fully came through, CHF 30 million impact from Forex that’s pretty substantial of course I mean CHF 80 million of sales translates in our case down to CHF 30 million of Forex very close, but you could calculate out of our sensitivity rules given usually connects with our guidance.

So tallying up to what I’ve said before we did not achieve our original targets, we came short of the guidance even the updated guidance we crushed value to 6% I could be now very careful and say look we sold our Italian retail business early in January that was little bit it I believe in north of CHF 20 million of sales so we had about CHF 5 million impact of sales negative impact was just from this spin-off in Q4 and that would have brought us back to the 6 or north of 6%, but I’m not been that careful and dissecting it, but what a transition we did out of strategic equations. We sold that business funnily enough early in January to AudioNova at that time we didn’t know that they’re in the process to sell it so we get now a perfect double Italian business back and finally have the crazy comment in Italy being then the number two. So the main drivers I said before of us not meeting targets CI about CHF 30 million, Costco another CHF 10 million and somewhat Brazil and then of course that record balance at the bottom line.

Now the few details here you see the numbers the P&L as reported and then you see the variance as we now see half year by half year and you can see the first-half was slightly slow – faster than the second-half come back so that’s why we have then some more details on the businesses. The section on page 14 of the various growth components most of that I discussed already. And then a few comments on the regions this is group so we always to keep somehow in mind HI and the CI business when we look at that, but we’ll make a few comments later on when we dissect or comment a few or make a few detailed comments on the two businesses.

We usually don’t report geographies by business, but we can give you at least an indication. EMEA had a good year no doubt, we had a slower second-half and that was A driven by Germany the German relative challenge was diverse in Q3 to look we have the Q4, but the Q3 was very hardest against the previous year quarter, which was phenomenal, which was kind of the final phase of these constant currency boom we had at that time. So that was an impact and then mainly the second-half and of course somewhat in the first-half already. And then Italian retail business, which I said before was also negatively impacting of course the retail margin as well as some of the whole the retail sales as some of the wholesale going with it.

U.S. negative if we wait the CI business on it the CI business was negative throughout the year in the U.S. it came back to nice growth in Q4, but that has to be accounted for in those numbers. The HI business was in Europe mixed single-digit and we had about a point headwind in the U.S. at least from the Costco side. Americas excluding U.S. performed well especially in Canada, Canada like Australia one of our top eight countries well managed good position well under control. Asia I mentioned before great story accelerated even sequentially year-on-year and we saw a pretty broad based performance it’s not only China we had Australia, and Japan and Korea which were chiming in nicely here.

A few words dissect again this operational piece on page 16, you see here the goals contributions by those various category. So what contributed HI organic M&A and finally CI – and you see it again by numbers. The HI organic business growing only 2.5% ultimately added CHF 51 million, but turned in a nice EBITA and allowed even to add positively to the margin expansion. That’s for me very encouraging M&A as mentioned before diluted and the CI business of course was diluted given the lower sales we had predominantly in the first-half.

Ultimately, the tally on page 17, I’m sure you have seen that already, said before a solid year, sure not flamboyant, but I guess on a very high level turned in ultimately against the strong Swiss franc, decent margins and definitely strong cash flow, allowing us ultimately to propose also an increase in divided and allowing us ultimately also to make strategic moves like moving into AudioNova.

With that, I’m moving on to a few comments on AudioNova. That’s a subsequent event and we can’t be here today to talk about last year and giving you an outlook without squaring in somehow and boxing in what is AudioNova all about how would that look like when we fold it in after closing into our financials. Strategically, again, AudioNova is a perfect fit of our go-to-market strategy and is a perfect fit in our vertically integrated business model.

We serve a whole series ultimately of patience or customers with our solutions. We have products. We have known supply chain. We have a very controlled distribution and we go through all control channels or third-party channels. So bringing in AudioNova is not a new business model, it just fits into that business model perfectly here on the channel and adding to our own retail, which we have been building in the last 20 years already.

What is AudioNova? Some of that is repetitive to to what I mentioned on the call two weeks ago, but I would like to mention it again, at least, in certain aspects. You get about Horlicks stores over a series of European countries. When you look at the counties, it’s very complementary. We get in Germany one of the top brands, that’s the Geers brand with about 550 stores and going to build in the order of a 700 store network in Germany.

We’ll add in France somewhat, we get Italy back, and we get Poland. We get Holland, where we basically are not in and we get probably some of the Nordic base and complement that very well with our own retail. We are getting a business with about 300,000 hearing instruments, allowing us to increase our own share of wallet. We control about 20% to 25% of that share of wallet with our own Unitron products, so definitely that gives us a possibility over the time to increase that share of wallet.

They bring short of 3,000 people, but they bring 1.600 specialists, and that’s part of our strategy why we go vertical. We get closer to the end user. We control the services in the channels and can further build them, and third, we of course, get grow into that margin and value-added potential of the channels.

HAL is not the new thing or HAL invested in the company in 2000, it was there already in Holland and then slightly expanded it, the biggest step was in 2006 and 2011 when they acquired the Geers Company in two step from the Geers family. They have strong leading brands. In Germany and Poland, it’s Geers. In Holland, it’s Schoonernberg, and we get Minisom in Portugal. It is a well-managed company. You see that from the margins for retailer turning in 60% EBITDA on a standalone basis, that’s pretty impressive and they have sales of about €360 million reported a year ago, or in the last fiscal year.

Again, a good fit for us strategically. It supports our go-to-market strategy. We get critical mass. We get very strong positions in Europe ultimately what we need. You need a certain decent position in the country, otherwise it makes no sense. I gave you that example of Italy, where I said with 70 stores in the North we can’t expand, it’s sub-critical, let’s get it, sell it and get it to somebody who can build finally a chain. And ultimately, in that case, we are the lucky now, we’ll get it back again.

Yes, we get closer to the customer, which is part of our strategy and I said before the share of wallet for us. It’s definitely a great add on. Please keep in mind, those numbers here how the mix is changing from retail today about 27% of our reported sales and about 10% of our unit volume we will get up to 38% and probably about 17% and 18% of our unit volume.

The deal is, as discussed before, yes, it’s not a cheap deal, on the other side not utterly expensive. We always compare it in terms of sales multiple, or EBITDA multiple, it’s comparable what you see in Amplifon on the EBITDA multiple, and here even we get a control premium. So from that end, I think it’s expensive acquisition I would doubt. We know also and we were in competition for that asset. I think we were not even probably the most – the highest bidder. But from a strategic rationale point of view, where we have a very convincing case here on the table.

So for the group with the net EBITDA – Net debt/EBITDA ratio of 1:1 that definitely a very adjustable acquisition and it’s going to be substantially EPS accretive as we – as then have the closing into the first year. We expect somewhere in the second half, a regulatory approval. So we need to be patience for another handful of months, but I think the process is well underway.

With that I’ll come to the outlook. And we need the couple of things now with that event of AudioNova coming. First we say okay, how does that look – outlook look for Sonova without AudioNova? And then I’ll explain to you how we folding AudioNova, before I do that, a few things which we were considering about building that outlook.

First, on the market, then we think that the markets will continue to be on the HI side, that’s where all the CI side, pretty healthy, probably the HI market in unit volume micro in the order of probably 3%, 4% maybe next year 4% we’re able to see, value wise, we hear that sometimes it’s lower. We – from our perspective I explained to you, our ASP looks healthy. So we think and value and unit should be pretty close to each order.

We do see ongoing bifurcation in that market – in those markets. We see costs cut in the U.S., driving heavily on the discounting and they’re going to do 300,000 units in the U.S. alone this year. I have the number pretty much secured from internal sources and that’s pretty substantial. So they are probably having a share of 12%, 13% of the commercial market.

Now of course they drive it very much a supported by M&A. should achieve the low cost product on the market is the lower the price somewhere by €200 million for two instruments again, which was for me surprising. But it shows that they’re really driving hard with the packaged private label product and try to gain market share with the standardized offering.

In Germany, the market will come back to growth after the – last year which was no growth after the constant currency boom they had in 2014. But also in Germany, the fill months are effect, and we have just heard that also Apollo is now trying to get into the – from the optical into the hearing aid market.

So it seems that specially the optician James see the benefit to combine here hearing aid and optics. We know that in England it works, in our own joint venture, it works very well. We know that Specsavers does it very well, so it seems that now in Germany, we start to more and more to see the bifurcation between “discounters” to say “and the more value-added type of professional service driven independent.”

The Brazilian market will – not easy, that’s what that this is assuming our plan, but I think we have to put our sales in good position. When it comes to HI, we expect solid sales momentum, definitely the new products come into the market we’ll have, definitely in the second half, we expect some first impact and then as we go into 2017 in a serious of ways again.

In Europe we expect an initial push back in mainly in Germany and Italy from our decision to go into Sonova. U.S. we had seen good growth in the commercial and in VA. We expect to continue that and in AP, BR sticking to our strategy and think that should further want a decent growth there. We have – yes as you know by acquisition is not in the official guidance in yet, I will come back to that, but soon as we close we will come back to you, and give you and you then a details guidance for the remainder of the year, but I give you already now a flavor how that could look like.

Question always comes, are you’re going to continue and to acquire again businesses, sure we are not stopping, but probably the bigger moves are down for a couple of year, that I don’t know what bigger moves might we are in the markets. I said that two years ago and, finally, here we have a bigger move, but if – probably getting rarer and rarer and more difficult to find a lots of target, but from our point of view there will be a few build on mainly probably under retail side in some countries outside of Europe.

Cochlear, I think we are back. The new products obviously resonate well. We expect it still a little bit higher sales in the second half when we went into the second half, but I said before the growth came back nicely we headed or response on the new Q series of processes is good. We just launched now the Naida Link, and that is basically the hearing aid product, which goes to the Cochlear implant for those which have bimodal system, hearing implant and Cochlear implant. It’s got to fit as one system, you steer and control it as one system. It’s not like in other cases you have to steer and control these two things independently.

That is definitely a further nice contribution to the market. We expect our second implant, the new one coming to the market towards the end of the calendar year, everything is in the final filing with FDA and we’re pretty positive that we should bring it now for the final approval process.

So pretty positive on Cochlear. Cochlear implants, you know me, I have been positive about the business before and I got burned in the last 12 months, but having seen the dynamics, having seen all the changes we did in the organization and the team today being at the helm of the company, what’s the business I must say pretty confident that finally, even Sonova starts to understand how to run an implant business.

With that, I come to the guidance without AudioNova. And what we did here is that we added now our mid-term guidance. And we did it – we decided to say, okay, now with the business model long-term changing more and more to retail. And with having always this currency impact, yes or no on our margins, let’s change from this margin view and go to more a bracket view on the top line and the bottom line and imply basically the margin expansion.

So what we say is, we think long-term, we can grow our business on average 5% to 7% per annum in local currencies, and that should bring us to 7% to a 11% EBITDA growth bottom line. At the midpoint that would – in average correspond to about the 60 basis points margin improvement. So our message, yes, every year we want to improve our margin, should be basically covered by that message.

This year, of course, now they come with a great guidance, first year they were conservative. But we have two effects, we need to consider and they are commented on the bottom of the guidance. First, no impact on that guidance from AudioNova by consolidation. But some impacts we expect now from some of our retailers, independents in some of the markets we mentioned before. So that’s what we build into that more conservative guidance as it would look like.

And the second thing is, the Italian business. We miss about CHF 15 million to CHF 18 million of sales in the first nine months, that’s kind of reflect here as well. But at the midpoint that would be still the no margin expansion, but at least, we maintain the margin if we were able to hit that guidance with these two special effects. But then having done that, I think our mid-term target clearly is a 5% to 7% total group should be our target going forward in a 7% to a 11% in the bottom line guaranteeing or warranting for a steady nice 60 bps margin expansion at the midpoint.

Now the big question is then if AudioNova comes, what dose that mean? And we try on this slide 27 to give you a feeling how that falls in. And what we did here is to show on the left side, Sonova last year, including our guidance for 2016/2017. So this is the dark blue and the light blue. And then we add the 12 months AudioNova on top of it. So we had CHF 80 million, the CHF 50 million bottom line, and then we tally that up to the total.

That means the moment of closing the subsequent 12 months, how that would look like. Now I can’t tell you, is it October, is it August, is it November. But the day we close it basically that rolling 12 months you would look like what we show here and then, of course, we come and tell you what does it mean now for the remainder of that fiscal year more specifically.

And so it gives you a feeling and it shows that if we fold on a full-year AudioNova on top of us, we’re going to be a business in that subsequent 12 months, which will go between 22% and 24% on the top line, it’s about 15% to 19% on the bottom line. And you see the impact on the EBITDA. The Group is running between 23% and 24% EBITDA in 2016/2017. We bring on AudioNova with a 60% EBITDA and that would dilute us down by about 100 basis points on the EBITDA as well as from the EBITA. So it’s not a dramatic impact from that end, but you clearly see how much it is.

What are some of the consolidation effect? So the net contribution will be about 320 million of sales. We show 380 here on the left side, but we have some intercompany sales from Unitron products, which we have to take out. Share of retail sales will go up on the Group from 27% to 38%. We will get an improved gross profit margin, retail comes usually with a gross profit about what we see in wholesale. But of course, we get about 100 basis points dilution here on the EBITA margin of the Group.

The ROCE will reduce by about something north of 600 basis points, about 20%./ Yes, if we add a 900 – if we put CHF 900 million into the balance sheet and our ROCE is always calculated with goodwill and whatsoever, we are fair here. And yes, by that it comes the dilution, I know that.

On the other side, I mean, when you look at current facts in the market on stock market, I think, we still have a nice headroom compared to blunt investments in a standard stock here. Some additional effects we’d like to share with you, the retail integration synergies that’s really what happens in the markets by combining market organizations, reducing our headquarter, eventually adjusting some stores rebranding will bring us in Europe CHF 8 million to CHF 10 million of synergies ongoing per year. And the one-time costs to do that spread over two years is about CHF 15 million. Usually that process doesn’t go that fast, you need about two years.

So we have one-time costs over two years of total CHF 50 million, but you get then per year from an integration benefit of the retail organizations into countries about CHF 8 million to CHF 10 million of benefits. Wholesale share of wallet increase is substantial that won’t happen in five minutes. But we will start, of course, with the contracts we have at hand from Unitron and then from one of our competitors. But as these contracts expires, we will bring in definitely our own products, they will go up in the time to follow two years about to make that happen up to 80%, that’s usually our experience how we see that.

Yes, such a transaction project usually is not cheap. It’s a big one. We have one-time corporate transaction costs in Europe CHF 15 million to CHF 20 million. We have investment banks and other banks involved. We have a lot of lawyers being happy about the project and other advisors. So usually these things are co-projects for those a little bit expensive for us to do, but that’s to be included in the total deal.

Bottom line after all the synergies are fully realized, but basically very first after closing EPS accretion is substantial and you can calculate probably by your own. So all in all, we think it’s an attractive field, not only strategically, but also financially for the Group. There will be some transformation as the group has taken so much of different shape and form as it has been before. So with that slide, we hope that we could frame you the impact of an AudioNova as far as possible. But I can tell you when we close the first thing we’re going to do, we come back to you and say, okay, now closed, what does it mean for the remainder of the year specifically and update our guidance accordingly.

The last thing before I hand over to our CFO for a few additional comments is outlook always is a margin and sorry the currency issue we have updated our sensitivities here. They have somewhat changed, not dramatically here. But what has changed is somewhat that’s pie chart. But that’s not including AudioNova yet, but AudioNova comes, the euro will be bigger in that pie.

But it shows that the dollar and the euro have still an important share in it. This basket here has somewhat become smaller as the currencies, I mean, the business due to currencies have shrunken somewhat. I said before, we should never forget that emerging market currencies, or the smaller dollars than also Japanese yen and British pound, they have their sensitivity, we have substantial businesses in those markets.

And last year they had an impact. We discussed it on the half year in the month of August, September last year, we got mainly hit by those currencies. What I can tell you, we have expanded our hedging tools and we had in second-half a much better situation than in the first-half reducing those exposure substantially.

So, yes, today we’re hopefully much better covered than before we learned that not only the euro and that the U.S. dollar had an issue, given our global position, these other currencies have their impacts as well.

With that, I hand over to Hartwig.

Hartwig Grevener

Thank you, Lukas, and welcome everybody this morning or this afternoon wherever you maybe. As you know, we will normally go through the two segments, hearing instruments and cochlear implants. However, I will keep it short and not just really touch on every page.

Starting with hearing instruments, you see a couple of slides that reflect the bridges that you have seen earlier on and given that hearing instruments is about 90% of our business. So you have seen kind of the same profile already in Lukas slides.

So let me just fast-forward to page 34, where I just want to also not miss to reflect the first-half, second-half perspective that Lukas started his coverage with. And so you see repeated here that we have been progressing well on the EBITDA margin, getting up to 24% in the second-half. But it’s also displaying here that we have a stronger comparison base if you look at it on a year-by-year basis. And so both the organic part, but also the M&A part in terms of healthy growth is slower than in the first-half, the organic part is 1.5% over 4.1% and the M&A part is 3.2% over 4.6%.

So on the organic part, we need to keep in mind that we had a very successful venture launch in the last part of 2014 that really even in Germany pushed us strongly in the third quarter of that year. On the M&A side, we need to consider that we have Comfort Audio that annualized in October – October 1, 2015, as an acquisition. So the M&A contribution is no longer accounted there.

And so that is – they are the underlying dynamics if we look at the first and the second-half. And, again, as we said, the U.S., Germany, and Brazil are really making the difference in the year-over-year perspective, holding our growth back in this particular year.

Page 35, where you see that in the overall, we still are very strong in premium growth, that is very important for us, and is one of the carrying pillars of our various added factory ASP performance. I want to report one mistake in the schedule. In the standard segment for the second-half, it should read 5.8% not the 11.8%, it’s corrected on the web, I apologize for this oversight. But still it – the schedule still shows, if I want to use the word again a bifurcation between premium and standard with a relatively constant movement of advanced.

You see that the wireless communication was still up strong 10% for the whole year, a bit slower though in the second-half related to the first-half, as I mentioned previously, still had an acquisition growth factor in from Comfort Audio. The second-half could have been more strong than it is displayed here also. But we were depending on government orders, in particular, generally in the BRIC countries, but in particular in Brazil. And those slowdowns considerably offsetting improvements in other markets, which is why you see a 0.9% growth only for the second-half year. Continuously, a pleasure to look at is our miscellaneous segment with services, warranty extensions, and batteries very comfortable even accelerating to almost double-digit for the year.

Going to page 36, just real brief, you see here zoomed in again the very satisfactory margin performance that we achieved on the organic side, plus 20 basis points in a relatively modest growth environment, so we are very happy about this. And we have talked about the M&A part with the effect from Hansaton integration in particular. So I want don’t want to rest there and fast forward further to cochlear implants.

The CI business, looking at page 42 is – did have a difficult year. You heard this, but we see a quite significant improvement in the second-half, probably it’s true, yes, we would have liked to see this kicking in a bit earlier than it did. But we’re back to growth. We’re back to positive bottom line, and that’s important for us, and that’s what this page is illustrating. There’s a small acquisition impact here, because we have acquired a business in Israel that has a multi-setup hearing instruments and distribution of cochlear implants, but not significant.

So that gets me to the financial section. And this year similar to earlier years we do not have very significant anomalies to talk about, if it goes below EBITA or in the cash flow. Certainly, the cash flow, I’m now looking at page 46, on the bullet points, the cash flow continues to be a source of pleasure with a high cash conversion and keeping up on a level that we had in a very successful 2014/2015 financial year.

It’s a – let me quickly go to page 48, talking about the operating expenses, which also includes other income from nonrecurring benefits like product liability releases or capital gains in this case from the Italian disposal. If you look at this – the relevant line item here G&A and S&M and R&D, you see a picture that shows relevantly constant investment in R&D, and I’ll come to that on the next page again.

You see an increase investment in sales and marketing and that relates to one end inside the growing gravity of our retail business even prior to the CI business because of retail business all count into sales and marketing. But it also reflects that if we had the headwinds from the German retail strategy announcement in Germany that we haven’t dialed back our sales costs there by any significant extent, but rather continue to be present in our accounts and in the markets to make this interim impact as short as possible. But you see quite a significant, let’s say, savvy attitude in the G&A that actually came down by 1.3% in local currencies.

Page 49, gives the coverage of the R&D spending, including the capitalized amount net of amortizations that you’re used to. So we’re at a good 7%, that’s not a big change over prior year, and still a very significant investment around CHF 150 million in our combined hearing instrument and cochlear implants businesses.

That gets me to page 51, again just on the cash flow, you see that we are strong with CHF 344 million operating free cash flow very close to the income after taxes higher, cash conversion, and in that respect similar to the prior year. We had a very significant year in terms of acquisitions and net of disposal, that’s CHF 90 million, including the gross perspective, you will see in a few seconds, it’s actually CHF 120 million. We have also been very active in just bringing back cash to the shareholders with cash flow from financing activities, dividend to share buyback at CHF 325 million.

Balance sheet 52 you see that we have been able to gradually improve our working capital of KPIs, so that’s secured, and we will continue to travel on that journey to the best of our abilities, very strong balance sheet still with 69% equity of total sales. And capital employed, yes, it has increased and Lucas alluded to it the return on capital employed is now at 26%, reflecting a somewhat of a degradation from the additional strong acquisition activity that we had this year.

We continue to increase our dividends to now CHF 2.10, that’s 2.4% about last year’s value and try to signal obviously here our confidence in the healthy progression of our business. And that gets me to the conclusion on page 54, the four pillar structure of our shareholder return approach acquisitions last year, a higher year was CHF 120 million, mostly driven by the Hansaton acquisition, dividends now increased to CHF 2.10, solid cash position around a CHF 300 million and share buyback we stopped the share buyback as you know on the day of announcement of the AudioNova acquisition, but still until that point we expect – we paid out CHF 156 million for acquiring those shares.

That concludes my contribution to those part of the presentation I hand back to Lucas. Thank you.

Lukas Braunschweiler

Thank you, Hartwig. Yes with that, we’re summarizing our presentation for today the book is bigger than usual, but we had also to explain a little bit more in terms of more subsequent and more recent events. I hope it was comprehensive enough, detailed enough, forthcoming enough that also like you clearly can understand the underlying dynamics and mechanics of our business.

Nevertheless, I know there are always questions and I’m more than happy to hand back to Thomas, who will lead us together with Corinne and Nicole through the Q&A session. We’re going to start probably in the room. And then we also are going to have in through the call people from abroad. We need to juggle this a little bit with the acrostic system, but hopefully Sonova can handle that.

Question-and-Answer Session

Operator

[Operator Instructions]

Unidentified Analyst

Thank you for taking my questions. I would like to start with the Costco in fact that you discussed. Is it fair to assume that the negative impact you saw is driven by competitive disadvantage, because Kirkland have more attractive prices and hence the private label market didn’t do that as well as Costco. And my second question relates to the CHF 30 million just given as for Brazil Costco and Germany if I were to add that all back your organic growth would be probably around slightly below 4%.

And one we’re trying to understand is what was the impact from the Germany where you were really punished for the announcement and not so much where you’ve lost market share from Costco. And then the last question, I’m not sure if you’re going to give me an answer in that, but looking at your acquisition impact and looking at the regional performance, it doesn’t really look like you derived a lot of organic growth in Europe and in the U.S. It looks like your organic growth has been driven by Asia and Americas. It would be great if you could give us some indication on the two different regions. Thank you.

Lukas Braunschweiler

Okay, I’d start with the last one. It’s usually the freshest one if it is okay go the other way round. It’s true I mean the U.S. had from an organic point from an acquisition point of view was not a big impact. The acquisition was mainly in Europe with Hansaton. And if you peel that out, you come down to a low single-digit organic growth, but then you have of course to account for Germany which was the brunt of the headwind we had in Europe I mean Europe had to absorb that and the Italian disposal as well, which was slightly I mean in the last quarter.

So when we take that back Germany alone was, I give you the number the we were losing about on the group level to previous year about CHF 0.20 million in Germany year-on-year. And then in Europe that top of, of course so even a little bit north of double. Then on the CHF 30 million I answered that question already. Now Costco I shared with you a chart on the call we had on AAA that’s our share of wallet in Costco stabilized around this 20%, I can say. According our intelligence, well, not that we are so smart, but what we find out is about 65% to 70% on average with is Kirkland Signature at the moment.

So substantial share is flowing into their own private label product. The balance, then, is 10% as it’s probably made up of two other brands since 20% is our Phonak branded Phonak for your product. So we came from about 30%, 35% share of wallet though on a little bit of lower total volume a year before down to 20. In the first-half that didn’t show too much as we were a year before going into it, but in the second-half it really showed and that’s where we, in relative terms lost to previous year about CHF 6.5 million and throughout always in the plan about CHF 10 million.

Now what really changed and probably we underestimated or realized it not right, is that Costco, when they introduced the KS6 last May/June, they lowered the prices also on the B2C by $200 so they sold formerly two instruments for one 1,999 now it’s 1,799. So one instrument is about $800 B2C that compares to about a branded B2C price of about $1,400, what they do outside.

And that changed – supported definitely the change of the dynamics that the KS is the favorite product – in general favors their own products and push it. But for us definitely this is a fact we have to swallow, and say, okay, if we are back at 20%, we can hopefully lock in. The question is, what kind of product are we then offering down the road to the channel?

We will bring a new product to the channel in the course of the year. But the question is always how competitive should it be against the KS? And how recent should it be, compared to the independent market which we care about? For us to go into KS is definitely not an option, because then we would ally with basically one of the most competitive products against the independents; that’s what we accounted for.

Unidentified Analyst

Okay, and just have a follow-up. I think it was the year ago, when you showed us on a chart that you basically recovered your total market share in the commercial U.S. market, so taking the independents, chains and Costco. What that mean that you are – are you still flat or you down?

Lukas Braunschweiler

Yes, we’re still flat, because the commercial market behaved pretty decent. I get a lot of question was it worth the going to Costco and I always say, yes, When I look at all the ups and downs and ins and outs, I must say probably no. But when I look at the fact that we need to somehow be in that channel, given its importance and that it picks up for the lion’s share of the growth, then I say, yes we need to be somewhere in, and now the question is, the best way to be here?

Oliver Metzger

Hi, Oliverl from Commerzbank. First question is on AudioNova. So you target a closing of the deal in second half, so what happens with necessary investments during that time? I assume that the current owner’s not willing to spend too much money, because basically it doesn’t.

And the second question is on the hearing instruments, you showed the slide that the premium instruments have slowed down. And you mentioned the fact of Costco; however, Costco should get a comparatively low ASP. So can you give us a little bit more background about this slowdown on the premium side? And the last question, just a modeling one. So can you give us just the impact of the acquisition made in last year will affect the current year?

Lukas Braunschweiler

Yes, good. On the first thing on AMI, basically there is no incentive for the sale of not to investing the business that’s the mechanism of the transaction. So we are the pretty good handle or how they run the business now. And so – there is no – there is not the way that they can deplete it, or just under invest it and can you safe the cash flow, The mechanics of the deal are made in such a way that we have that under control.

On your ASP, we – the premium is homing – how we classify product is not only by price. Sure, the price is reflective of where you position a product, but they are basically classified by their number. So the 90s are in there. Now there are other channels getting 90s and one is Costco, but the wholesale price we get in Costco for the branded product is not too far below what we get from independents, on average.

So this is not dramatically dilutive. What is more dilutive is usually “VA. VA” is also a 90 product, but has about $380 kind of aver rage price from our side. So basically the Costco is that we see it on the premium on the second half, that’s why we said Costco had an impact on the premium on the second half.

Oliver Metzger

Okay, thank you.

Hartwig Grevener

In regards to acquisition impact for the New Year 2016, 2017 are at – is between CHF 15 million and CHF 20 million. We’ve identified this one percentage point as part of the growth guidance?

Holger Blum

Holger Blum, BZ Bank. And a question on maybe the error side of the equation you mentioned a good explanations of the shortfalls in some of the other countries, so usually you have some offsetting pieces. How about that in the last year something that went really above your expectations and maybe you can point us what could do better in the current guidance, what can drive the range potentially overall the upper end, if we look at it?

Lukas Braunschweiler

Sure, and I think we can use that slide, which we showed when we commented on some of our considerations on the guidance. There are some businesses which did businesses which did well, that is for sure. I would say we didn’t have any business where you would say it was fantastically above the expectation, I mean we did very well in England, for instance, we did very well in France. We had a good Italian business. I can single out countries or in Australian business.

But I think in the overall, you always have these ins and outs and I think it’s not something which we’re saying, wow that was really kind of outstanding against our expectations. So it’s in the total mix where we’ve had those where we really say, wow, they were the headwind last year.

Now when I go back and say in the guidance where we seeing some hopefully improvements in relative terms, in the U.S., its VA, I mean we were year-on-year flat with a strong second half. We think we should continue to see a further improvement in VA. We just launched new products. We’re going to launch again new products in fall for them.

So I guess in VA we have definitely, year-on-year we should see a pretty good situation, predominantly in the first half. We think that we bottomed out in Costco, and with the new product coming, we should have a fair shot that we might see a little bit more upside than have the conservative assumption we have taken for the time being.

So that’s what I would see there. And then I think Asia we think should continue to do reasonably well. We had now a very good year and we obviously have to see Australia/Japan in that fold which are kind of established markets, so the mid to teens growth, mid-teens kind of process really good and we think that that could be a further supportive element on that. In channel, our retail markets did well. We had a very solid year last year. So that should be another stronghold to say, yes, the retail business have some kind of formula should help to carry the group also for a decent year again.

Thomas Bernhardsgruetter

Okay. One more question in the room and we’ll move to the Carla.

Carla Baenziger

I have the question related to the guidance for this year. And you indicated that on EBITA and guidance is lower what you see in the midterm and now you have two positive impact reported in OpEx, one is the reversal of the provisions and the other one is this CHF 3.7 million capital gain. Do you think – you take out the capital gain, that’s clear. What do you think about the provisions? What should we calculate there?

Hartwig Grevener

Thank you, Carla for the question. If you look at the provision reversal, it is by a couple of hundred thousands fully offset by an extra warranty provision that we have build at the CI segment in the first half. So it’s both CHF 8 million and change. So remind if the capital gain, but the rest is offsetting.

Thomas Bernhardsgruetter

Operator, we would then be ready to take some questions from the phone.

Operator

The first question from the phone is from Michael Jungling, Morgan Stanley. Please go ahead.

Michael Jungling

Thank you and good morning. And firstly thank you for some really good disclosure, probably best-in-class in the European med-tech sector. And my first question is on the guidance. The minus 1% that you’ve dialed into your forecast for this year, is this the collateral damage you expect from your overall retail acquisition strategy, or is this a deconsolidation effect from internally generated sales that you have with those retailers?

Question number two is also on the guidance, what is the organic constant currency sales growth estimates for hearing instruments and implants separately? And then the third question is, is if I look at the Sonova share price, it’s sort of flat since 2010, has been underperforming many of the indices, even the Swiss market index, and it follows very, very closely to the deterioration in the ROIC which peaked in 2008/2009. What makes you confident that the dilution to ROIC, and also moving into the slower growing retail business, is what shareholders value? Thank you.

Lukas Braunschweiler

Okay, hey Michael, the last question, I really didn’t fully get. Can you please repeat it?

Michael Jungling

The last question was, if I look at the share price performance of Sonova since 2010, its underperformed most of the main indices, and it seems to track the dilution in the ROIC, which sort of peaked in 2009/2010. And the question is, what makes you confident that the dilution in ROIC and also buying more and more yourself into slower growing retail is what drives the share price and what shareholders value?

Lukas Braunschweiler

Sure. Okay, I get it, yes. First on your question, as I understood it on the retail impact, that’s minus 1% is just that we say we see, that’s why we take, it’s that stare-off included. In the fourth perspective the stare-off included about a headwind of 100 basis points from reactions on – of our wholesale customers, for instance, in Italy or in Germany, or in Switzerland to some extent. That’s our lump sum, it’s about another CHF 20 million where we said that that might materialize. Then on the retail side, the effect of Italy is in the stare-off of M&A netted. I hope that answers your question.

Then on the HI/CI guidance, we usually don’t separate that guidance. But I think you can do a math and if you say, if the CI business really would grow 10%, say, then you can divide it by its weight and you see what’s about the contribution we would see from the CI side on the top line guidance here.

The third thing on the ROIC, I like your questions. We showed that curve last time that the big drop we had originally when we acquired the CI business we pumped in a lot of goodwill into the balance sheet. I always commented yes, the retail acquisitions we did have further probably put pressure on our ROIC and nevertheless on a constant currency model, or at least with less currency impact in the last three years, our ROIC has crawled back to the 30%, dropped this year mainly due to currencies, and now will drop again through the acquisition of AudioNova.

I think going forward, we will further again, and that’s clear, the target improve our ROIC. I don’t think that our acquisition activity in the next five years will be very high. Frankly, I guess, in the retail side, we have built out our network after the deal of AudioNova substantially, so I’m much more positive that our ROIC will again recover to the mid-20s.

Michael Jungling

Great. And then a follow-up to the 1% headwind from perhaps the collateral damage. Is it fair to assume that if I take the CHF 21 million that you’re sort of forecasting as a loss and I divide it by the ASP of a hearing aid, is it fair to assume that you’re probably thinking of a 60,000 unit headwind? Is that a reasonable estimate from your collateral damage estimates?

Lukas Braunschweiler

I don’t get that, sorry.

Michael Jungling

Well, CHF 21 million divided by, I don’t know, average selling price of a wholesale hearing aid of CHF 350 or so would give you 60,000 hearing aids?

Hartwig Grevener

Hard to get answer, as you go. Mike, in general, it is – you are thinking in the right way, we are thinking about the headwinds though, not just in number of units, but really in revenue impact, given that we have enough, at least, also in particular in Germany a significant beyond hearing aid business in regards to accessories, et cetera in services. But you are thinking in the right direction there.

Lukas Braunschweiler

Maybe I can refer to last year, Michael, briefly. When we said we lost about CHF 20 million of sales in Germany year-over-year, part of that was market, but part of that was headwind. The loss in units was more in relative terms, because we lost predominantly lower-end range products, cost [indiscernible] or shifted out to competition, mid range, high end products usually from Phonak, that’s what the retailers tend to keep.

Michael Jungling

That’s great. That’s very helpful. Thank you.

Operator

The next question is from Ian Douglas-Pennant from UBS. Please go ahead.

Ian Douglas-Pennant

Yes, it’s Ian Douglas-Pennant from UBS. So the first one is on the medium-term guidance, and that 60 basis points number you’ve helpfully calculated for us. And is that effectively in my model I can get there just by a bit of margin expansion on the implants business. Is it fair to say that the instruments margin is as high as it’s ever going to be there and even after the synergies you are expecting from AudioNova?

And then, I thought your comment on Costco just now was interesting that you maybe regret that now. Is there a risk you’re going to say something similar about AudioNova in a year or so time, if the boycott is larger than you think it is? I mean, certainly, your guidance looking at it today would imply that the boycott will be quite large. Did you feel you had to do this, or is there – or did you feel more voluntary like that? Thank you.

Lukas Braunschweiler

Okay. Yes, good point. Sorry, I had to ask Hartwig briefly. On the mid-term guidance when you really look down to the bottom line, we did say we grow at the mid-term, at the midpoint 6%, and trickling down to 9% on the bottom line, this corresponds to about a 60 basis points margin improvement. And where does it come from? On average you would say about 30, weighted about half comes from the CI margin expansion and half would come from the hearing aid business, which of course, we have to consider that in the first years probably here we are a little bit more conservative than having once AudioNova in the game.

And we know that the margin expansion in retail is doable, but it’s a little bit tougher tougher than usually to get as it’s a lot of operational improvement. So we take this midpoint margin expansion coming from about half the CI recovery of the portfolio of the margins, and B, from the continuous improvement on the HI side. When it comes to AMI, the impact we see basically on our end. We don’t expect that AudioNova is going to get headwind, because they are not in wholesale.

But really it’s the fact is that wholesale parts of ours say hey, you are going to be my competitor, I’m not buying products from you anymore and usually it’s Phonak, because they know that Phonak is most dear to Sonova, and frankly, sometimes the punishment is not against even Phonak, it’s against us here at the headquarters, trying to convince the strategy is not a good idea to go into retail. So you’re not expecting any headwind on the AudioNova side.

Ian Douglas-Pennant

No. Sorry, that’s not quite what I was asking. Sorry, I was asking about your comments where you said you might – sorry, there is a terrible echo and the comments where you said that now you might regret the Costco deal. I was wondering whether in two years’ time, we may hear you say something about AudioNova. It was quite a premium price you paid, and maybe the boycotts that you might experience from your other customers might be larger than you had thought. I mean, what is the risk that we end up in that scenario?

Lukas Braunschweiler

Hartwig, you want to answer?

Hartwig Grevener

I mean, Ian, let me just repeat the question, because it was not fully to hear you here. But – so your question is whether we have confidence that our estimation of the negative effects to the wholesale customers from the AudioNova acquisition that we can really can have a good hand on this and that we don’t underestimate them. That’s really the question?

Ian Douglas-Pennant

Yes, that’s a good summary, yes.

Hartwig Grevener

And look, I would say, we have the experience now under our belt, it’s not only Germany, we have also done it in France. And ultimately, there’s, let’s say, a deferral of growth effect and there’s a decline effect. I would say in Germany we went through the decline effect within a 12-month cycle. I believe that’s pretty acceptable for an important strategic step that we have taken.

I would say in France, it was about the same level of cycle time. And from there, we believe we will go back to normal growth patterns. But this 12-month cycle we will now have to go through again with AudioNova. Is it 12, is it 18, still in the big picture of the rationale of this acquisition, it is very affordable for us to make that step.

Lukas Braunschweiler

And the mindsets of these partners in the course of the years as well, whenever you bring new products, the mindset is changing, because they will say, wow, okay, we probably would also look at that product B, very often these guys change their minds that they suddenly want to sell their business. When I look at the last six months, which we acquired 50 stores in Germany, who sold ultimately to us. We had a couple of guys who were die-hard against us a year ago, and ultimately they say hey, wait, I think you do it right, I’m going to sell you my business. So many things can change on the way, so what you hear today might not be the opinion a year from now.

Ian Douglas-Pennant

Thank you.

Lukas Braunschweiler

Let’s take one more question from the phone and then we move back to the room.

Operator

The next question is from Chris Cooper from Jefferies. Please go ahead.

Chris Cooper

Hi there. Good afternoon. Thanks for taking my questions. I’ll start with more of a high level one, please. If I look at your guidance for this year and then your midterm target, what charged the incremental leg up? And clearly, the last couple of years have come in below your expectations, but guidance for this year seems to be below your mid-term target as well. If we put aside the near-term distortion, what do you believe is going to change in the underlying market, or your position within them?

Thomas Bernhardsgruetter

[Foreign Language] Sorry, we’ll have to come back, it’s very hard to understand the question we’ll come back to you just a second. Let’s move onto in the room.

Chris Cooper

A follow-up question from my side. I guess the business rationale for the AudioNova acquisition is quite obvious, but you’ve been talking about the strong growth that you are seeing at Costco, at Feldman, Apollo is going in there, and just seen very good growth at Boots. Now if you want to play devil ‘s advocate, would it not have been possible for you to take that close to CHF 1 billion Swiss francs and to open up a completely new channel where you actually get the customers walk in, not because they want to have a hearing aid, but accidentally buy a hearing aid but accidentally buy a hearing aid, which means it would translate into higher growth and less marketing expenses? In the way that the market is changing on the retail side as what you have been telling us for the last two years why hook your money into a channel that appears to be tend to be more challenging?

Thomas Bernhardsgruetter

Yes, we announced it I think we have to look at the total market. The bifurcation relates how the market is developing, and I guess the professional service channels, as we see them it’s classically the independent where we position our own retail value proposition, it’s not going away. You have to have see that in the OpEx You need the doctors of audiology, the specialists; you need those who can really deal with the severe, the profound and pediatrics, whatsoever.

And that’s clearly what we see as a need, that we protect that channel and further build that out, and make it more productive. And that does not mean that those channels also can embark on initiatives, which make use of, for instance, e-technologies or digital marketing tools. There is a great potential to do that. Developing a channel, or a optical channel whatsoever, that’s probably not in our turf. That to say, yes, we’re going to fire up an own kind of an independent channel, ultimately what you need is also specialists. And I think what we are buying as – we’re buying a lot of existing capacity, audiological capacity and specialists.

By the way, all these channels which are starting at the more standard end to start competing in the market, and that’s also for probably future pharma channels in the U.S., they are fighting for resources and it ‘s not so easy to get those resources from them. When you look at Costco programs to develop dispensers these are not even high end audiologists, it took them 10 years to come to the level where they are today and I think that’s one of the biggest constraint. So it’s a interesting we’re not buying stores, per se; we are buying capacity and audiological competence to serve the customer best.

Chris Cooper

Okay. Thanks.

Thomas Bernhardsgruetter

Okay, yes good.

Chris Cooper

[indiscernible] I’m still a bit puzzled about Germany; I mean when you presented at the AAA, and you did the call for the new products, you mentioned that the German collateral damage was not that harmful as expected. But now, you have the same effect with minus 1% forecasted for this year like for last year. So where is the delta’; is that already including some AudioNova?

Lukas Braunschweiler

Yes AudioNova.

Chris Cooper

So only that so you already have a negative free action.

Lukas Braunschweiler

No we expect.

Chris Cooper

Yes, so but you had a negative feedback from some of your customers then so why do you don’t know?

Lukas Braunschweiler

No yes that time nobody was aware and not even us whether we’re going to close the deal and finally announce it, but whether we’re going to sign the contract and announce it at that time was clearly – last year’s announcement, us going into retail and our progress in retail has led to the situation as explained in the AAA. And it’s the number, I told you today we lost about CHF 20 million in sales in Germany year-on-year and that I must say, that was an impact, but it is basically a little bit less than what I was afraid of. Now, going forward, we say with us now announcing AudioNova and knowing that the German market and the Italian market might be rallying again somewhat we say it could be that we need another percentage. And that why the guidance is a little bit more conservative on the top line.

Chris Cooper

How about the guidance on minus 1% is related to…

Lukas Braunschweiler

AudioNova.

Chris Cooper

Mostly, because it’s on the slide as mentioned without OpEx just more on the top line so…

Lukas Braunschweiler

Yes there of effect of retail strategy and wholesale means?

Chris Cooper

AudioNova so you include the potential negative, but you don’t include the potential top side of the deal?

Lukas Braunschweiler

Yes, that’s the brutal thing in the moment. We, for sure, get headwind but we can’t now consolidate yet the target.

Chris Cooper

And so sorry I mean I was a bit late in the beginning but talking about the different half-years now. Looking at the run rate of 1.5% of any growth in the second half I guess, with all the competitors now in the high single digit or even low teens, organic growth, most of them, and one of them has not even launched their top product in June than we done, I guess your first half will be pretty dull. Is that correct?

Lukas Braunschweiler

I wouldn’t say dull but we said yes go the moment a little bit – we had been safe partly due to all these effects, which we mentioned. But I think, when we see our products coming out, but we have in the mind in the next six to 24 months. I think the second half of product point of view will be more attractive for us.

Chris Cooper

But the first half then is – the new technology platform is in autumn, maybe the successor of PALIO is also in autumn. I don’t see much apart from the negative points with are reversed on the product point of view. From product point of view is not much to expect in the first half.

Hartwig Grevener

We have other effects. We had a negative growth in VA in the first half of last year or no growth. We were negative, now we should have an easier comp. So there are some ins and outs.

Chris Cooper

Okay.

Hartwig Grevener

I would in general, concur with your conclusion.

Chris Cooper

Thanks.

Thomas Bernhardsgruetter

Okay, operator and we’ll try again with Chris Cooper from the line if you could put him on again please.

Chris Cooper

All right, thanks. Can you hear me at this time?

Hartwig Grevener

Speak a little less fast, thank you.

Chris Cooper

So the question really was more high level, I’m looking to understand a bit better what’s driving the incremental improvement from your guidance for this year to your new midterm targets, given that for the last couple of years you’ve come in below what your midterm targets now are. I’m just hoping to get a bit more granularity around to whether this is – what sort of extent this is your position or to what extent it’s the market position or both.

Next, please, on Costco. It’s kind of been covered, but I would just like to question a little bit further, please. I’d just be interested to hear your thoughts on the extent to which the shift to the white label products has been driven by, I guess, changes in consumer preference. How much is the relative strength of KS6, and how much is driven purely by the price reductions that Costco could realize here?

I’m just trying to get a sense of how sustainable this trend maybe and how the mix might look going forward. And then lastly, please, just on the implant business. Historically, you’ve always viewed this as a double-digit growth business; I just wanted to confirm that your midterm expectations for this business do remain the same as you look at it today.

Lukas Braunschweiler

Okay, thank you. We understood you, hopefully, perfectly clear. Look, when you look at the guidance, and I and have to slide up again and the 5% to 7% midterm target when you look at this year, we came in with 5.8%. So we would be probably smack on in the mid-year from this midterms target.

Now you set a setup from this year to next year. This year is more steps down from the target because of the precautionary measures as we have discussed it with Daniel before that we assume that we’re going to see – due to the AudioNova acquisition again, a collateral headwind. So it’s more the other way round. But I think this year has been about in the midterm target. Yes, you might from that end look at and say no, this has been probably not the best here for Sonova from a growth perspective so that might be looking conservative.

That bringing me to last question for us from the CI, how do we look at the gross here? With our strategy in place, we should be always able in a normal year “to our growth on market” because we still have a great penetration potential in the clinics and because we have these good synergies with Phonak on the product and solution and on the Naida, severe to profile customer base.

No if the market growth 5% what we did probably until last fall, we rather see then probably an 8% growth in a normalized environment, whereas if it goes up to 8%, we should be able to grow back into the low-teens. So in summary, yes, an average in the next three to four years on average in the midterm guidance, we should see about a 10-ish percent average growth contribution from the CI side.

Then on your second question, Costco, yes, what is really driving it. We understand and learn that the private label products on Costco, whatever you take are their favorite products because they get the best deal, they can place them more attractively in the market, they have specific features. And they use the branded products very often to position themselves also as a vendor who has branded products, from a marketing point of view, to get traffic into the store.

But now the question is what really was driving Kirkland Signature? I think [Technical Difficulty] sorry for that something happened probably to my – so what is really – I think the product is good. There is no doubt. They have a good solution overall at hand, and the other thing is definitely they put a lot of internal marketing towards it, and the third thing it is a damned attractive price on the B2C market. If you had a decent solution probably not the super duper fitted thing, but the decent solution for $800 in instrumental or $850, so 1,700 that’s attractive.

And I think the price in the market has been another factor why that KS business is successful. If I look at GN’s actual result, their U.S. business grows nicely and they’re complaining, though, about Beltone, but it shows that the Costco business was driving their growth, but it has their impact on their margin.

Thomas Bernhardsgruetter

Okay, we take another question from the line.

Operator

The next question comes is from Alex Kleban from Barclays. Please go ahead.

Alex Kleban

Hi, thanks for taking the question. Can you hear me okay.

Lukas Braunschweiler

Yes, yes.

Alex Kleban

Okay, perfect. Maybe just two, just one on numbers and just a broader question, so first one, back to the H1 versus H2 phasing. How do we think about sales and marketing expense and the impact of that on margin, given that you maybe have some defense activities for the coming launch in June, but I guess also you’re going to have some things that you’ll want to put some effort behind later this year and into next year, so just to understand how the profile’s going to work there?

And just the second one, overall but on GN’s deal with Audigy is that services type business something that you had considered in the past or – was it even looked at this time around? And given that, as you mentioned there is fewer targets to be looking at on the retail side in the coming years, is that an area that you could potentially target? Thanks.

Lukas Braunschweiler

Thank you. Probably on the phasing on cost as usual we don’t expect any extraordinary cost impact from our running or business here in the two halves; even from product launches point of view that’s – as usually for us in the current expense kind of volume we have. So we don’t expect any special kind of a blip or whatever in terms of new products coming out, or other kind of marketing efforts.

GN, Audigy, Audigy is a buying group, which we know we were never partners of them or suppliers, but we know the guys, we know Brandon Dawson very well. It’s a buying group plus you might say, but ultimately this is – it is not retail or they work with channel partners and partner with them to on certain services and then among others of course on the product supply.

So from that end, that’s it and I can’t comment whether the price is high or no; it’s just be aware of it. I know the numbers of course we looked at their selling memo at that time, yes. It’s a special kind of a buying group, which has been established in the U.S. in the last few years. We were not in the bidding deal, ultimately. We looked at it at an earlier phase and, at that time, did decide not to go after it.

Alex Kleban

Okay, thanks. Could I just ask maybe a quick follow-up on that one? Do you see in that potentially a better return on capital profile, just given that it is a relatively capital-light business and as it grows, maybe you get more leverage as you don’t have the stores? When you did your initial analysis, did you see accretion or dilution relative to what you did on AudioNova?

Lukas Braunschweiler

Yes, sure. I mean we have to look a little bit at also the different markets. In Europe, we see – to invest capital into the channel are still a very attractive opportunity in the 34 capital wise, except of course acquisition prices, but when you really look at the capital in the stores et cetera that’s pretty light. The real what you buy is capacity, know-how in the stores and customer that’s what you really buy.

And when it comes to the U.S., the situation is a little bit different. It is more difficult in the U.S. to run your own stores. It’s the relative channel margin is smaller than in Europe. You have more wholesale margin in the market than in channel margin and so, per se, that’s more difficult. We’re having the U.S. a little bit situation that’s scanning the game is a fact.

People obviously seem to be more multi-weighted to run in their own business than to work for kind of larger organizations. We always see that and an issue of retaining and developing your audiological base. That’s one effect, that’s why in the U.S. you’ll see more and more franchise concept. Amplifon completely turned back to approach a few years ago. They had an own chain and they’re basically turning back into a buying group, they kept Miracle-Ear, though.

We see other franchise concepts like for instance, Beltone, Miracle-Ear I mentioned before, and you see buying groups. I mean we have a buying group. Delhaize is control to a large extent by Demant. Elite is controlled by Amplifon. These are typical kinds of situations.

We are not sure whether long-term the buying group is a sustainable kind of a platform because you are working on a service concept with independent entrepreneurs. It’s their ultimate decision what they going to do with the business and you have never the guarantee that you can’t control down the way. There are participating in your buying group but they have to right to go. So yes, it’s the moment away you see still in the U.S. happening, but down the road we will see how these buying groups are finally turning out.

Alex Kleban

Okay, very clear. Thanks again.

Thomas Bernhardsgruetter

Okay, let’s take one more question from the line.

Operator

The next question is from Romain Zana, Exane BNP Paribas

Romain Zana

Yes, good afternoon. Thanks for taking my question. I got three if I may, the first one on the product mix on the hearing instruments. Given your position in the current product cycle and the likely future competitive environment on the high end, wouldn’t it be realistic to expect the premium segment recover already in the FY16/FY17? That’s the first question.

The second question on Costco, it seems you have lost more independents that you gained from Costco with, obviously, a lower visibility and loyalty from this big retailer. So two years after the decision to go to Costco, you seem fairly less convinced about this move, if I understand well.

So should we understand that you will stop putting incremental focus on Costco? And also, what extent does the like-for-like growth in this segment is still exciting, now that the penetration of hearing aid corners within their own network is apparently almost full, and…?

Lukas Braunschweiler

Okay, so these are your questions I counted two.

Romain Zana

Yes, I have one follow-up. I’ll come back.

Lukas Braunschweiler

Okay. First question on the mix, I think we have shown in the last few years, we had a pretty stable mix development and sure, the high end and the standard products, they are the ones which are driving the volume here. Yes, the mix has always a big, let’s say the high-end has a big focus for us, not only from a product point of view, but also from a customer point of view.

And that’s where we focus a lot of our marketing efforts and our relationship management with our independence and all the customers. So I’m not so very that high end product will suffer due to kind of competitive product. We have seen competitive products coming in the market in and out and we will bring new products as well.

On Costco, you’re right and on Costco is a certain outreach here, though the product to they may have hearing instrument services in all of their 450 stores in the U.S. and obviously theye still are improving the volume. We discussed what – and interpreted how they do that.

On the other side, you’re right, and that’s one of our biggest initiatives, the independents. They are – that’s the market segment where we have, in relative terms, the largest share in the U.S. And we definitely pump much more attention back into that segment than polishing our relationship with Costco. We do well there. We want to maintain it, but there is a limit. The big efforts are going back into independents, and I just would like to remind you any new product is always first, substantially first move with the independents and not with Costco.

Romain Zana

Okay. Thank you. I’m coming to my third question. Regarding the initial pushback following the AudioNova announcement, can you give us more clarity on the kind of customers who are the most active? I mean, are pushbacks mainly coming from independents, or do you also see, or expect pressure from bigger chains? And in Germany, would it be fair to say that, given the pushback you’ve already experienced recently, the potential incremental impact linked to AudioNova acquisition should be limited?

Lukas Braunschweiler

That’s a good point. I can only tell you what we experienced last year in Germany. The biggest – interestingly, the biggest pushback we did not get from the independents. Very often single independents, they are not so sensitive on that. They might see one or two stores in their neighborhood, but they are not so worried. It’s the smaller chains and the buying groups, which were more pushed back. The buying groups usually take that as an event to go back to the drawing board and try to get better conditions on new deals. So that’s how we saw it. The biggest pushback last year we had from the buying groups in Germany.

Romain Zana

Okay. Thank you.

Lukas Braunschweiler

Are there anymore questions in the room? If not, we go back to the phone.

Operator

The next question is from the phone is from Tom Jones, Berenberg. Please go ahead.

Thomas Jones

Good afternoon. I had two questions. One was just on phasing between H1 and H2 this year, given kind of where you are sitting at the moment, and the comments you’ve been making about product launches later on in the year, reconciling that with your 4% to 6% growth guidance for the full year, would it be fair to be thinking something in the low single-digits for the first-half and then a pickup towards the high single-digits in the second half, or is that not the way to be thinking about it?

And then the second question was just on retail acquisitions. We’ve seen quite a rash of big wholesalers, including the one that denies it’s doing it buying big retailers. We know this sort of strategic arguments and the rationale for it. But what do you think has precipitated this sudden spurt of activity? Do you think the retailers can see something bad coming down the pipeline, so they are keener than they have been to sell?

Do you think the wholesalers can see some incremental challenges coming, so they are keener to diversify and do something about it? I kind of understand the rationale for it all, but I’m just interested to hear your thoughts on why we’ve seen so much activity of late, or is it simply a question of nobody wants to be left on the shelf, so to speak, so as soon as one goes, everyone else thinks they have to follow suit fairly quickly because they’re fearful of being left out of the party, so to speak?

Lukas Braunschweiler

Okay. On the phasing point of view, I think I would concur with your statements. We have – take it the other way around, we have probably a little bit easier comps in the second-half than in the first-half, from a relative point of view. We had those from special effects which I discussed before with Daniel Jelovcan. But overall, I guess, we should see also with some new stuff in CI, in HI coming into the market that the second-half might show a little bit more activity.

Then on your retail question, I mean, the big moves are probably pretty much done. I mean, when you look at larger chains still available, you talk GAES in Spain, you talk KIN [ph] in Germany, yes, that’s in about it then. And yes, you can talk Amplifon, but I don’t think that Amplifon is consolidated, it’s going to be a rather consolidator and a strong player. They might even consider backward integration; that wouldn’t surprise me.

But the – I guess why did that happen is, it’s not a new process. It has been ongoing since several years, but has probably accelerated now in the last two, three years a little bit more. I guess, it’s this conclusion that the market is bifurcating and that you have lower price higher performance coming into the market. And so it’s a question that, where do you want it down the road really get your margin from.

If you pitch and hold in the corner as a pure wholesaler, just serving large retail formats at low prices, that’s going to be a pretty difficult business to be in and I tell you. If you only say, I bank my business on supplying as an OEM kind of into the two, three larger chains, you have every year huge contract negotiations. And the only way is to lower the prices every year and I think that’s not what we see is the right strategy for Sonova. And obviously, some of our competitors, you mentioned one, has come to similar conclusions. That’s how I would take it, but activities might slowdown after an AudioNova acquisition most likely.

Thomas Jones

And just one very quick follow-up, if I may? Just a clarification on the cost for AudioNova. Are you talking about CHF 30 million to CHF 35 million in total, because I think on the slide there were two mentions of CHF 15 million? Were they separate charges, so you are looking at CHF 15 million to CHF 20 million in total, or CHF 30 million to CHF 35 million in total in terms of one-off costs for AudioNova?

Lukas Braunschweiler

It’s CHF 30 million to CHF 35 million.

Thomas Jones

Perfect. Thanks for the clarification.

Lukas Braunschweiler

But not in one hit.

Thomas Jones

Sure.

Lukas Braunschweiler

Can we ask the next question from the line.

Operator

The next question is from Richard Biliczovsky, AB Bernstein. Please go ahead.

Richard Biliczovsky

Hi. Just one from me, given that you talked about the that fact there is not many more big deals out there. How are you thinking about returning to share buybacks in the future? I mean, is it something we can expect in the next couple of years, and what sort of level of buyback would you expect to be doing?

Lukas Braunschweiler

Yes, that’s a valid question. I think Hartwig explained to you or give you an update on our four element total shareholder return strategy, our cash employment strategy, that’s how we do it with priority acquisitions, if you don’t need everything there. We have a dividend, of course, which is a given, which we try to tend to increase, we have then the net cash position which we want to have, it served us well. We are now very flexible that we have a positive net cash position in light of such a large transactions and then whatever will be surplus on that goes back to a buyback.

Now going back into net debt position, then of course, we are waiting until we are in cash positive again, there and then we might fire up the buyback program again, if we don’t need the cash. It’s interesting, depending from which camp you are that’s kind of how we go through the road shows. There are people say, great, you do an acquisition, don’t do buyback. The next one tell you, you should have done buyback and not an acquisition.

So I do – you find all kind of flavors here. At the end, we are industrial. We want to build our business and buyback for us is usually not the most sexy thing we think we do day in, day out. So we’d rather find great targets, which we can bolt on to our business.

Richard Biliczovsky

Yes. Great. Thanks very much.

Lukas Braunschweiler

Next question please.

Operator

Next question is from Peter Testa, One Investments. Please go ahead.

Peter Testa

Hi. Thank you for taking the questions. They’re all surrounding the outlook. If you look at the step up required to get to high single-digit growth in H2, I was wondering if you could give us a waterfall view by channel as to where you think the acceleration will come?

And then on the medium-term target of 5% to 7%, does that include bolt-on acquisitions? Then on the margin, if you could help us a bit, there’s a limited operating leverage this year, maybe you could help to explain why? And then related to that, why are then returns to decent operating leverage in the medium-term target?

And the last question is just on slide 36, where you give a view of the hearing instrument business by the 35 – by product group. I was wondering if you could give us a view on how you see that product group the three segments of hearing instrument changing in your medium-term view? Thank you.

Hartwig Grevener

Okay. On the first one, it’s a little bit hard here, I know just on a microphone to give you a waterfall chart of the growth components of the second-half. So we probably would have to do it on a one on one called, and if you would call us probably back, that’s probably easier to eventually, or possibly, answer your question here.

The second question was related to what -- I understood it, how we go from this year 2016/2017 to the mid-term guidance?

Lukas Braunschweiler

Yes, sorry, yep for that one. When you look at the guidance on page 27, you would see there, it’s a 5% to 7% and thereof in average a point from acquisitions that new acquisitions in a given year plus spillover from the previous year. And that has been a pretty good rule for us in the last few years, except last year where we really stepped beyond on the acquisition side.

And then on page 35, which is the mix change, I don’t think that it’s going to change dramatically. That’s really hearing instrument and it is a combination of wholesale and retail, and they go hand in hand. I think that’s going to be pretty reflective of what we’re going to see. Of course, we always strive to have in average a good growth in the premium. And it has a strong complete range and naturally shows at the high end and the low end are the ones, which are carrying the growth.

The medium you need in many markets as a stepping stone for selling up. And that’s why the audiologists like this kind of seamless range from the bottom up to the high end.

Peter Testa

Okay. There was a question also on the operating leverage, please, if you could just help understand that. Thank you.

Lukas Braunschweiler

Sorry for that. Yes, we have – when as soon as we have again a healthier mix between organic and then Dave we have shown in the last few years that when you look at the constant currency base we regular had our operating margin improvements. And I think as soon as we have integrated all these acquisitions, we can assume that again.

So even without AudioNova, we know that we have great potential to further improve our bottom line our margins accordingly, as I said before the guidance at the mid-term – the mid-term guidance at the midpoint both tell us that we get about a 60 basis points average margin improvement every year and we say that comes from cochlear implant and that comes from the HI business on average.

Peter Testa

And this year, it’s relatively limited operating leverage?

Lukas Braunschweiler

Well, you see we have known, because we know when we go down in the sales that March is getting dice here, we always say, if we get below the mid single-digit growth and the midpoint will be 5%, it’s starts to get dicey. I mean, we can stop all investments in OpEx and still get formally a nice margin expansion, but that would bite us and down the road.

Peter Testa

Thanks very much.

Lukas Braunschweiler

Thank you. Next question please.

Operator

The next question is from the David Adlington, JPMorgan. Please go ahead.

David Adlington

Hey, guys, thanks for the questions. Firstly, just qualitatively, I just wondered what the early feedback from your independent customers on the AudioNova deal had been and whether you were seeing any competitors trying to make some trouble for you on the back of that.

And then secondly, just in terms of your long-term guidance, the 4% to 6% organic I think, I just wondered what your expectations were for market growth over the medium-term as well. Thank you.

Lukas Braunschweiler

Thank you, David. Probably to the second one first, I did not say the 5% to 7% mid-term target underlies an assumption of 2% to 4% mid-term/long-term growth on the hearing instrument side and probably 5% to 10% underlying market growth on the CI side, that’s kind of the math behind.

Now your questions on the reactions, well, they had not a lot of first reaction. It is definitely calmer than it was a year ago, but that does not mean that it is better. Last year was very emotional, this year is probably more rationale. People saying, well we understand that we kind of expected it. Do we like it? Some say, yes, doesn’t matter; some other ones say, no. But that’s kind of what we expected so far.

Now sure, competitors always try to take advantage of that, though in Germany specifically, people expect that some of those guys will come out with their own retail kind of efforts as well. And I tell you, I know and see who is competing with us for assets and it’s interesting the names you encounter sometimes. And so if somebody says we are not in retail and have no plans, at the same time, I see their name bidding, then I have an issue. And these type of rumors more and more get out in the market as well.

In Germany, pretty much everybody expects that everybody has somewhere some retail and is going to get into it, and has ambitions to do it. I know in the bidding process in AudioNova, there were a couple of our friends bidding heftily as well, not only Amplifon.

David Adlington

Great. Thank you.

Operator

The next question is from Veronika Dubajova, Goldman Sachs. Please go ahead.

Veronika Dubajova

Good afternoon, gentlemen. Thank you for taking my questions, I’ll keep it brief. My first one is just on your expectations for product launch and I appreciate you’ve sort of just given us a little preview saying second-half you expect contributions. But is it fair for us to assume that this is your long-awaited 2.4 gigahertz connectivity platform, or are you still working on a near-field magnetic product that we’ll see in the fall, and then maybe followed on by 2.4 gigahertz as we move into 2017? If you can just clarify, your thinking on that and your plans on that, because I think the messages have been a little conflicting on that over the past 12 or 18 months.

And my second question is just on currency and any special effect. I appreciate the disclosure you’ve given us this quarter, but obviously, there was a one-time gain that you had in the second half of the year. Hartwig, anything from you that you want to flag in terms of either FX, working capital, or any gains or costs that we should be bearing in mind as we think about the guidance for 2017? That would be appreciated. Thank you.

Hartwig Grevener

Okay. Hi, Veronika. I think I can answer the two questions right away. The first one launches, now we have become a little bit more close on the – keep the books more close to our chest because otherwise, it’s just for us competitive getting awkward. I said there will be launches. I clearly said that were next generation 2.4 gigahertz chip, the second one, will come out in form of product in the course of 17 that’s what we stated and sure we have lots of stuff in the make and we are looking forward to that.

Your second point regarding FX impact on working capital, we can say that obviously our efforts to really that increase our hedging efforts and building it across more currencies is bearing fruit. So going forward, we are pretty confident bearing any crazy kind of moves of the currencies in one shot that we should be well covered and shouldn’t have any kind of larger fluctuations on the GP.

Veronika Dubajova

Great, and if I can just follow-up on that, Hartwig, any guidance you can give us on the EBITA impact that you expect from currencies into the next fiscal year? I know you’ve given the euro and the dollar sensitivity, but of course, there is other FX that’s moving quite a lot at this stage. So any help you can give us on that would be very helpful. And that’s it from me. Thanks.

Hartwig Grevener

Well, Veronika, the current spot rate environment, I wouldn’t see it will be significant year-over-year. I guess we are not far away from being at par, but you know there is another 10.5 months to go, and that’s why we giving you the sensitivity. Veronika, I’m afraid that that as much as I can say. I hope that…

Veronika Dubajova

No, understood. Thanks.

Hartwig Grevener

Yes, thanks.

Lukas Braunschweiler

The best you can do, Veronika, to tell in London everybody that the Brexit is no option.

Thomas Bernhardsgruetter

Okay, we’re coming closer to the top of the hour, we have two more questions. May I just please ask you to keep it brief as we have more program afterwards, sorry about that.

Operator

The next question is from Ines Silva, Bank of America Merrill Lynch. Please go ahead.

Ines Silva

Hi thank you for taking my questions. I’ll keep it very brief. First of all, just a clarification on the channel conflict that you have included in your guidance for next year, I didn’t quite understand if you expect higher impact on Phonak products, or lower priced products. And then second question is that did we see a positive or a negative impact on margins from the deceleration in Costco sales, gross margin and EBITA margin, please? Thank you.

Lukas Braunschweiler

Okay, on your first question, the channel conflict, it’s a totally difficult to read. Is somebody going completely going away from you or as we kind of saying okay, I don’t buy anything, buy it only of the certain part of the product range? We have seen, last year as a trend in Germany that it was rather the way that they gave away the lower end product, low to mid range into mid to high end were kept. That’s why I said we lost somewhat more on volume than on Swiss Franc or dollars. So by the way, our ASP in Germany wholesale went up last year as a consequence of that quite markedly, one of the positive side effects of it. And then on the second question, yes?

Hartwig Grevener

The second question I understood was about whether the Costco progression has more impact on the gross profit margin or more on the bottom line. When we talk about Costco and margins and Lukas said this earlier on, Costco is a premium product only channel for us, even though they have a good price there that is not far off from being the average ASP that we have in the overall commercial market. And second, in terms of operating expenditure, it is a relatively savvy client. It doesn’t need so much hand holding than our independents. So out of those two statements, I hope you can read the impacts there. Given that it’s a premium product, the impact on the bottom line generally is not insignificant.

Ines Silva

Thanks. Can I just have a quick follow-up, one minute of your time? Could you give us a brief comment on potential FDA changes in regulation, regarding personal amplification devices, and over-the-counter hearing aids? Thank you.

Lukas Braunschweiler

Okay. You refer to that whole [indiscernible] story, they all know that they are hearing on FDA, what help, what the outcome will be we will see, frankly, you have seen history how these things go. We don’t expect a revolutionary kind of reaction from FDA. There might be down the road that they ease up somewhat the regulation at the lower end of the product that you could say, okay, some hearables wearables or forms of [indiscernible] down the road might be used for certain mild form of amplification, but we will see.

Frankly, you have election in the U.S. These questions tend to be not to be answered in these times very fast. And the second thing is, I guess, FDA, they have some much bigger fish to fry than to answer these questions these days. So I’m a relatively relaxed on it.

Ines Silva

Thank you so much.

Operator

We have our last follow-up question from Michael Jungling, Morgan Stanley. Please go ahead.

Michael Jungling

Yes, thank you. Two questions. On product launches, you used to have a slide in the back of your deck, which showed your product pipeline, including the word platform launch in the second-half of 2016 calendar year. This slide is missing. Is this now still an accurate slide, or should we ignore that slide for the purpose of guessing the timing of your new product launch?

And secondly, when it comes to comparative product launches, over the next 12 months, and your guidance, how would you assess the headwind to your business? Is it a high risk, a medium risk, or a low risk based on what we know today from William Demant, Widex, Sivantos, and perhaps also GN Store Nord?

Lukas Braunschweiler

Okay. On the second one, I think it’s the standard risk we have. We also have a pretty active pipeline. And your first question, yes, I told before, we were probably a little bit more pharma style before and looking into the pipeline down the road more actively. But I must say, we had to change that policy to some extent, given that some competitors make use of it in a form, which was probably not very favorable to us.

So we’re a little bit more careful about that. But I think, given our rhythm and kind of how we bring platforms into the market, you get a pretty good feeling how we extrapolate that, and I guess from that end, I –what I said before in general, we are pretty confident that we have a rich pipeline in technologies and products and shouldn’t hide here.

Michael Jungling

So of the problems, it does in a different way, does the UHA meeting count as an important launch meeting for you this year?

Lukas Braunschweiler

We use, of course, these trade shows, though we know the trade shows effect become a little bit weakened by several effects, one is usually that you have to bring products into the market in, like in the U.S. in August that you can hit the November timeline with VA, et cetera, et cetera. So we see down the road a little bit a different way how we go into the market probably with these products. You see those from one of our competitors, they announced the product and now in the months to come, they start slowly, but safely to bring it into the market. But the trade shows play an role and frankly, between the two big ones, formally the UHA is a little bit more important as it still attracts the larger kind of third-party customer base.

Michael Jungling

So just to be clear, is the omission of the slide in the slide deck a sign that you will launch a product in 2017, or more of an omission, I wasn’t quite clear on that?

Lukas Braunschweiler

Sorry.

Michael Jungling

Is the omission of the slide in the previous slide deck that you will launch a second-half PF or product platform, is that an indication that it’s still valid, or not? I’m not quite sure what the answer was?

Lukas Braunschweiler

Yes, you should stay tuned on our launches. And I’ve said before, we will bring products to the market in the next six to 24 months in various ways.

Michael Jungling

Okay. Thank you.

Lukas Braunschweiler

Thank you. Okay. So with that, thanks a lot for all the questions and for hanging in here, for coming here. We had a great attention here in the room. We have a series of subsequent event, as you can read from our presentation. We’re going to have – I just would like to remind you, we’re going to have a road show, we are on the road quite intensively next few days.

We’re going to have our general meeting on June 14, and it’s the ultimate decision on the dividend, which we think the shareholders will applaud, hopefully. We’re going to have our Sonova Investor and Analyst Day on October 18, here in Stafa. We will be at the Congress, and Michael is right, the Congress is important to us as usual. And then we will get back to you at November 14 with the first-half results.

So thanks for being here, and thanks a lot for your support. See some of you on the road, and otherwise throughout the summer anyway. Thank you. Bye-bye.

Operator

Ladies and gentlemen the conference is now over. Thank you for choosing chorus call and thank you for participating in the conference. You may now disconnect your lines. Good-bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!