Sonova Holding AG (SONVF) CEO Arnd Kaldowski on Q2 2019 Results - Earnings Call Transcript

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About: Sonova Holding AG (SONVF)
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Earning Call Audio

Sonova Holding AG (OTCPK:SONVF) Q2 2019 Earnings Conference Call November 20, 2018 8:00 AM ET

Executives

Arnd Kaldowski - CEO & COO

Hartwig Grevener - CFO

Analysts

Ian Douglas-Pennant - UBS Investment Bank

Daniel Jelovcan - Mirabaud Securities Limited

Elisabeth Clive - Sanford C. Bernstein & Co.

Yi-Dan Wang - Deutsche Bank

Thomas Jones - Berenberg

Veronika Dubajova - Goldman Sachs Group

Christoph Gretler - Crédit Suisse

Michael Jungling - Morgan Stanley

Oliver Metzger - Commerzbank

Maja Pataki - Kepler Cheuvreux

Daniel Buchta - Bank Vontobel

Operator

Ladies and gentlemen, welcome to the half year results 2018/'19 conference call and live webcast. I'm Sarah, the Chorus Call operator. [Operator Instructions]. The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Arnd Kaldowski, CEO. Please go ahead, sir.

Arnd Kaldowski

Sarah, thank you very much. Good day, everyone, on the call. Thanks for making the time to listen in here on the first half year results 2018/'19. I'm together with Hartwig Grevener, our CFO, and Thomas Bernhardsgrütter, our Head of IR. We will go through our presentation as we voice over, and I trust that you all follow the webcast and will see where we are, to understand the disclaimer here, which I am aware everybody understands.

Moving on to the agenda. We want to cover some of our group results of the first half year, then the hearing instruments and cochlear implant segment specifics we give. I will take care about the first three points, then Hartwig will come on and share financial information in more detail. And then I will come in on the outlook and open up for Q&A. We target to spend about 35 to 40 minutes on the presentation so that we have ample time on the Q&A side.

With that on the highest level, when we look at the first half year of this year, we look at it as a solid first half year on the top line, in line with the indicative top line guidance we gave. We don't normally give a guidance for the half year, but we gave you some heads-up that the first half will be somewhat slower and as you can see from the financials a good double-digit EPS growth. Most important to think at the second half of the year through and with the full year results, obviously, the launch of the Marvel product, which I will comment more in detail. One good news at the beginning here, we're launching the product this week to end customers, so a couple of weeks ahead of what we said in the May full year results.

Just a couple of comments pretty quickly with regard to our market and the strategic frame on Page 6. As the ones that had the chance to come to Capital Markets Day heard me say, no change in the principal strategy of Sonova. We like our vertically integrated business model. We like our strong position on the products hearing instruments as well as on the cochlear implant side, and we believe that's a great starting point for this industry. We then continue to broaden our consumer access ultimately, obviously, through a strong wholesale business but also an increasing retail footprint.

From a market trends perspective, an attractive market, good demographics, with the aging population and now the baby boomers growing into the age where hearing help is relevant to them; continued bifurcation on our channels, which makes us serve the independents with the different product offering than the large retailers. And then particular with the emergence of the connectivity in the industry and the emergence of Made For All phone connectivity with the Marvel and opening window to leverage the Internet of Things more in our industry now and going forward.

A quick recap on the four growth drivers we shared at the strategy discussion. Clearly, leading innovation is critical in our industry. There are still many things we can make better on the hearing aids with regard to audiological performance but also the consumer experience, and that is at the center of our strategy. Secondarily, not just the expansion but also the optimization, and I will comment on some progress there as we go through the results of our audiological care network. And for the wholesale and the cochlear implant side, a continued expansion of our multichannel partnerships, one new one, as we have discussed, the managed care business in the U.S. as a new growth sector in that market but also driving for continued improvements of the commercial execution. And then as a last point, in participation and the significant investment into the high-growth developing markets.

Before we get later into the numbers, just a little bit our reporting as well as organizational structure, restructured in three businesses after sitting in two segments: on the hearing instruments segment, we have the hearing instruments business. Think about it when we talk of revenues as this being our wholesale business; the audiological care business, which is what we historically have called retail; and then the cochlear implant segment, all three driving the individual innovation elements, the hearing instruments business and the cochlear implant on the product side and the audiological care business on the service delivery.

An important one to think the year through is where we stand with regard to launches of innovative products, also obviously something to make sure we deliver on this part of the strategy. And as I said at the beginning of the call, we're proud and happy that we're in the position of launching the Marvel at this point of time and has been shipped to the selling units. And tomorrow, we will start shipping the product to end customers.

What is the Marvel? For the ones who are closer to us, a recap; for the ones who are not that close, hopefully some news here. The Marvel is really combining what many of our customers would call all the features they are looking for in a hearing aid. And that means high audiological performance with the Marvel improvements on our algorithms to improve first time fit relative to the generation before; the strong lithium-ion rechargeability offering we have with incremental improvements relative to what we had launched two years ago; and then the Made For All phone connectivity, which is a unique differentiator for us still in the marketplace; and now enabling all of the different product call-ups you need to connect with the different devices, to enable Binaural VoiceStreaming and get to the best audiological performance.

We have launched the product with UHA. We had strong response from the audiologists there. We've seen an unprecedented high number of preorders with UHA. We also have seen in the following launch events in all the different countries we are selling in significantly more people coming then for the Belong platform, which is the last big platform launched two years ago and we see very positive reactions of the markets to the Marvel.

For us, it's relevant obviously to get a step-up with regard to the growth in the hearing instrument business side. The Marvel comes with our first broader set of eSolutions launched to the marketplace, elements like remote fitting and a couple of other applications relevant for the audiologists; and to cater our independents in a cloud-based model, so that they're able to use those technologies relatively seamlessly. It also comes with a couple of consumer-centric applications like the speech-to-text translation, which we have integrated, so really an ability to improve the hearing of somebody with a more severe hearing loss while they get a telephone call. That's on the hearing instruments side.

Another important one for the cochlear implant side, we have received FDA approval in September for the HiRes Ultra 3D implant and also the CE Mark now in October. The HiRes Ultra 3D implant allows people with an implanted -- with a cochlear implant to not worry about an MRI scan to be done. You don't know if you need an MRI scan down the road, so this is a real concern. Cochlear as well as we didn't have that functionality. But with this product launch, we have that capability and have adjusted the way our maintenance functions so that they don't -- they are not a pain, nor do you need to take any precautionary measures when you go through an MRI. So that late launch will obviously have an impact into how we think about the second half for the cochlear implant business.

Now moving on to the summary of the first half year, I'm sure most if you have already jumped to that page or read it before the call. I'll voice over some of the bullet points here. On the sales side, the 4% in Swiss franc, they are the benefit obviously from a currency perspective. We've seen a 2.1% in local currency; and organic, 2.6%, I'll get to which later to explain that a little bit more. On the EBITA side, 3.3% growth in local currency.

Looking at the hearing instruments business, a strong performance from a growth perspective in the audiological care business. Last year, we were organically growing at 1%. This now stepped up to 5, a lot of improvement but clearly on a good path and good momentum; but on the other hand, a slower growth ahead of the Marvel launch, with the Belong platform being two years old, and some headwinds in significant markets from an ASP perspective, which ultimately had an impact also on the segment profitability here.

Cochlear implants, a good half year, 6.7% in LC growth. If in both years you'll leave out the China tenders, which we always argue is a onetime and also a low gross margin, we actually look at a 10.4% growth in LC, which is clearly above market. And EBITA of CHF 7.7 million, after a slight loss last year, there is a Vendor B element in here but also very good organic step-up of the operating profit for this business.

Going a little deeper on some developments by segments and by geography. Audiological care, strong double-digit growth in many of our major markets we are playing in, you can see here Germany, Canada, France, Brazil, New Zealand; but at the same time, also an improvement in the two great countries we've discussed in length, the U.S. and the Netherlands. We've completed our network restructurings in line with what we said earlier this year, and we've now seen in both markets low double-digit same-store growth, which was the litmus test we wanted to use to see if the restructuring was successful, and we're now getting back into a growth phase. So overall, pretty good showing here of our retail business.

Looking at the HI side, a couple of positives and some negatives. A high single-digit volume growth, driven by Europe and Asia Pacific, and that puts us in unit volume at market slightly ahead of market actually. But then as you can see, we're spelling results here, mid-single-digit ASP declined, partially real price erosion, partially a mix effect, but people were buying, also on the back of the basic product introduction, lower-end product. The U.S. particularly challenged, we interpret this as a competitive environment. We interpret this as a market where innovation is important. We are also seeing in the VA us losing some share given the product launches we've seen in the VA from our competitors.

CI, double-digit growth outside of North America. And then the product launches, as you are aware, the one I want to highlight, which I haven't spoken about yet, is the third bullet point here. And that will help us in the second half in North America. We do launch product in Costco later than in the independent channel. We hadn't launched a B-Direct version nor any rechargeability in Costco. Just wanted to be careful with regard to the momentum in the independents that had its impact on the top line, and so in the Q2 -- the second half of the Q2, we launched both functionalities and have seen a strong pickup of the Phonak product line in Costco clearly also helping us in the U.S. for the second half of the year.

On the key financials, I don't want to take all of the thunder from Hartwig. Just two comments from my side here. If you look at the sales, I watched that over. If you look at the gross profit, we were able to keep the gross profit margin stable despite of the ASP headwinds, which, in my eyes, indicates that we had good improvements on manufacturing productivity and in procurement but not enough to show an improvement on the gross profit relative to the ASP headwind we had on the HI side.

On Page 14, you can see the breakdown of the revenue. You can see that if you take the organic and the bolt-on, which is normally the growth rate we would have reported historically is operational because we didn't divest businesses, we were able to get to 3.8%. But you can see that we had a 1.6% headwind out of the divestments of our hearing plan business in the U.S. as well as the stores we sold or closed in U.S. on the retail side.

Getting to the geographical focus or the split here, quite different -- or different perspective by geo. If you look at EMEA, Americas and Asia Pacific, that's at market probably slightly ahead of market particular for EMEA as a growth rate. And then you see us with a significant decline in the U.S. Now that includes the investments which were all in the U.S. but still a negative development in the U.S. from a revenue perspective after the divestments. In EMEA, all of the three businesses have done well; as you can see, mid-single digits, high-single digit, double-digit on the CI side. If you look on APAC, Australia is a single large case where we had no operational issues, which we're in the process of fixing; but the rest of Asia Pacific, all double-digit growth. Then if you get to the U.S., you can see that we're still having some headwinds in the various businesses for different reasons. HI, the aging platform, including the VA being behind the competition with what we had available in the VA, did put some headwinds against us. On the retail side, really the divestments, as I said, low double-digit growth in same store, so I think we turned the corner there. And then on the CI side, with a low single-digit decline. But if you unpeel the onion between systems and upgrades, on the systems side, we've done well; the upgrades had a very strong year-on-year comp, north of 50% growth in upgrades last year in the U.S. based on product cycles there. So we weren't surprised because we knew that, last year, we had a very strong showing on the upgrades.

The growth rate by segments on Page 16. Not a lot I want to say to what I have already said. Probably the only one is if you add the 1.8% divestment effect back into the HI, that would be at 3.5%. And the total Sonova, as I said, is 3.8% operational.

Getting to the gross profit side. We reported gross profit margin flat year-over-year, but that's helped by the FX side. And if you look on the operational picture here in the middle, while we have seen some absolute organic improvement in gross profit, you can see that we lost 90 basis points, and that's really the balance between the productivity gains but also the ASP headwinds on the HI side.

From an EBITA perspective, reported EBITA margin improvement of 70 basis points contributed to the onetime cost, which we didn't have after last year that was related all to AudioNova. And then FX impact here, but on the operational side, pretty much 0.3% of an EBITA increase.

Now diving a little bit deeper on the hearing instruments side, now lots of the bullet points are kind of repetitive. Let me comment on the one here with regard to ASP and a little bit more detail on the EBITA. This is really half a mix issue, with us, on the one hand, selling more of the basic product which we have launched newly; but secondarily, also trend we tend to see when a product gets older in the product life cycle, where people go sometimes a level lower, and then your whole mix shifts. The other half is real price and where we had to give price no matter if it was in a large retail account or whether this was in an NHS or whether this was in an independent.

From a new platform launch perspective, Marvel obviously important. Our expectation on the Marvel from a price perspective is a mid-double-digit price increase. And we have good positive feedback from our teams and the market on that, and that is relative to the runway we're coming in with from the first half year. And for the ones who are running the numbers in the back of their head, Marvel is about -- or the segment we're serving with Marvel is about 25% of our hearing instrument business. I talked about the Costco pickup as well as the availability of the Marvel.

Just quickly on the next pages, a little bit more color, which we provide with regard to the growth pieces in the hearing instruments segment. The first page is the hearing instruments segment, so wholesale and retail together. You can see the composition of the 1.7% growth: 2.3% organic; 1.2% through acquisitions and retail; and 1.8% through disposals. If you go to the hearing instruments business, here you clearly see the impact of the lower volume and the price on the hearing instruments side, where we globally just had 0.5% of organic growth and a significant divestment impact from the hearing plan business. And then if you go to the retail, you can see the composition of the strong growth we had on the audiological care side, where we had 7% in total, 4.9% organic, 3.1% through new acquisitions over the last 12 months, and then minus 0.9% from the disposals of stores in the U.S.

And we move on to cochlear, many things said already, talked about the top line with the 10.4% if you correct the China central government tenders; strong systems sales growth, which I'll get to on the following chart.

I spoke about the CHF 7.7 million EBITA, which is an EBITA margin of 7.1%. There is an impact of a Vendor B reserve which we took out or released. But if you take that, we have a year-over-year 430 basis points improvement, mainly driven by productivity improvements with regard to manufacturing, also purchasing and some restructuring we've done in order to streamline the organization, so a good first step towards the goal of getting this business to mid-teens profitability and then the launch here of the Ultra 3D.

I think the next page we can flip over. That's numbers we've shared already. A quick word on system sales versus upgrades and accessories on the cochlear side, 8.8% on the implants growth. If you again take out the China tenders in both years, we actually grew double digit in the systems side, which is a strong signal for the competitiveness of the offering and the execution of the sales team because that's really convincing new recipients to take our products. And on the back of that difficult time, we can capitalize with regard to the upgrades. And then as I said, the U.S. lower from a year-over-year performance on the growth in the upgrades, on the back of a very strong campaign but also a favorable position in the product life cycle of the upgrades.

With that, I want to hand over to Hartwig for financial comments.

Hartwig Grevener

Thank you, Arnd, and good day, everybody. I'm on Page 29. And as usual, I will talk a little bit about the reported numbers on and below EBITA, balance sheet, and then give you also some more visibility on how the functional cost categories have developed. So you have seen that the reported EBITA in Swiss francs was up 7.6% and the reported margin up 70 basis points for the group. The earnings per share was up a good 10%, reflecting the EBITA growth and also helped by a little bit lower tax rate. I'll get back to that in a few moments. Very good and continuing high-level operating free cash flow 106 -- of CHF 166 million, up 8.3%. And the cash conversion, pretty much on prior year level, with 66%, based on operating free cash flow over EBITA. Balance sheet continued on a -- to be on a strong level, with a leverage ratio of 0.5.; a little decrease on the capital employed of 5% to now CHF 2.6 billion.

I am moving on to Page 30. You have seen most of those numbers. Return on capital employed is one that I haven't yet talked about, so it's up by 180 basis points, helped by the decrease also on the base here, which again is also a little bit helped by accounting. I'll come back to that in two more -- 3 or 4 more pages down the road. Let's move on to Page 31, about the functional costs buildup. The R&D costs, up 1.1% in local currencies, it's a lower growth rate than what we had in earlier semesters, but it is in the more normal fluctuations that you can have in regards to capitalization or the realization of third-party R&D support.

Sales and marketing, up 3.4%. If you normalize that for the prior year onetime costs for AudioNova, a larger part of that is in here. That's actually 3.8%., and that's entirely related to the mix shift that we have from a higher growth rate of the audiological care business versus the hearing instruments wholesale business as the audiological care business has a higher sales and marketing -- or generally OpEx ratio. G&A, a pretty good picture, reported down 6.6% in local currencies; normalized for prior year onetime cost, a decrease of 3%. And that is a mix of through cost-containment efforts and a smaller -- to a smaller extent, lower bad debt cost.

The other income and expenses, Arnd mentioned the cochlear implant product liability release of CHF 3.8 million this year. And that is kind of on the same level with a capital gain triggered other income expense that we had also in the prior half year, in the first half of '17/'18, that related to -- as I said, to a capital gain of the disposal of AudioNova Portugal to Amplifon at the time.

So if you take -- if you kind of tally this all up and take out the impact of the onetime costs in the prior year, you're looking at a 2.1% OpEx increase. Moving on to Page 32, just to kind of quickly go through on what is from -- between EBIT -- reported EBITA and net profit. You see that the margin increase is around the 60 basis points and 70 basis points mark. There is a bit of rounding involved here. We rounded this on total -- on multiples of 10 basis points here. We have a small improvement on acquisition-related amortization given that some of the cochlear implant Advanced Bionics acquisition-related amortization has matured. Financial results, not moving the needle here; income taxes, at CHF 30 million. I said early on that we have a mild positive impact in terms of net profit from the income taxes coming down from the mid-14% to a mid-13%. That relates to the on-plan progress of the integration of the AudioNova businesses also tax-wise. And so we are, for now, settling into pre-acquisition levels here.

Moving on to Page 33, where we go through the operating free cash flow. I said early on, it's nothing unusual here, plus 8.3%, largely reflecting the reported net profit and EBITA flow. And you'll see the different elements here: profit before tax, obviously a strong driver here; and income tax paid, a little bit of a help here, we paid less, but that can fluctuate from year-to-year; and then a little bit more CapEx, which is also including capitalized R&D, but mainly this is coming from true CapEx including that we are putting up a new building in Switzerland in our wireless communication business in Northern and Western Switzerland, but this is in the realm of the normal fluctuations as well.

Let me flip forward to Page 34. You see here that we have made mild progress on trade working capital items, DSO and DIO, both trending favorably year-over-year. We're working on both of those, and we will hope to be able to sustain and further improve that.

Capital employed, there is an accounting change also triggering the balance sheet here. We have, as just as our -- as many others, listed companies, you will have seen that implement IFRS 15. And that is giving us like a -- that level of magnitude of CHF 125 million, an improvement here on capital employed, which is pretty much explaining that variance here. Underlying it is a stable net debt decreasing, given our strong cash flow performance from CHF 490 million rounded to CHF 290 million, I should say, decreased but improved, and that's improved net debt balance.

And that links me over to the share buyback and confirm on Page 35 that we are now progressing and have launched this, the share buyback is announced. So you will see that the net debt going up again. And the framing -- the frame of this share buyback, as you know, is 1.5 -- up to CHF 1.5 billion over three years, geared towards a 1x net debt-to-EBITDA leverage.

I make the extension here on the current accounting because next year, we will have the adoption of IFRS 16 lease accounting standard. This will increase our reported net debt, but very much in line with adjustments that are already now being applied by debt analysts on our current pre-IFRS 16 net debt.

With that, I return back to Arnd. Thank you very much.

Arnd Kaldowski

Thank you, Hartwig. Let me comment on the outlook and then we can open for questions and answers. As you've seen from our press release, we are leaving our guidance for the year unchanged. That's driven by the good momentum we have on the audiological care business as well as the good momentum on the cochlear implant business. And then the Marvel, which we're certain to release to customers tomorrow, in addition with the strong positive response we've gotten from many customers around the world on the product, and that should set us in a good position to achieve results for the full year in line with the guidance here.

If you go to Page 38, just a recap of the most important top line drivers. If you think from a first half to second half year sequential, the four months -- so a little bit more than four months contribution of the Marvel, then the benefit of the expanded product offering or the renewed product offering at Costco, which is an important channel for us which came in October and -- in August and September in two steps. The Marvel, as I said, we have a high expectation with regard to price, but not unusual relative to other platform launches we have done. We're comparing here mentally with the Belong launch two years ago.

I think an important one to keep a little bit in the back of your mind is, if you think about our growth rate last year first half versus second, our first half was stronger. The second one has somewhat of an easing comp base. And then the last point, the launch of the Ultra 3D implant, important for the cochlear growth momentum.

With that, we're through with what we wanted to voice over here on the slide and would invite you to questions, which we will try to answer.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question is from the line of Ian Douglas-Pennant, UBS.

Ian Douglas-Pennant

It's Ian Douglas-Pennant at UBS. So the first is, I think as you anticipate on the guidance, I think you just helped us a bit understand how you get there on the revenues. But could you also talk about margins a bit and your expectations in the second half? It seems like with launch costs for Marvel's instruments, we should expect those to decrease, or does price offset that? And secondly, to go back on the revenue guidance, is the top end of the revenue guidance realistic at this point?

Arnd Kaldowski

Ian, thanks for the questions here. Let me first comment on the bottom line guidance here. I think if you think through the fall-through required out of the incremental volume from first half to second half, I think -- and on top, the price expectation I have shared, I think we have good line of sight for that profitability lift here from the first to the second half. And that's in line with our, let's say, normal fall-through ratios, which we've seen at this kind of volume lift. I think you need to assume something around the 60%, 65% fall-through, which I think is doable in our business. I think with regard to the guidance, we do not give guidance upper or lower end. I think you hear that we're confident about our Marvel as well as the 3D and the Costco product. I think you see a good performance here on the two businesses, audiological care and cochlear. So I think we're in a good position on the top line for the second half.

Ian Douglas-Pennant

Okay. If I could just come back -- just quickly just come back on the margins. I mean, you're not expecting significant -- only if you say 60% to 65% fall-through rate is normal, I mean, should we not expect less than this in the second half given the investment cost? Or because the bar sort of lift is...

Arnd Kaldowski

No, I think -- if I think our investment cost through for the launch and the preparation of the launch, I would not see that having a significant impact here in the equation. I'm looking at Hartwig, he is nodding. Yes. No, no, it is -- there is a launch cost in the second half, but it's not -- it doesn't have a significant impact on the fall-through, given the generally high gross profit margins that we have here in the business.

Operator

The next question is from Daniel Buchta from Vontobel.

Daniel Buchta

The first one, on the hearing instruments. I mean, can you give an indication on how the volume growth in that particular business has been versus price versus mix? I mean, we have seen 0.5% organic growth here. And the second one on the same business EBITA progression, I mean, the margin was down 60 basis points. I would assume that this means that hearing pair was probably up and you still have synergies to reap from AudioNova, but on the other side, it would mean a significant margin contraction in the traditional hearing instruments business. Could you help me on that side to understand?

Arnd Kaldowski

Daniel, thanks for the question. Yes, on one page earlier, we actually, in order to explain the dynamics, spelled out the volume and the ASP effect. We have a high single-digit volume increase on hearing instruments, in the hearing instrument business, so the wholesale side of the house, and a mid-single-digit ASP decline. Now with that, I think if you do the math, you can see that, that ASP decline was a minimum, the key driver of our challenges on the gross profit and the operating profit. If you look at the other line items with regard to synergies out of AudioNova, but also being tight on the spend side in driving productivity in the hearing instruments business, we're all feeling good about that. It's really the ASP side here at the end of the product cycle.

Operator

The next question is from Lisa Clive from Bernstein.

Elisabeth Clive

First question, just on your U.S. wholesale growth trends. Given the decline in that channel, could you just give an indication of what the split was between volume and ASP? And then in light of your comments around the decent growth in Costco, can you confirm that it was really just the independent sale where your sales must have been notably down? Second, on those new stores in the U.S., on those greenfield store openings, how long should it take to reach volumes versus a sort of fully up and running store? Hello?

Operator

[Operator Instructions]. Ms. Clive, can you please repeat your question?

Elisabeth Clive

Sure, yes. So the first was just on the growth in the U.S. market, if you could just give us an indication of what the trends were, the split between volume and ASP and in your wholesale growth in the U.S. And then also just in light of your decent growth in Costco, just confirm that the independent sales were negative, which I assume they must have been quite some margins. And then last question was just on the new store openings in the U.S. How long does it take to ramp up those stores so that they reach sort of average run rate volumes for your store base?

Arnd Kaldowski

Thanks for the question. So on the U.S., I wouldn't go as specific to give you exact numbers on the price and the volume. But we had price headwinds, given the product life cycle, but we were also struggling a little bit on the volume side. You commented on the Costco. I did not imply to say that we were growing in Costco, to say that carefully here. I think as you heard me say, we have relaunched or launched a newer version of the product. So we were at the end of a product life cycle here within Costco and have some competitive pressures. The independents actually performed, let's say, in line with the independent market in the first half year for us, so think in terms of somewhat of a flattish, slightly up business on the independent side. With regard to the store opening and what we expect from those, normally, we say 18 months is about the time until which you are at a normal revenue run rate. But don't overthink the U.S. store openings or acquisitions, you're talking single-digit stores. Our bolt-on acquisitions, which you see in the numbers, are predominantly in Europe, and then there were some in Brazil and in Canada. By the way, I have to make one correction. I was corrected by Hartwig. Sorry for people having to go back to their notes. I misused the term mid-teens on price.

Hartwig Grevener

Double digit.

Arnd Kaldowski

I used high double digit for the ASP increase we expect for the Marvel, and I should have used the term mid-teens. So please, if you correct that in your notes. It's still a good ASP increase, but please plan with mid-teens.

Operator

The next question is from the line of Yi-Dan Wang from Deutsche Bank.

Yi-Dan Wang

Just to follow on your comment about the mid-teens ASP increase. I mean, that's certainly very attractive. And you also mentioned that you've been taking unprecedented prelaunch orders. So can you give us some sense of how big the prelaunch orders are compared to your prior generation product introductions? And also comment on how much of this mid-teens ASP uplift do you think will stick and the basis for that? And then the last question is, Hartwig, can you comment on the impact of FX on sales and margins in the second half of the year and also for the next year? If that's possible.

Arnd Kaldowski

Thanks for your question. On the preorders, this is really an early indicator because the thing we can measure is what is ordered at UHA. If I compare that with last product launch, Belong, two years ago, our last platform launch, you're looking at something like 40% to 50% more on units. Again, this is not all the growth we need, but it is a clear indicator that people had pretty high excitement from the product on the booth. With regard to the pricing side here, just one caveat. The mid-teens, as I said, are to be deployed to the relevant product segment, which is about 25% of our hearing instrument business. Our experience is that if we come out with those kind of prices, you can keep that price for a couple of quarters. And then over time, as other people bring out new product, you start to see some erosion against the price. But certainly, we feel good about that price for everything which is relevant for this fiscal year.

Hartwig Grevener

Yi-Dan, on FX, obviously, if I would be able to predict FX, I wouldn't be sitting here. But I understand your question, kind of what the read is on current spot rates. And so we are kind of almost in neutral territory year-over-year overall. In regards to top line and bottom line impacts, if I take the average of the last, call it, 60 days, and that would mean, in any case, that we would not accrue further benefits in the second half. But it could also be that we actually eat up a little bit from the benefit that we have seen in the first half.

Operator

The next question is from the line of Tom Jones from Berenberg.

Thomas Jones

I had a question about the non-U.S. business. Really, the dynamics in wholesale versus retail, I know you've given us those figures at the group level, and you've given us some color on what's going on in the U.S. wholesale versus retail. But the growth was quite a bit stronger than I expected in the non-U.S. part of the business. So was just wondering if there's any significant difference in the dynamics between the local currency growth rates in the wholesale versus the retail business. And my second question was just on the double digit -- sorry, mid-teens price increase that you referred to for Marvel. I wasn't entirely clear as to what that was versus -- is that versus your current sort of selling prices for Belong direct? Is that versus your current portfolio of a sort of advanced products? If you could just clarify, that would be helpful.

Arnd Kaldowski

Yes. Tom, thank you for the question. On the wholesale versus the retail dynamic, I would say there's not a spectacular difference between our wholesale and our retail organic growth rates between -- in the different geographies outside of the U.S. I think we see good growth also in wholesale in many of the markets, to name France, to name Germany with good growth, to name Japan as one on the wholesale side. We have other ones in retail which are stronger. But I think, by and large, there's not a big systematic difference. I think the one where we still benefit a lot from an inorganic component of the retail side is in Germany, where we've acquired a larger chain with 50 stores, which was still fully in the inorganic side. On the pricing side, when we do those comparisons at sequential versus what was our run rate for the half year before, so this is really kind of helping to bridge from a step up from where are we right now and where do we go to. And it considers the entire form factor that is launched, excluding the VA business that we have not yet launched it in. So Tom, it's not just top of the line, but it's the entire portfolio of the RIC form factor.

Thomas Jones

Okay, perfect. And maybe just a follow-up question. Given that your product portfolio is kind of broadly similar U.S. versus ex U.S. and the competition is broadly similar, why do you think the stage of your product cycle was such a big headwind in the U.S., but seemed to not have too much of an impact in the non-U.S. business?

Arnd Kaldowski

I think it's a little bit speculation here on my side. One thing we know that we have markets in which we have stronger relationships with independents, and that's expressed in certain type of loyalty programs and things we do from a value-added services perspective. To them, in those markets, we tend to be more immune against product cycles. One market to commend would be France, which we share more publicly about going well. So that's one element here. I think the basic product, we talked about the retail, so it's not relevant for the U.S. market. That was a significant positive in markets like Germany and in a couple of other European markets which are more price-sensitive. But I think the other one is -- and that's, again, that's a little bit speculation or perception. I think in the U.S., customers tend to switch a little faster between different vendors than what we're seeing outside of the U.S.

Operator

Our next question is from the line from Veronika Dubajova from Goldman Sachs.

Veronika Dubajova

I have two, please. My first one is actually on the Marvel pricing. And sorry to belabor the point, but I'd like to understand, as you look at the proposed pricing that you have for Marvel, can you help us understand where it fits versus your competition? Because the mid-teens price increase seems significantly greater than the type of ASP increases that your peers are talking about. And I'd like to understand exactly where you are, not versus history, but really versus your competition. And then my second question is a bigger-picture question. I think, Arnd, you were quoted in the press this morning saying you are considering whether to participate in the over-the-counter market. And I'm curious, given that your two or, frankly, three large competitors all have a consumer brand that in one way, shape or form interact with the consumer today, is that something that you think you would need to acquire or develop to be successful in the OTC market? And how you're thinking about that from an M&A perspective?

Arnd Kaldowski

Veronika, thanks for your questions. On the Marvel pricing relative to the competition, I think we are going to be well positioned and appropriately positioned relative to our main competitors on the high end of the product. I can't give an exact number because, a, it's not that's easy to see all the numbers in the marketplace and have an exact number; secondarily, it's very different by geography. But I think we would sit at a place where relative to the main product, we're at a slight premium relative to them. We would also sit at a slight premium relative to where we were with our Belong platform. From the bigger-picture question here, we are obviously in a situation which we are thinking through what to do about an OTC market. Is that attractive? Is that not attractive? So in that regard, I was saying we're considering this. But you would expect from us -- we have not taken a decision in any direction. There's still some time, but secondarily also, a couple of open questions. I think the big question in that is what is the right go to market and what is the right branding. So what we know is that technologically, we believe we have what it takes to participate in the channel and branding as well as even the final decision, would we go or would we not go is still to be taken. I think if you listen to our customers, just as an incremental point here, meaning our independents but also our own retail, they would love to have some form of an OTC product. And if it is just to upsell people, so that's certainly close to home, and you would probably do with some form of brand from ourselves. If you go further down the road of more disruptive channels, you would probably think very differently about branding.

Operator

The next question is from the line of Chris Gretler from Crédit Suisse.

Christoph Gretler

I have actually two questions. The first relates to your retail business. I was impressed by some of the growth you reported. However, it looks like you didn't discuss the U.K. and Australia, which I guess those are -- are not developing so well. So maybe if you could spend a few words on that. And the second question relates to your CI business. We noticed that you've changed management there. Could you provide some background for that decision? And also maybe what kind of expectation you have with respect to the new management in place?

Arnd Kaldowski

Yes. Chris, thank you for the question. On the U.K., I think we have some headwinds. We spelt that out here. I didn't voice it over as much. I think it's a combination of, in general, a slow consumer spending level in the U.K. I think we also see more of the marketing moving to more of an online lead generation side, not the predominant part of the market, but an important part, and this is where we have to do more work. And leverage, those kind of [indiscernible] more in our [Boots] [ph] channel, which is a great channel from a foot traffic perspective. I think our Australia wholesale business is really more of an operational matter where we lost a couple of people, particularly in the sales front. And we just need to make sure we have the right people in the positions in order to drive our business day in, day out. Nothing magic from a market dynamic perspective, in our eyes.

On the management side, on the cochlear implant side, I think after five years of leadership for the cochlear implant business being -- sitting here in Switzerland, which I think was a good choice given the quality issues we had way back when and our interest to get the product road maps tightly aligned and using as much Phonak technology as possible, we're now at a point where I think those things are executed. And we're getting back to how do you accelerate your innovation road map. And we're getting back to the question on how do you conquer the U.S. market, which is going in systems, fine this year, but not as much in upgrades. And I think we all know the size of the market as well as the price attractiveness. And ultimately, if you want to grow significant share against our largest competitor, we need to win in the U.S. So that just got us to the [real] [ph] outlook, why we like the progress of the business over the last years and also the last 12 months since I'm here. I think it's just strategically better to have that in the U.S. So take from there continued strategy on innovation, tightly integrated between product management and the R&D, close to leading customers in Europe as well as in the U.S., but then also -- and a continued focus on the operational execution as well as the go-to-market execution in the U.S.

Christoph Gretler

Okay. Maybe I have one follow-up on the retail side. Could you actually discuss the margin performance of that business overall? I don't -- I know you don't disclose, but maybe directional given the strong performance in terms of this business. I was just wondering whether there has been also some margin leverage to the business.

Arnd Kaldowski

I think not too specific, but in general, you have to assume that the retail business, given the relatively unchanged footprint to the size of incremental volume, was a net positive contributor from an operating profit expansion in the first half.

Operator

The next question is from the line of Michael Jungling from Morgan Stanley.

Michael Jungling

I have three questions. Firstly, on the VA, you kind of surprised us on the October data. You suddenly gained -- well, you gained -- regained share despite no new products. What drove that reversal? And do you feel that reversal is sustainable for the next 6 to 12 months? Question number two is on the audio headset market. Is the [indiscernible] market an area of interest to you? And would you consider a material acquisition? And then thirdly, on management changes, are you happy with the appointments that you've made so far? Or do you feel that additional changes are required to get Sonova back on track into a market share type gain mode?

Arnd Kaldowski

Michael, thank you for the questions. On the VA, we were pleased, too, that we had a little bit of a pickup on the market share side. I would wait for three months to say if this is a positive upward trend here. We think that the cards are laid right now from a product perspective. Unfortunately, and I think we were pretty clear on that when we talked about Marvel in May at the Capital Market, we will not get the Marvel into the VA contract at this term. So I would say from here around the market share, steady would be good. There may be other new products coming into VA, which may give us some more headwind, and we need to make that up in the commercial market. On the headset business, not something we have any particular interest at this point of time. So you never know what comes down the road, but certainly not top of mind for us at this point of time. On the management changes, I think both changes were done for good reasons and will help us, including the transition periods we have with the current leaders there, I don't foresee any significant other changes on that level. I think it's fair to say that over the last 12 months, we have made some new assignments on people who are leading countries, which I think are also important positions you have to think through when you think about how do you get to growth uplift in certain geographies when you are struggling with growth relative to, let's say, the benchmark within the group.

Michael Jungling

Can I just follow up on the management side? I mean, if you look at the last 5 or 6 years, the organization has continuously foreseen a slowdown, deterioration to an organic growth number in wholesale. That really is quite surprising, surprisingly low. Why do you feel it's not the right thing to replace the talent more broadly? Because what's happened over the last five years is a function, I guess, of the people who are leading the organization. So I'm just curious as to why you think the management team is the right one to have, as it is today.

Arnd Kaldowski

I think it's the right one because I'm working together with it since 12 months and we are putting changes in place, which I think are the right changes on certain country head positions, but also the right changes with regard to how we want to drive marketing and sales from a commercial execution perspective. So I feel good about the things we've done over the last 12 months and the people I have to help to drive the changes we want to do on the approach and the processes.

Operator

The next question is from the line of Oliver Metzger from Commerzbank.

Oliver Metzger

My first one is about your turnaround for German business. Is this -- was this double-digit growth achieved for -- also for Geers in particular or for the overall German business only? My second question is more a clarification one. Would you describe the restructuring of the assets in retail completely as done right now? And my third question is also on the VA market. From your positioning, so are there any measures, what you can take to reduce the negative momentum you currently experience or is it just purely product-driven that we have to wait until May?

Arnd Kaldowski

Oliver, thank you for the questions. So on the retail improvement, given the share size of Geers in Germany, which is almost 3/4 of the whole number of stores, with the strong momentum we've seen also on the organic side, obviously, Geers also needed to contribute, and it did. I think we've seen a good change in the mindset of the team there and the better work on lead generation and the store productivity. We have a new leader in place since January in that business for retail Germany overall, and we're seeing good progress there. With regard to the distraction from our branding, I think we had a couple of markets where we were particularly hit. The U.S. always came up, particularly on Costco. But in Germany, I would venture to guess your question was more on the Germany side. I think we're at the point where we're in steady waters. And a good product and a good execution of the team can convince customers to come back or buy more from us. And that's what we're seeing right now. We're seeing some improvement on the wholesale side in Germany. We do expect Marvel is a great opportunity to open a couple of more doors which were closed. But there is no heightened negative wipes in the discussion and in the marketplace at this point of time. On the VA, yes, it's not just product, but VA is particular product-centric, given that the people who are fitting the hearing aids are mainly focused on the technology, don't have to worry about commercial terms. There is things you can do with regard to making sure you serve them well, making sure that you see them often enough, and we have some measures in place in order to drive that. But I wouldn't expect that to now swing the market share significantly. I use that more as a "countermeasure" in case somebody comes up with another new product.

Oliver Metzger

Okay, great. I just have one follow-up on care. So in the past, it was commented a couple of times that the big bottleneck are audiologists, which are hard to get in Germany. Given your first 12 months of experience, would you say that this bottleneck has become smaller or essentially has eased?

Arnd Kaldowski

Yes, we have done two things in Geers and in other markets, but particular in Germany where we have the large footprint. First, we focused on reducing the leakage in terms of attrition. So we've been able in Germany as well as in U.S., I have heard us say that we have a significant attrition issue a year ago. We have significantly improved, not losing people by driving classical talent engagement measures. So that helps us not lose people. We have intensified our recruiting efforts and our recruiting capacity. So we're now, in Germany, at a place where we feel we don't have a significant number of vacancies. A year ago, we have that. Now the second step is something we decided to do to change structurally here. We have announced recently that we're building a sales -- an audiologists academy in Germany, which is a training center in which we hire apprentices and then train them and train some of them up to the meister level. We do that in collaboration with the local association for acousticians. But that will help us to be ultimately always having enough talent and potentially a net contributor to the talent pool.

Operator

Our next question is from the line of Maja Pataki from Kepler Cheuvreux.

Maja Pataki

I have two. I'm aware of the fact that it's a bit new with the management changes that you've implemented at the cochlear business. But can you help us think about margin progression in the medium term? We're looking at a couple of years where margins, if they were present, were really hovering around the mid- or low-single digit. Last year, there was some improvement. But this year, you've been helped by some -- by the release of some provision sets. What needs to be -- needs to happen that we can actually, for once, see sustainable margin above 10% for the cochlear implant business? And then the second question is regarding the VA. I understand from some -- from talks with some of your competitors that there are sometimes an exception with the VA where if you bring a significant product, you can actually enter the channel outside of the two days. And with Marvel and with the launch of the remote fitting and your project that is running with the VA for the remote fitting, I was wondering whether did you think that you could introduce Marvel at an earlier stage.

Arnd Kaldowski

Maja, thanks for the questions. On the CI side, allow me to have a little bit of a different perspective. If you take the Vendor B releases out, we still have shown 430 basis points EBITA margin improvement from last first half year to this first half year. Keep in mind that the volumes are different between the two halves. So our simple thinking was from starting point last year, if for three years in a row, we get us to 400 to 500 basis points, we get into that mid-teen range. So clearly, we are nowhere near to that number. But I would say at least the first half year we were measuring, we made a good improvement here, outside of the Vendor B release. Now what needs to happen? I think we need to continue the work we have started to improve our product and manufacturing productivity by 5% plus per year. That's one component.

We have to be driving share winning in the U.S. because it's the highest price market. And we need to charge for innovation as we're actually currently doing with the MRI, where we get a significant price premium over the non-MRI solution. So I think we've run that numbers. And obviously, at the growth rate, volume will play a little bit of a role. I don't like that to be the excuse for not driving productivity. But I think if we do those things, and we have seen all of those that play in the first half of the year, I think there's a path towards the 15%. On the VA, I was looking at Thomas here. We -- this is news for us. Hopefully, our U.S. team knows that. But we will certainly go after your hint here. We would love to get an exception. I think the product is very good, which we have. And we also have done a lot of pilots there. But we are not aware about such a process, but we will certainly go after it.

Operator

The next question is from the line of Daniel Jelovcan, Mirabaud.

Daniel Jelovcan

I just have a question on the Vitus launch. Is it fair to assume that this accounts for most of the ASP decline which you mentioned before? And also, where was -- I guess, Vitus was more launched in emerging markets like -- or let's say, in other countries like Brazil and so on. That's my first question. And then the second question is, unless I have overlooked it, is it true that you don't disclose anymore any segments in hearing aids? If so, why not? I mean, we have seen that for the past 10 years, at least. And if you don't provide that segment, I guess it's quite logical that you lost in the premium segment and you substantially gained in the low-end product category segment and probably flattish in the mid-range kind of product segments. Is that a fair assumption? Those are the two questions.

Arnd Kaldowski

Daniel, thank you for the questions. On the Vitus, first from a where, it is more the emerging markets, but it is also certain price-sensitive markets based on reimbursements. So a big part of Vitus plays in Germany, where it is for the type of product which are paid all by the reimbursement. It is not a product for a market like the U.S. also. On your question on the price impact, the Vitus was a component to the price bridge, but not the majority. There are some other mix elements, as you were indicating, that we've seen a general trend downwards here at the end of the product life cycle. There's a couple of channel mix issues in our pricing bridge. So Vitus wasn't the majority. Now on the segment reporting, I'll hand over to Hartwig.

Hartwig Grevener

Yes, Dani, absolutely, we stand in here for good transparency and do not want to reduce. And you might have seen that we have now become a bit more vocal, in any case, for this semester where it played a particular role about volume versus ASP trend. And we find this more helpful than providing you the by-product category information. As you might recall, the by-product category information was a mix between wholesale and retail. And it's further clouded now as we have introduced IFRS 15 by the separation lines between associated ancillary revenues for warranty battery programs and the like. And the core product are becoming more and more blurred. So that's why we have chosen to no longer represent that. But I can tell you that, in fact, yes, Vitus had a particular supporting effect on the standard products. So that's true. But we have, by no means, not any particular weakness in the two other categories. So there is a Vitus impact, but nothing else beyond that.

Daniel Jelovcan

Okay. And can I follow up on Germany then? When that was a good point that this also -- Vitus is also in Germany. I mean, in the press release, you mentioned double-digit increases in the retail business in markets like Canada, Brazil, France and Germany. So specifically for Germany, you mentioned in the slides that actually, retail had high single-digit growth and a bit in Germany as well. So I'm a bit puzzled maybe between, I guess, retail and -- sorry, acquisitions impact and probably organic growth with different sources here, if you can clarify on that.

Arnd Kaldowski

So Dani, the Vitus did not play a significant role in the retail business in Germany. We're not that aggressive on the -- at the customer gate level. I think what you see on Page 15, the high single-digit growth is for all of EMEA. The double-digit was on the pages before for the specific countries, including Germany, sold out. Now in Germany, I think it's fair to say we were in the mid-single-digit from an organic perspective, the rest was the ISMA acquisition.

Operator

The next question is a follow-up from Yi-Dan Wang.

Yi-Dan Wang

I was just looking for some historic data on the ASPs, given that we're losing the disclosure on the segment reporting. Hartwig, are you able to give us the changes in ASP in the wholesale hearing instrument business for the half ended September '17 and half ended March '18? That would be helpful.

Hartwig Grevener

Well, we signal you by the terminology that you have heard from Arnd. So we had a mid-single-digit headwind on ASP, as we said, in this semester on the reporting. And in prior periods, you might maybe read between the lines, and I would confirm that we generally had pretty stable ASPs. And at times when our competitors had ASP declines, we had still a stable ASP. And we had, through the rechargeable launch through the '16/'17 year, let's say, a level lift in ASPs from just the higher product content from rechargeability. I hope that's helpful.

Operator

That was our last question.

Arnd Kaldowski

Then thanks for calling in, and thanks for the question here and the interest. With that, we conclude the call and wish everyone a rest -- or a good rest of the day. Thank you.

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. Goodbye.