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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. Here in the room in Stäfa. Welcome to the full year results also to the interested people on the audio call. I hope you can hear us well.
I have Birgit Conix with me, our CFO, to guide you through the full year results as well as the outlook. We plan to spend about half an hour on there, and then we have good time for Q&A.
And Thomas told me already, there's already incoming questions. So I take from there some people that have already read the material. Just a standard disclaimer.
The presentation contains forward-looking statements, but we don't offer a guarantee with regard to future performance. And now diving into the matter here with regard to our strategy, business results and financial results.
I think if we look at the last fiscal year, it was not an easy one with regard to how to navigate the market environment. I'm sure some in the room will remember when we stood here a year ago, our outlook for the year was more positive than what has unfolded in the marketplace. I think that's true with others in the market.
I think the big underlying reason, I think we have, on the one hand side, underestimated where the inflation will go, and we have also underestimated to degree what inflation does to our marketplace. Because historically, when you look at other recessions, not high inflationary environment, our market was more immune. So in that regard, unfortunately, you've seen us going through the year, changing our playbook to a degree, which we will share because we had to adjust also adjusting our guidance for the year, unfortunately, in August.
But relative to the market conditions we have, we look at this year as we made good strategic progress on what's important for us in the long run, particularly on the M&A front.
We also look on the sales performance being solid, driven by predominantly acquisitions, some organic lift, relative to the macro-economical environment and the often discussed non-renewal of a large contract with U.S. customer.
Q4 was better than Q3 in market development, but also in our own sales, which allowed us to end where we ended. When you look on the profitability, clearly muted picture. Partially because of a significant known headwind from the acquisition of Sennheiser predominantly, which came in at a low profitability. We said that when we acquired the company. And that created some headwind from a margin level perspective, but then also the macroeconomics as well as if you look on the Swiss franc side, clearly, a significant impact from the FX between our cost structure and our revenue structure with all the moving parts, dollar, euro to Swiss franc.
But we can also see in the numbers that we have responded and reacted particularly starting in Q2 when it was clear to us that the picture was different than we thought, on the cost side as well as on the pricing side. And we'll comment more on that.
Strong focus on the M&A side in the year before with the Alpaca and the Sennheiser acquisition, making good progress towards integrating them into our businesses, creating a new business unit and consumer hearing business. But also the ability to create now a meaningful footprint in audiological care in China through the HYSOUND acquisition.
Significant advances on the innovation side, we launched our new platform, Lumity, in line with our normal cadence of 2 years. And I'll comment where we stand on the journey on that one, but also within the Sennheiser brand, but with Sonova Technology launching the first early-entry hearing solution in January.
Now looking at the outlook. I think if you look at the number mentally deduct still the impact we have this year from the non-renewal. You're seeing the number pretty much in line with our midterm targets. We also look at the market and appreciate that the first calendar quarter was a good step-up versus the quarter before, but we see still lots of volatility in the market.
So look at it as a balanced perspective, hopefully appropriately balanced not with the same challenge we had last year being ultimately too optimistic. But we really believe this market is not -- this year is not a full step back to the regular growth rates we are used to, but a gradual recovery of the market towards a more normal.
Highest level results, 14.6% in local currency growth. You see the significant impact here from the Swiss franc on the top line, 3.5%. And then on the EBITDA, 6.1% in local currency. If you mentally deduct the dilution coming from or the low profitability coming from Sennheiser, and if you take into account the inflationary headwinds we have, it is organically a good margin performance.
EPS significantly better than the bottom line growth, partially based on the share buyback, but also some moving items on the tax side, Birgit will comment on.
Our sales outlook is 3% to 7%. I said already deducting the headwind out of the non-renewal in line with the midterm targets we set ourselves. And then you see on the profitability side, a good step-up from the margin perspective, around 50 basis points, because of the activities and initiatives we have, but also the volume fall-through.
Strategy unchanged, despite it being a more muted year clearly believing in our strategy has worked well for us. And if we go to the organic minus losing one customer, I think we're also making progress in many of the dimensions. Clearly, a year of expansion of our consumer access.
I want to highlight a couple of things on the strategy side, starting off with leading innovation. We launched Phonak Audéo Lumity in August '22. We continue to see a good customer response, the penetration rates. And what we measure on penetration, how many customers moved -- B2B customers moved from the Paradise over to the new product, the Lumity, is in line with what we've seen in platforms before. That's always an important metric for us. And keep in mind, the Lumity comes at a higher price than the Paradise, so willing to pay more.
But now in April, we launched 2 more, call it, form factors or brands with the Lumity technology. We launched within Unitron, the RIC device called Vivante, on Lumity technology. So that's normally a good step-up in Unitron territory. And then we have launched the Phonak Slim Lumity. It has similar content, but a very different form factor, which we think is appealing to part of the consumers just because it looks different and it looks different behind the ear.
So good news coming into the year in April, 2 product launches, certainly not the same order of magnitude as the first Lumity, but they always from our experience, a good second step lift to the organic growth.
Other point on lead innovation. You see on the right-hand side what we launched in January in a, call it, soft launch motors, we're going to go in this quarter into full production and then need to drive the demand side stronger, but we launched at the CES, what we call speech-enhanced hearables under the Sennheiser brand, which really gives people an opportunity to have a device who only want to have it for 2 to 3 hours as a -- in a noisy environment who are not yet ready for hearing aids.
A little bit more color around expanding consumer access in the audiological care network. Continue to make progress on a high level of acquisitions and greenfield openings. The HYSOUND acquisition giving us that entry into China in a more meaningful scale with 200 POS. But in addition to that, we acquired over the year, 140 more POS in the target markets we have defined. And we continue to do greenfields in the audiological care side. So our network has grown to 3,900 POS throughout the year.
One new news, which we haven't shared before. I wanted to share it today because it's relevant with regard to how we improve our footprint for multiple reasons. We have embarked an opening operations facility for the Americas and Mexico. We are making good progress there. We expect that to start to have the first output in the second half of this year. So that's how far we are.
It will serve ultimately hearing instruments in the Cochlear Implants business, key benefits, especially for the custom-made products, which today often come from Vietnam to the U.S.. This cuts at least 2 days out of the supply chain and delivery fast is more and more important for our consumers.
It clearly is a place in a world where the costs are pretty low and you get highly skilled labor, many medical device companies moved to Mexico and have built a brain pool there and the capability pool, which we can tap into.
And then in light of the uncertainties with regard to supply chains over the last couple of years with our strong footprint in Asia, which we have established some 10, 15 years ago, I think we're well advised to balance more between the regions and the geographies.
Significant return starting in a year upfront, some investments, Birgit will cover that in her section.
ESG highlights, I don't want to go through all here.
But first, if you look at rankings and indexes, we're ranking very high, highly regarded -- with regard to the ESG footprint and the activities we do. We drive all 3 different pillars every year. Big highlight in Environmental was the commitment to science-based targets, about a year ago and now embarking on the journey on Scope 3, we already had meaningful measures under Scope 1 and 2.
Social, a lot of focus on employee engagement. Because it is increasingly difficult to bring people to the industry and hold on to them. So engagement is really important. But at the same time, diversity and inclusion, you can see here we're above 50% with regard to people leaders being female in the organization. And then more progress on getting more and more governance parts into place, which we think are important sustainable risks for our suppliers from an assessment perspective, but also the well-expected Human Rights Policy.
With that, let me move to the business and financial results. Commented on sales and EBITDA already. If you look at the EBITDA margin, 190 basis points down versus prior year, but if you unpick the [indiscernible], you will see, and I think Birgit does it later.
On the organic side, if you take the dilution out, we had a positive margin expansion despite the macro environment and the lower growth than what we had in the years before. Hearing instruments, call it, flat in local currency, 0.2%. If you correct for the non-renewal, you are in a territory of 4.1% in local currency, as a growth rate, not what we have seen before muted market. But I think a decent number here for the year. The Lumity helped as well as the price increases.
Consumer hearing business, new to us, new to you to some degree, CHF 284 million in revenue came from the Sennheiser product lines. First full year of consolidation, we are making good progress with regard to the organizational integration. We're also making good progress with regard to our expectations on the profitability, which we achieved for the first year. We're not intending to share the number all the time, but we're tracking it internally and we make sure that we're on the path we have set for ourselves here. Market share growth, market share gains meaningfully because we had many successful product launches.
The 2 biggest ones were the True Wireless earbud and then the Momentum 4, which is a Bluetooth headband headphone, which both are playing in the biggest category, Sennheiser is active in.
Audiological Care, significant growth, 15.7%, organic, 4.5% same-store and then M&A contributing 11.2%. And then last but not least, our Cochlear Implants business, I need to unpack that more 2.8% from the outside loan number. But if you dissect into the instrument side and the upgrade side, there's a story to be told. I'll get to that in a couple of minutes here.
From a growth perspective, the composition 2, 3 organic mentally adjusting for the lost contract, you had 4.5%. You see the 12.3% and you see a significant FX impact here.
Looking at the performance by region, focusing on the full year results here. If you go top to bottom, Europe, Middle East and Africa and then a good number. On the market side, we've seen the countries like the Netherlands, Austria and Nordics being positive, felt like not impacted by the macroeconomics.
Unfortunately, the larger ones, Germany, France and the U.K. went in a more muted environment. The U.K., particularly given all of the macroeconomic challenges in the country, France, to a degree, because had a huge lift in the year before coming out of the new reimbursement and a little bit of a step down.
If you go to the U.S., yes, we had Alpaca coming in. But on the one hand side, we had that headwind from the customer contract. On the other side, we did see the U.S. market going further down than Europe. There was always a source of discussion. We've seen now recovery in Q4 towards better territory. But in general, if you look at our Q2 and Q3, it was really significantly more muted than Europe.
AsiaPAC, a very positive number here, 40% growth. There is the HYSOUND acquisition in there for 3 months. Sennheiser also has a meaningful footprint in China, but also many countries who in the year before, still had lockdowns just on the recovery phase. Highest level on the P&L. I gave you all the numbers on the full year, so it's probably more interesting to unpack the first half, second half dynamic on this chart.
On the top line, the first half year, almost 18% second half was 11.6%. We see again the impact of the contract but also a slowdown in the marketplace. On the other hand, if you look at the performance on gross profit and profitability, you can see that the actions we took somewhere in Q2 started to have an impact.
Price increases on the one hand side, the Lumity launch held, some easing of the cost pressures, not all freight still higher, but not as high as it was 6 months ago, also on the component cost side and then dedicated focus on driving certain cost initiatives.
So if you look at the second half year, getting to, call it, only 60 basis points decline in profitability. Keep in mind, dilution was significantly higher. So in reality, second half year, despite the lower volume, we were able to drive some good profitability improvement year-over-year.
Let's spend a few minutes on the unpacking by business.
For the ones who not that often hear, we share the revenue performance of the different businesses below the segment level, but not the profitability Hearing Instruments segment.
Overall, you can see the 15.7% and the 2.3% organic growth-wise very different stories last year. Audiological Care 15.7%, 4.5% organic. I would put in a territory at above market, good inorganic contribution. But also strong on the organic side. The Consumer Hearing business, as I said, meaningful growth year-over-year. We don't report this as organic, because it's the first year in the company, but Sennheiser actually grew 16.6% based on the product launches as well as one quarter and the year before where we had lower supplies. But the predominant part of the 16.6% was growing share. And then on the Hearing Instruments side, with the dynamic between slower market and losing a big contract only in that 0.2% here.
Just now for background. I voiced them all over on the HI on the Hearing Instruments dynamic, I think, positives but also meaningfully negative, ultimately leading us to at 4.1%, if you include -- exclude the contracts, but only 0.2%, if you look at the true number.
Consumer Hearing business, I think, 2 more comments to be made. We have opted for: a) creating it as an independent business unit. So it has a full leadership team that is comprised of Sonova People and Sennheiser people. It also includes some Sonova engineering capabilities because of that early-entry devices we developed.
We've gone through all of this alignment of our organization. They have one joint road map. They also have a road map on how they want to drive top line and bottom line. So in that regard, I think we're in a good position a year in of it functioning as one part and as one part in our organization. As you can tell from also the launch of the first products under the Sennheiser brand with Sonova Ingredients.
Audiological Care, I don't think a lot more to voice over on the M&A side. I think 2 points I want to pick out on top of the M&A. We continue to make good progress on what we call the Digital Lead Generation Hub.
Once we were at the Capital Markets, Christophe was laying that out more. I think increasingly, you need to engage with some of the consumer digital and then move them through a call center process into your own retail store.
Ideally, you said while they're on the call already the appointment, and it should be in 2 days, not in 5 days. Otherwise, they may go somewhere else. We started that in Germany. We now have established it into serving 5 of our countries and it does help us drive additional growth, but also utilization in the store because we can target the leads where we have open availability in the calendar.
The second one, we launched what we call the SilentCloud, our first step towards a more medical services, call it technology enabled. It's an application on one side which you can download in iPad or phone or a computer, which guides you through how you navigate tinnitus as an individual and how you can help yourself, it's deeply embedded into the sales process. There is a significant number of people who come to the audiologists to struggle on tinnitus and hearing it is part of the solution. So we're getting our feet wet with regard to how do we do more than just the hearing aid and how do we do this on the technology-enabled way.
Last stage for me to cover here Cochlear Implants segment. I said 2.8% in local currency from a growth perspective. But if you unpack it, you need to look in this business on the system sales, which is the implants and the first processor. And then 5 years after the first or the implantation people in most countries have the right to get another processor. And that has a very different timing dynamic. Right? So the instrument or the system sales, the implants, that's really kind of you building your installed base, if I'm allowed to use that term, right?
5.1%, but unfortunately, for half a year, we had an injunction in Germany we see that out of a legal discussion that an injunction got lifted. But in the first half year, we defect that very little German revenue. If you're correct for that, you are in the high single digits from a system sales perspective, which is probably not a bad number in this market in the last year.
Upgrade sales minus 1%, but we launched the Marvel processor 2 years ago. And what people do, they're saving and waiting until the new processor comes and they all jump on it. So having the same level in year 2 is actually a good performance, but you still have a little bit of a dilution relative to your growth rate.
So overall, I think fair result here, feel good about the system sales minus the injunction.
On the EBITDA perspective, we improved by 150 basis points the margin despite the lower revenue growth. Unfortunately, also here we see a significant impact out of the exchange rates. So we're "only" a 12.5% margin. We still have the ambition to get meaningfully higher than that. But not so much in organic performance, but more, again, an exchange rate topic.
With that, I want to invite Birgit up.
So welcome here in Stäfa today and for the people on the call, also welcome. So I'm going to take you through a few slides, and I'm not going to pause long on the financial highlights, because Arnd already touched upon most of it.
So let me dive immediately into the gross margin development that which you see here. And you see the 180 basis points decline on an operational basis and the FX is a theme throughout the presentation. So here, you see there is another 60 basis points headwind from the currency here. And let me just explain the 180 bps. As so you see that the main effect is the dilutive effects from the acquisition of Sennheiser. And then we also saw a weaker market performance in high ASP markets that had an impact on our ASP. On our average ASP, which we offset that by price increases in all of our businesses.
And then we have the effect of the freight and the component cost but that we offset to continuous improvement -- initiatives and also structural improvements. So that is what you see on the left-hand side. You see that organically, we improved by 40 basis points. And what is important to note because we discussed that during the first half results is that we see the sequential improvement of 230 basis points from the first half to the second half of the year.
Then if we look at the operational expenses and you look at the operational part, you see the growth of nearly 15%. And if you look at it organically, you see the 2.3% there, and that much is exactly the organic sales growth of 2.3%. So -- and that really reflects our disciplined cost management. And this is despite inflation and also the shift in the business mix with Audiological Care growing.
So we have that headwinds. And then also lower sales versus originally expected due to the market environment. And so that's where you can see the impact of the continuous improvement. And then you see that the growth is primarily driven by our acquisitions, so the AC network expansion and again, the Sennheiser Consumer division. Because that was 80% actually of the operational part of OpEx.
Then if we look at this slide, you see R&D is increasing by 6%. And as research to sales 6.5%. So this demonstrates that we maintain a very high level of R&D spend, so that we can invest in innovation. And then when you look at the next slide, this is the highest spend bucket in terms of also of increase, the 19% increase.
Here, you see that 75% is related to acquisitions. And then if you go to G&A, there all of it is related to acquisitions, the growth, saw the 6%, because if you look at it on an organic basis, we were even declining G&A as a percent to sales and also in absolute value.
Then the adjustments of CHF 31 million, I'll come back to that on a later slide. So then how does this come together? You see here the EBITDA component saw 6.1% growth. And operationally, this is a minus 190 basis points in EBITDA margin. And you can see the effects here underneath.
So organically, and that is what Arnd already said, we grew 30 basis points in margin, and that is reflecting all the cost discipline that we had.
And then you see next to that, the CHF 20 million contribution from M&A, which had a dilutive effect of 220 basis points. Then you see the adjustments. That's another 100 basis points, and I'll come to that here, you see CHF 38.8 million. On the previous slide, you saw CHF 31 million, but that was the operating expense part of the adjustments and the full spend. And then you see again here a very adverse impact on the FX, and this is 80 basis points, getting us to a margin of 21.4%.
So then the next slide, the key financials, and I already touched upon most of it. So let me just quickly highlight the acquisition-related amortization. So the CHF 54.9 million, that is primarily related to, again, the acquisitions.
And then on the tax line, you see that we had an underlying tax rate of 9.7%. This is much lower than we originally expected. Because we -- and last year, for -- I mean, the previous year that was 14.5%. And this is because of a delay of the implementation of the global minimum tax rate. And then -- and actually for this fiscal year for '23/'24, we do expect a 15% tax rate again.
Okay. Then here, the adjustments. So you see that this is divided in 3 buckets, as we always have. So first of all, the restructuring. And here, Arnd already mentioned one of them, which is the -- it's the investment in infrastructure. So in Mexico, the operations facility that is of one of them, but there's other structural improvements.
Then transaction and integration, as you can see, Sennheiser, Alpaca, HySound, and then legal costs and that is the ongoing sort of patent litigation with MED-EL. And then tax, I already talked about that, that has an impact on the EPS here.
And then the cash flow development, what you can see here. So actually, the operating free cash flow before changes in net working capital is impacted by higher tax cash out and also decrease in long-term provisions. And then when we go to the net working capital part, there you see a CHF 30 million we talked which is due to the consumer hearing buildup of the net working capital. We talked about that already in the first half. And you see that here as well, so CHF 30 million.
And then, if I move to the other bigger ones, this is -- so the CapEx investments, so we go back to normalized levels. So after COVID, we still had some catch-ups to do. So that nearly CHF 50 million is related to -- you can split that into tangibles and intangibles. Tangibles again. So the Mexico facility and primarily and then intangibles investments into the AC network and also the digital ecosystem. So forth, to give one example, the CRM implementation in our Audiological Care business. And then the payments for lease liabilities are also related to the Audiological Care network expansion.
Then if we go to the balance sheet, so DSO stable, as you can see here. So we keep on having a strong receivable collection. And then DIO went down because of the reduction in the safety stock. That is a 15% reduction. And then net debt going to CHF 1.5 billion. This is primarily related to acquisitions, dividends and also the share buyback. And then you see that we are at a 1.5x leverage, so net debt-to-EBITDA.
Then again, our capital allocation strategy here in terms of the -- in order of priorities. So first, the accretive acquisition. So value driving acquisitions. So here, we did for the fiscal year '22/'23, you see the CHF 260 million, which is higher than what we originally guided for the CHF 70 million to CHF 100 million.
Here, you see HYSOUND and bolt-ons, then the attractive dividend. So here, you see the 5% growth year-over-year. So here, we demonstrate that we can consecutively grow dividends in meaningfully.
And then the healthy balance sheet. Here, you see that we target a healthy balance sheet or a moderate leverage ratio between 1x and 1.5x, and we are currently at 1.5x. So the upper end of that guidance.
And then the share buyback here. So we announced the program back in April '22, and we bought back around CHF 420 million worth of shares. And then given the balanced approach that we take and we see a moderate leverage ratio is what we aim for. So there is no share buyback currently foreseen in the fiscal year '23/'24. We believe that is a balanced approach given the rise of the interest rates and also there's still volatile environment that also Arnd was describing.
So let me then now go to the outlook for '23/'24. So as you can see, the sales growth from 3% to 7% and EBITDA growth from 6% to 10%. So let me back that if you look at the market first. So that is the left-hand side of this slide. So we continue to see that the -- and really strongly believe that the fundamentals remain intact, so low penetration and obviously, innovation driving growth.
And then we do see still some uncertainties in the macroeconomic environment. So for instance, in the month of April, when we look at just the market data for key geographies, we do see that there is -- that is weaker versus the previous quarter. That's where we saw the uptick. So that keeps on being volatility. But then we do still believe that the consumer sentiment will gradually evolve. We saw a big uptick in consumer sentiment in the past quarter, and we believe that will improve throughout the year.
And then, we do see potential support from pent-up demand when customers start renewing the ones that delayed their renewal. So volatility and uncertainty is what we do still see, although we believe it will be positive throughout the year.
Then on the Sonova side, that's the right-hand side. So we have a high comparison base in the first half, and that will be easing in the second half. This is an important point, but as you already know. So in the first half of last -- of the fiscal year -- past fiscal year for '22/'23, we did still have the large U.S. accounts. And in the -- this fiscal year, the first half, we don't. So that has an impact of around 4% on revenue. And you can then easily do the math.
Then we believe cost pressures ease, and we see -- we will see that throughout the year. We already saw cost pressures coming down. And then we also have a continuous improvement, and we will see more of that actually in this fiscal year. And then, we also would like to note restructuring and integration costs for an amount of around CHF 20 million to CHF 25 million also for the fiscal year '23/'24. So that means that the first half will be significantly lower versus the second half, and that goes without saying with the elements that I just described.
So then on the FX, and that continues to remain a headwind. So we just did the math on the May rates, but of course, that can still change because we see that currencies constantly change. But if we do the math on the May rates, we see that the top line is potentially impacted by 4 to 5 percentage points or 4% to 5% and then the EBITDA by 8% to 9%. So that is what we currently see, but as said that can easily change.
So then let me go to the last slide, which gives you a snapshot of the upcoming events. So then, the -- as of tomorrow, we will go on road show. And then on June 12, we will have our AGM, which you're all very welcome. And then on October 18 to 20, there is the EUHA Congress in Germany, and that will replace actually our Investor Day, and we can meet also investors and customers and consumers over there. And then on November 21, that's when we then also meet next for the results and that is for our half year results publication.
So with that, let me end this presentation and start the Q&A. So operator, if you can open the line for questions, please.
I think we will start with a few questions here in the room before we move on to the people on the phone. So just raise your hand.
Daniel Buchta from ZKB. Maybe 2 questions from my side. The first one on Lumity. I mean, if we look at what your friendly competitor from Denmark was reporting with the Oticon, that one is performing pretty well. And that my understanding was always you and demand have the closest focus on highest quality. I mean how do you see this performance of your competitor? And what does that mean vice versa for the Lumity? And then maybe on the market environment. You just mentioned April, which was softer again after a very strong March. What do you, on average, expect for the rest of the year in terms of market growth, normal year, 4% to 6% more or less yes, how do you see it, Arnd?
Yes. So with regard to performance relative to individual competitors, it is certainly interesting to observe the individual players. I think clearly, demand, I would say, has a good development in the last couple of quarters. I'm not sure that's only product. I think there's other things they do well.
If we look at the acceptance of the Lumity in the RIC form factor, we like our performance. There's other products we have in the product line. To name one, if you look in the year, we're currently disadvantaged with regard to not having Bluetooth and rechargeability in the same device. So I would not be that worried about the Lumity, for why I can tell. I think there are some softer spots in our portfolio, which we work on. But it's also not relative to one player. It's relative to market where we take a look on our performance.
On the market assumptions we have, I think we're, in general, more muted in our outlook than what I've seen from some competitors. I think there's one other competitor who is similarly muted, and we are in the outlook, I would call it, 2% to 4% in the units. This is kind of the mental basis for our guidance here.
And that's in line with what we said. Yes, we've seen some improvement in the first calendar quarter. We have seen probably that's a little bit our advantage. We have also seen the April numbers before we commented. Keep in mind, they also have different phasing because they had the January to March in their fiscal year, which was a strong quarter. But I think for our fiscal year, 2 to 4 is the underlying assumption behind our guidance here.
This is Chris from Credit Suisse. Maybe one question with respect to your ASP development and whether you could break that out relative to your mix component, so that will be good to know to get a bit of better sense about the underlying unit growth in the second half. And I think you mentioned that Q4 was much better than Q3, whether you also could give a bit more of a clear indication, let's say, on that relative momentum. And then the other question I had was on the profitability in the consumer business. Is that also somewhat ahead of your plans? Or is that basically also according to plan?
Chris, thanks for the questions. ASP unit -- we have driven a strategy where we said we need to recover some of the inflation on price. Other people may have been driving somewhat differently or at least not as clearly as we. From a lift perspective, you've seen in the second half year, we have good contribution on the ASP side. We do have positive growth in units, if you correct for the lost contract.
But clearly, part of our growth comes out of an ASP increase, which we've seen. Q3 to Q4, I don't want to give you our numbers, but they're not very dissimilar to what we've seen in the marketplace. I think the market was down in the order of magnitude those 12 tracked countries by 2.5% to 3% in Q3.
Q4 was more in the range of, call it, 4% to 5% across the different geographies, Americas and Canada stronger. So there was clearly a better year-over-year, but similar step up quarter-over-quarter.
And then the last question on the profitability on the Sennheiser. We've been a little bit better than what we have planned for the Sennheiser product lines in the business we took over not significantly, so not giving a huge lift towards what we said is the midterm target in the mid-double-digit. I think we're starting fine relative to the market being muted. I think that's a good performance. But the balancing what we do on the cost side versus what we have to do on the growth side.
Daniel Jelovcan with Stifel. The first one with the big commercial customer in the U.S. Anything you heard of them coming back?
I mean, I guess, KS is that as far as I heard from them. But in brand, you're also not there, at least I don't see it on the website. Are you there? Or are you -- is it possible to be in there? I mean, can you imagine that you as the #1, you are not present in the biggest commercial channel in the U.S. So...
Yes, There is no KS which was kind of a little bit of the surprise of the last year. I think that's based on their decision on how they want to drive their brand portfolio at the end. And probably also differences in price points in the branded versus the non-branded.
I think, no, we're not in that channel today to answer your specific question. And yes, I think over time, we will have that discussion. But it often needs to be seen on their end in their -- what is their strategy, how many suppliers do they want, when do they make changes. Clearly, we have good technology and good product.
I think the other one that was a conscious choice of us. We had a Phonak product in the channel for the non-RIC side. And we've chosen to take that out, it was a small revenue, but the price points in that channel wouldn't fit well with what we command as prices from independents with the Phonak brand, right?
And so you can see there's a discussion to be had at the right point of time, and I don't want to go too deep into the commercial discussions we have there. But yes, there will be discussions on the customer to choose if they like the value proposition between brand price and technology.
And second question, actually, the retail was quite good, I think, in organic terms. Convening the fact that you are quite strong in Germany and Germany was quite soft. So kind of give us a bit more flavor on the U.S. on retail and Germans on retail?
I think we've seen good performance over the last years building in -- within GEERS in Germany. I think it started off with us being for 2 or 3 years now more active on branding that GEERS brand with above the line marketing.
People will know here in the room that Mr. Gottschalk is kind of the figure head for us with GEERS, which fits the target audience really well. And that was a conscious choice to make to improve our unaided brand winners but also improve kind of the recognition of GEERS in the market, which a couple of years ago was not at the same place from price, performance, quality. So that's one part.
You heard us talk about the Lead Generation Hub which we started in Germany, given that it's our largest market. And that has a nice contribution to the growth we're seeing because we just bring more new people to the category. And I think the team is executing well. So we have seen above-market performance in Germany consistently over last year.
In the U.S., I think the market is more difficult, as I said, that's true also on the Audiological Care side. We see good continued same-store growth in what came from our side with connect hearing.
You may remember that 4 years ago, we restructured that network and made it far smaller to have a good footprint with stores close to each other that continues to work well with good same-store growth. I think in the integration of Alpaca and other chains we have acquired, I would say half of them are doing fine.
No change in performance on the integrated entity in one larger part of that world. We have alignment to do from culture and mindset, which has led to some attrition. But in the some we're pretty happy with the performance in the U.S. but not running at full cylinders yet. Because if you bring -- if you go from 160 stores and you go to 450, you have to integrate the brands, you have to integrate the lead generation mechanisms and the marketing. There will be some hiccups in the first year, right?
But the good start from what we would have expected relative to the integration efforts, but certainly more to come.
I would suggest we switch it up a little bit, maybe go to a few questions from the phone. Operator, can you?
The first question from the phone comes from Maja Pataki from Kepler Cheuvreux.
I'll keep it to three. Arnd, can you help me please consolidate your comments that you had positive unit growth in the second half of the year? Is that on the wholesale side only or for the total group? That's my first question.
The second question just very quickly on Costco, you are contemplating how you will play that channel and your guidance for this year is adjusted reflect the exit of Costco. Shall we read that, that you will provide an updated guidance if and when you were to enter Costco this year? Or is it more that you don't think it's going to happen this year? And then just very quickly on the greenfield operations that you had this year. Can you remind us how long it takes for a store that is open to contribute to top line growth?
On the unit volume side, my comment was unfortunately, it's a complex modeling here between the large contract and then still wanting to see, are we winning share, yes or no, and how are we doing.
So I was excluding the large contract and then looked at unit volume for the second half year, excluding that contract and said, look, there was some positive unit volume growth, but a bigger part of our growth outside of that was in the pricing side.
This was meant to be for the wholesale business. The Audiological Care had more and if it is just for the fact that we have significant inorganic growth but then also organic growth.
On the large contract, we have not considered staying somewhat more on the plannable side of life any contribution from there into our guidance. If it would be a significant contribution and would be firm and we know when the shipment dates are, we would certainly inform either when we have the half year results, and we know or if it has such an impact that we would need to take the guidance up.
So rest assured, we will inform you at the right point, but not necessarily in line with commercial negotiations if that doesn't change the impact of the guidance, but it's not included in the guidance.
On the store side, I assume your question was on greenfield opening.
Yes.
On greenfield, it depends a little bit on the geography. But you can get to the greenfield store, which is opened, adding what we call local contribution margin, so the cost is lower than your revenue, call it in year 2.
In the first year, you're kind of having more cost on average than what you get in revenue. But in year 2 -- early year 2, you can get to a positive contribution margin. The challenge is always that you start without the database. That's the difference to an acquired store, which comes with an existing customer base, which makes up 50% of the revenues, right?
But the year 2 should be the place where you start to be accretive. I think year 3 to 4, you should be at a normal run rate over local contribution margin.
Okay. Great. May I just quickly follow up? Because you've been talking about the price increases that you've been putting through in wholesale. And to my understanding, there was always a talk that it could be -- we shouldn't take the full price increases on the wholesale portfolio, but maybe 50%, which could be in the mid-single-digit range. But if I follow your logically adjustment of Costco and everything, it seems that the pricing impact in the second half of the year or the ASP impact in the second half of the year would have been less than 3%. What were the negative impact on ASP mix that were counterbalancing your price increases?
I think the biggest one is -- the big 2 ones are: a, when we referenced those numbers, that was to the independent market. Because larger customers have 1 year or 2-year terms. Secondarily, we had a meaningful mix shift between geographies. Because the U.S. was traveling lower than the Europe as a market, and Europe is at a lower price point. So that's the 2 elements why you see less fall-through than the numbers we have quoted.
I think when we quoted, we shared that probably half of the market will be impacted immediately because the other half is larger and longer-term contracts. But I think you should not forget the mix shift, which we've seen from the U.S. towards Europe as a higher share, as you could also see in the growth rates.
The next question comes from Julien Ouaddour from Bank of America.
I have a couple, please. The first one is that you will sort of the first player who really talk about potential for pent-up demand this year. I think, we've seen after COVID that the expected pent-up demand didn't really materialize. So what gives you the confidence that it will be the case this time? Let's say, if inflation remains high? And can you try to quantify it?
The next is on pricing. So have you just started to hear some pushbacks from clients when it comes to price increases? It seems that you were a bit more aggressive than peers, and just does the guidance include any further price increases for 2024?
On the pent-up demand, it's a certain logic we deploy. I mean, in COVID what we did see, and that's validated by our own retail, that it was the new consumers who didn't join the category. But everybody had a hearing aid was coming back because they felt comfortable despite the covered concerns because they knew our audiologists. And they know our store, they knew they will be taken care of from a safety perspective.
Completely the opposite in the last 12 months. We see normal growth in new customers. We do spend some marketing on it, but it is in line with what we had expected. [indiscernible] But the reality, the lower revenues we see in the market come from people who simply delay their purchase after 5 years.
And so this is just us deploying some logic saying, look, if somebody was waiting normally 5 years now, they waited 6 at the moment, they feel more comfortable about the economics. They will come back. While if it is a new customer, we know how much hard work we have to invest through the audiologist and the marketing to get them to the category. So we were less optimistic.
But to be proven, we haven't modeled in a significant pent-up demand curve. We just see that as a potential. I think it's still kind of mentally embedded in the, what we said about the, unit volume 2 to 4, and the revenue guidance we gave.
On the pricing side, if you increase prices in an industry where that was not the standard for the existing product, yes, people will comment on it, right? And then comes to question how many of those do you convince to accept that and go with you.
I think we had also clearly the objective to a counterbalance some of the headwinds. We also wanted to set a precedent in the industry that one can increase prices. I think other people have chosen a somewhat different strategy. I think everybody did some price increases, but we were probably at the higher end. I think for the go forward, we assume some price increases not to the same degree as last year.
I think last year was a clear year where inflation was going up so much. There was also an easy argument to have. I think we want to hold on to ask for some more value probably more than we have done historically, but not at the same -- let's say, increase year-over-year as we've done in the last year.
It was very clear. Just if I can squeeze a very quick follow-up on my last question about Costco. Could you consider maybe to introduce Sennheiser as a brand at Costco, maybe to compete with more consumer-oriented brands like Philips or Jabra?
We can consider many things, but the way we think our brands, we have clearly medical brands and then Sennheiser, we like having with us because it's a more consumer brand. And if we want to play in the market of early-entry devices and people come to the category without a hearing care professional, then we do believe that does require different brands.
So it would create brand confusion relative to the architecture we wanted to drive for, right? So in that regard, not as likely from our end because then we end up having another medical brand, we end up having confusion on medical versus consumer devices. So not very likely from that angle.
I also don't think it gives a huge benefit while the Sennheiser brand has a brand recognition in the United States of America amongst what we call the audio files. It is strong as a brand in Europe and in China. So I don't see this huge brand appeal of Sennheiser fund OTC -- not for OTC, but for a normal hearing aid in a channel like Costco.
Okay. Perfect. So I guess it leaves us with Unitron.
It's the brand we use for certain [indiscernible]
The next question comes from Hassan Al-Wakeel from Barclays.
I have 2, please. So firstly, coming back to market dynamics, could you talk about share dynamics in the second half? And particularly in fiscal Q4, given peers have posted high single-digit or double-digit growth in Q3 and to a larger extent in Q4. What do you put the share losses down to? And could this be perhaps durable given product cycle momentum elsewhere?
And then secondly, following up on Lumity, could you share some of the data points that you track around the progress of the launch and how you characterize this versus Paradise? And why do you think this hasn't driven some of the share gains you may have expected?
Our share dynamics in Q4, I need to say reasonably vague, because we don't publish quarterly numbers. I think, if I look at our unit volume in the Q4 relative to market, and again, I allow myself to extract that contract, I would say we were doing well relative to the general market data we have. It's also fair to say that there were 1 or 2 players who did better than we.
Now if you do the math there -- and sorry for getting deep into math, you have to add a loss to our side and the win on the other side because what we lost in the large contract, somebody else picked up, right? So in that regard, it's not just the 4% impact we're talking about, you need to do something on the other side because our 4% went most likely 2, 3 vendors, right?
But again, I think certain players have done well with their strategies and their products in the channel. We feel good about our performance relative to the unit market. We know it's the published market and that's where I would leave it here. On the Lumity side, I said it earlier, I think you need to unpick first a little bit the portfolio. Don't want to go into product-by-product. But clearly, on an IT product, we're currently struggling given that we don't have what other people have and what people are looking for, that's something to be solved on the product development side.
There are some other areas in the portfolio, which didn't do as well. I think on the RIC side, we're good with the performance. And we see on the Lumity, and that goes back to your question on the metrics we're tracking.
Our most important metrics is how are people adopting the product over the existing products, especially when you have meaningful price increases and the price increase or the price delta is mid-single digit there. And we're -- call it, very close to the same penetration curve as we had with the model in the Paradise, in the customers, which are our loyal customers.
So it's not so much the product in our eyes which is a concern. I think it's different parts of the portfolio. It's probably more on the competitive accounts in a market environment where prices are more sensitive. But it's not in the penetration to what's the people who convert from the one product to the other.
Let's go back to the questions in the room.
Urs Kunz from Research Partners. My first question regarding the Cochlear Implants. We saw this 12.5% margin, which would have been a lot better without the influence of the currencies. It's still your assumption that you get mid-longer term into the mid-higher teens margin in this area.
Then on the share buyback, if you have no -- if you intend to have no share buyback this year. So it's fair to assume that you won't have -- you won't get to this CHF 1.5 billion in the next 3 years, and you would maybe set that out of a longer date?
And the last question, I guess, I'm right to assume that in the sales guidance from 3% to 7% as the usual bolt-on contribution?
So on the Cochlear Implant business, if you unpack the numbers, we make progress on the profitability in local currency. Unfortunately, we don't control currency. So I think we're still making progress, right? And there is no reason why we shouldn't get in this business into the -- what you're indicating somewhere 15% to 20% EBITDA, right? Hopefully, currencies also help at some point of time. But if I look like-for-like, we have progress despite it only being a 2.8% year, right.
On the bolt-on side, yes, bolt-ons are in -- at a low percentage growth level. I think we've guided that. We expect, Thomas needs to help me out here in the range of about [CHF 40 million] in revenues out of bolt-on. So you would translate that probably to a presenter coming from the bolt-on side.
Do you want to make a comment on the share buyback?
Okay. So the share buyback. So yes, it's up to CHF 1.5 billion that we commented on earlier, but then in order of priority, if you look at the capital allocation framework, the healthy leverage ratio is -- has a higher priority. And there, we say it's moderate. So that means like between 1x and 1.5x. And given that we also have, as you know, the dividend payments upcoming currently, and we are running at the higher end. So we believe it's important to say that currently, we do not plan any share buyback.
As I said earlier, so given the rising interest rate and the volatile environment, this is how we set our priorities.
I think it's worthwhile to note, we have done more M&A than last year, right? So we were getting to that 1.5 and we're role-based the way we set it up, right? And we would not feel comfortable to be below 1x and above 1.5x. So that's why you see us going careful. I think it depends also to a degree on what else happens on the M&A side. right?
But if you do the math this year, you want to go, call it, to 1.2x leverage, that's some work to be done in the cash flow, given we pay a dividend, and we do some bolt-ons. But think about role-base, I think we really need to look at the leverage. And as long as we have that leverage in mind, that's what we shared with you. If we would make a change to our leverage assumptions we would tell you.
[indiscernible] I have another 2 questions. The first is on the restructuring expenses. Actually, could you detail what that you're going to use it this CHF 20 million to CHF 25 million this year?
And then the second question is just on this speech enhanced here, could you discuss how the market has been receiving that since you launched it in January?
So first on the structure or the restructuring, so that will be a continuation also on the Mexico operations that aren't alluded to in the beginning of the presentation. So that is one part. And then we have further structural optimizations also even in the audiological care network, but also just throughout the company. And this is just to address the cost base. So it's more a continuation of what we started already.
On the speech-enhanced hearables side, we launched given that CES was in January a product, and we have started selling it. It does get good responses. We have not gone on full marketing with regard to it, given that we need to ramp up the manufacturing, which we do in Vietnam. And so product availability expected in larger scale and then really kind of more marketing investment behind it more in this quarter.
And I think the initial responses are, the speech enhancement is quite strong in a positive way for people. Because they're not used to that kind of a speech enhancement in any year ago. Because we have -- as we have in hearing aids, the -- been focusing in there.
And so you really hear somebody who is in the restaurant, 2 tables next to you, very clearly. Right? So very positive for the ones who are looking for that performance. They do like the general performance on music and audio, right? So I think from the users who have it and have used it and who really looked for that kind of benefit.
They say, wow, that's quite impressive for hearable, but we don't have full data based on we really put significant marketing behind it and we now see how it works through the system.
So we have, I think, 3 more questions from the line, and then I think we will conclude the call.
So operator, can you give us the final questions from the phone?
The next question comes from Veronika Dubajova from Citi.
I'm Veronika. I have 3, please. One, I just want to go back a little bit to the performance in the second half. I think when you gave us the guidance back in November, you had talked about roughly a flattish market. I think it ends with that coming in actually a point or 2 better than that.
Yet you definitely missed consensus expectations, and I think your guidance as well from a revenue perspective. So I'm just trying to understand a little bit better what you think went wrong in that second half of the year. Is it that price realization? Is it something else? Just maybe give us a little bit of insight into that, because I think we're all scratching our heads to add that. So that's my first question.
My second question is just looking at the guidance for fiscal '24 sort of especially the upper end of it, it does imply some pretty significant acceleration as we move through the year and my math potentially up to high single digits exiting the back half of the year. Just curious if there is something in your pocket that you have that can drive that? Is this about the new Lumity extensions? Is this about Unitron? Is there something else that we're not thinking about that should make us feel that the entire range is in play? So that would be my second question.
And then just a follow-up on the decision not to do a buyback, any sort of -- anything we should be reading into that from an M&A perspective? Or is this really just a prudent balance sheet management?
I'll take the last one. The last one is it is a prudent balance sheet because that's, as I said, we first have the healthy balance sheet as a priority over the share buyback.
We also have to think about when we announced the 1x to 1.5x, we were in a different interest environment. So to a degree, you need to at least recognize I stick to my rules while the market is changing on me. You also see people who are getting into trouble from the leverage ratios and whatever. We feel comfortable with our balance sheet.
The share buybacks are appreciated at times. But just keep in mind that when we range that, so we just want to get to the range we said in the first place after we did some more M&A.
I think second half I would need to go back to my notes, you're quite pointed there. I'm not sure I look at it that way, but I can try to answer what are the areas were outside of product, there may be some, call it, headwinds to us. I think you've asked we came out with the half year results and then the large contract was up in the air and then there was some noise from their side on reliability as much as we like the performance of our products we're shipping today.
I think the Lumity is better than the Paradise ever was. I think noise in the market on reliability doesn't necessarily help you, right? But that's more kind of a thing in a way, so over in the market you have to work through. That is one discussion.
I think the other one on the pricing side, yes, customers don't necessarily like price increases. And if you play your cards then other people go in a different direction as may have consequences, right?
So in that regard, if you think from a confidence of customer perspective, there are some customers who were a little bit more held back in the discussion with us. But I wouldn't attach to Lumity as a product. I think the good news is our reliability proves to be pretty good for the product, and Lumity shows significantly better numbers in the product. Before I make no mistake, we do share this with customers.
Secondarily, if you look on the pricing side, it was interesting that at least 2 larger players have done price increases in between. So I think that also kind of side by side versus 6 months ago is a better position to be in. We do still think it was right to do the price increases, but other people did this later than us, right? So that's how we make sense out of it. But definitively not in the Lumity penetration side by side relative to other products.
On the second half year, we always like to have something in the back pocket. But if we don't share it, we don't share it. But in general, I think we do believe that if we unpeel the onion, and unfortunately, we have lost a big account. And unfortunately, that gives us negative and other people are positive if I just work through the numbers, I feel reasonably good about the second half year. We have launched the Unitron Vivante. We launched the Slim. We clearly have opportunity to drive even more positive upside with the Lumity through the right marketing exercises. There may be more additional products we launch.
We bring new technology to all platforms and to all brands and all form factors, but that's kind of more -- expect more than the normal on our end there. But I think -- clearly, there is potential in the second half because we don't have the headwind out of the contract on both sides. We do think the market is gradually improving.
I think the last comment, I think you need to factor in that, Veronika. Keep in mind the year-over-year dynamics and the jump-off point. Q3 was really a weak quarter for the industry. The market went backwards, right? So while the Q1 was particularly still strong last year, the Q2 started to get a little weaker but we really had a significant drop from Q2 to Q3. So in the first half to second half, I think you also need to factor in jump-off point assumptions. If you put them all together, we felt comfortable about the second half year without a magic rapid out of that.
That's very helpful. And then, can I just ask a quick follow-up on Russia. My understanding is you're the only company that remains. Any sort of rethinking on that -- was the big contributor in the second half? And are you getting any pressure from any particular customers or channels to Russia, just given the global comfort there?
So we don't expect a change in our strategy to be very clear about it. We have stopped to sell non-medical product in Russia right away, which gave us quite some headwind on Sennheiser, which had a meaningful business in Russia. It also gave us a little bit of a headwind in hearing instruments because of Roger and other consumer devices we have. But our choice was to say if somebody has a medical need, we think that should be supported. And if it is a consumer device, we see selling. So that was our ethical decision there.
I don't foresee a change to that, honestly speaking. I know there's lots of discussion out in the world, but I think the world has made some piece with regard to on the medical side, if it's truly a medical device, it's probably okay.
The next question comes from Susannah Ludwig from Bernstein.
I have 2, please. So first on Conversation Clear Plus. So wondering if you could talk a little bit on how you think about the marketing costs and marketing for this product? It targets a more mild loss category, which is sort of harder to convince people that they need help. I guess the early data from the OTC category, which also targets that mild loss is a bit disappointing. So I wanted to see what you thought on the reader costs there.
And then second, on the Cochlear Implants side, you guys have mentioned the headwind from hospital staffing shortages. Can you talk about how those progress through the year and if you're still being impacted by them at all? Some other elective surgery markets have seen sort of a big benefit from pent-up demand. I'm just wondering if you see any potential for next year for benefit in Cochlear Implants from pent-up demand?
On the Conversation Clear Plus, one of the reasons we launched this, and we're quite confident about it is the use case is very different.
And I think the perception is different. If I buy an OTC and also people being successful bringing category to consumers in need. I think you choose to buy a hearing aid. If you go to the earbuds, you choose to buy an earbuds from a form factor and from what it looks like. And you then need to convince the others around the table that it's okay to wear your earbuds also during dinner, right?
But a very different use case also with regard to 2 of the main functionalities will work no matter what the speech enhancement does. You can make phone calls, you can listen to music, right? So it feels like a softer entrance particular to consumers who may not be that comfortable to wear, hearing it in the first place, why we call it an early-entry device.
So I think that gives us hope and expectation that the dynamic will be different. I think on the OTC, nobody has asked, but I would say it's still early innings. I think people will need to find the right channel partner. I think direct-to-consumer with Facebook and Google apps is going to be quite expensive. So you need to figure out what's your channel. Does the channel have enough sophistication capability that I can explain it in the first place without having to do the fitting. So I wouldn't mentally give up on the OTC, but I find the speech enhanced hearable more relevant and easier to sell to a consumer who may not want to have a hearing aid at that stage.
On the Cochlear Implant side, it's interesting when I was over the instruments, 5% growth, I allowed myself to mentally take out the half year we couldn't sell in Germany. We're kind of in the high single digits. That's not necessarily a bad number. That's kind of the number we've seen pre-COVID, in a good year. Right? So I do think, yes, we have seen that the availability of staff while in some parts of the world, is still limited and in some countries, but in general, we don't have as much headwind as we've seen in other places.
On the pent-up demand, that's tricky one. I get pushed back when I discuss that with the colleagues. I think on the pediatric side, people will always get a priority to be fitted. Because we know in the first 2 years, you should get the Cochlear Implants and are not going to wait 2 more years just because they don't have so much staff.
On the adult side, that would require that the adult is completely convinced and is waiting for you, right? So perhaps a little bit, but probably not as pronounced as somebody who has a hearing aid coming up an year, fixed, got the reimbursement letter a year ago, right? So that seems to be, for me, more straightforward. But perhaps we will see. But not a bad instrument number in the last year in the market.
The last question for today's call comes from David Adlington from JPMorgan.
Just one, as me covered off, I don't think. Just in terms of as you build out capacity at your New Mexico plant, I just wondered if you expected any dilution to your gross margins as that facility ramps up that capacity?
There will be some dilution, call it, in the first 6 months or so. Because in order to prevent that we're getting into trouble from shipments, and it's not just the manufacturer, you need to get the supply chain right. And we have very different nodes, and you need to get over a border we're not used to. We will run carefully with buildup and build down. But it's -- we have reflected that mentally in the guidance. So this is not going to be such a big number. It's just more an approach from a caution perspective. It clearly will pay by itself if you look just at the labor cost differences.
Mexico is, I would say, close to Vietnam, significantly better than China, significantly better than the United States of America.
And maybe just one follow-up because that leads us on to sort of net working capital. Just wondered how you expect that to flow through this year and whether we should see it as a net positive or negative in terms of the cash flow?
Sorry, can you repeat the latter?
Yes, in terms of the inventory, obviously, not just related to Mexico, but I suspect there was some inventory build last year that perhaps that could play through this?
Yes. We do still see some of the -- there is still investment into CapEx also in this fiscal year '23/'24 for it. But not to an extent that you would say because, I mean -- if you look at the '22/'23 CapEx that you see in the cash flow that is -- I mean, only part of it is for the Mexican operation there. Because there is a lot in -- also on the Audiological Care network and that expansion. So it's not that substantial, let's say.
But on the net working capital, maybe on inventory, like Arnd alluded to, just to be on the cautious side, you could see some in the first half, but that would then go away again for the full year.
But that's relative to the factory. I don't know if your question was in general on inventory. I think on the total system Sonova in all of the different sites and all different types of inventory, we would expect an improvement in turns.
We still have safety stock with the easing of the components market now starting to move more towards them looking for buyers of the material and not allocating you. I think you can start to get into more careful -- into a less careful environment. So in that regard, I think I would expect a continued improvement of the inventory transposition.
Overall.
There's Mexico, but that's just part of the equation.
That's just part of it, and that is indeed what we planned for this fiscal year. The improvement, I mean.
Should I? I'm going to close. I was wondering what Thomas is going to do. So thanks a lot for the continued interest on our journey. I'm sorry for having to unpack so many things left right up, down. It was an unusual year in the macroeconomics, but also with the so often quoted non-renewal of a contract. We're looking forward for a year where this hopefully becomes a little bit more straightforward. You've seen our guidance. We're trying to balance between -- there is still some volatility in the market, but we do believe that we're in a good position to continue to drive market share growth on the back of the strategic initiatives we have and the acquisitions we've done. With that, thank you very much, and I'm looking forward to the next discussion.