Amplifon SpA

MIL:AMP

Earnings Call Analysis

Steady Growth Amidst Challenges in Europe

The company achieved a 7.7% revenue increase at constant exchange rates in H1, driven by strong organic growth and significant M&A activity. Despite a sluggish European market, productivity measures kept the EBITDA margin stable at 26.6%. Notably, the Americas and Asia Pacific performed well due to expansions in the direct retail network and strong market growth. Looking ahead, the company expects a high single-digit revenue growth and an EBITDA margin of 24.3%, supported by ongoing productivity measures and strategic investments despite potential European market volatility.

Steady Growth Amid Market Challenges

Amplifon posted a solid revenue growth of 7.1% at constant exchange rates in Q2 2024, despite facing softer-than-expected demand in Europe. Total revenues for H1 increased by 5.7% at current FX, reaching EUR 1.18 billion. This growth was driven by strong organic performance across multiple geographic regions, though there were noticeable regional disparities.

European Market Volatility

The European market displayed significant volatility, particularly from mid-May to June, impacting Amplifon's results. France underperformed, while Germany showed positive growth. Spain faced internal challenges due to the rollout of a new IT system and leadership changes, which have since been resolved. Despite the challenges, revenue in Europe remained positive, supported by Amplifon's productivity measures.

Strong Performance in the Americas and APAC

The Americas posted impressive revenue growth of 15.9% in Q2, driven by acquisitions and strong performance from Miracle-Ear and Amplifon Hearing Health Care in the U.S. However, the depreciation of the Argentine peso negatively impacted FX, resulting in an 8.8% headwind. In the APAC region, revenue grew by 9.1% at constant FX, with China contributing significantly through M&A activities.

EBITDA and Profitability

Amplifon's EBITDA for Q2 2024 was EUR 160 million, with a stable margin at 26.6%. For H1, recurring EBITDA increased to EUR 297 million, up 8% compared to H1 2023, with a margin of 25.2%. Despite various market challenges, Amplifon successfully maintained its profitability through field productivity measures and strategic growth initiatives in the U.S.

Cash Flow and Investment

Operating cash flow after lease liabilities was EUR 112 million for H1, down from EUR 138 million in 2023 due to higher cash outflows for taxes and financial expenses. Net CapEx increased to EUR 65 million, and free cash flow stood at EUR 47 million. Amplifon significantly accelerated its M&A activities, acquiring over 240 shops primarily in France, Germany, the U.S., Uruguay, and China.

Debt Profile and Financial Ratios

Net financial debt closed at around EUR 1 billion, with short-term debt accounting for EUR 487 million and medium-long-term debt at EUR 678 million. The application of IFRS 16 led to a lease liability of EUR 512 million, bringing the total debt liability to EUR 1.52 billion. Equity stood at EUR 1.14 billion, with a net debt over EBITDA ratio of 1.7x.

Outlook and Guidance

Despite a softer Q2, Amplifon expects the European market to normalize and return to solid growth. The U.S. market is anticipated to continue its healthy growth trajectory. Amplifon aims to achieve high single-digit growth at constant exchange rates, driven by its strategic initiatives and market performance. The company projects an EBITDA margin improvement to around 24.3% for the year, attributed to positive contributions from productivity measures and strategic investments.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Amplifon Q2 and H1 2024 Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relations and Sustainability Senior Director of Amplifon. Please go ahead, madam.

[Francesca Rambaudi, executive]

Thank you. Good afternoon, and welcome to Amplifon's conference call on the second quarter and first half of 2024 results. Before we start, few logistic comments. Earlier today, we issued a press release related to our results, and this presentation is posted in our website in the Investors section. The call can be accessed also via webcast and dial-in details are on Amplifon's website as well as on our press release. I have to bring your attention to the disclaimer on Slide 2, and some of the statements made during this call may be considered forward-looking statements. With that, I am now pleased to turn the call over to Amplifon's CEO, Enrico Vita.

[Enrico Vita, executive]

Thank you, Francesca. Good afternoon, everyone, and thank you for joining us today for our Q2 results conference call. As always, let's begin commenting on the quarter's results, starting with the top line and the market dynamics, which in Europe showed remarkable volatility throughout the quarter. In fact, the European market was below our expectations, particularly from the second half of May to the end of June.

I must say that it's difficult to explain the reasons for this clearly, but we might suppose that the better weather in some markets and perhaps the European elections have negatively impacted the footfall in that time frame. If we look at the market dynamics for the main European markets, we still saw an unexpected negative demand in France positive growth in Germany, while the other markets contributed to an overall flattish European market with plus and minus. On the other hand, the U.S. market was still strong and in line with our expectations, although it slowed down from the double-digit growth of the first quarter to around plus 5% in the second quarter.

Finally, we estimated that Australia and New Zealand were again somewhere in the middle of the 2 regions. In this context, also in Q2, we delivered a strong revenue growth, over 7% at constant exchange rates. And let's see this as a substantial achievement if considering our geographical mix, which is, as you know, still more skewed towards Europe, although the Americas region is growing very fast.

Commenting then on our performance by region. In Europe, our revenue performance was still positive despite the sluggish market demand dimension. I must also share that the region's performance was also affected by contingent operational challenges in Spain related to the rollout of our new IT front office system and the change in its leadership. Both challenges are now resolved.

Then I'm very satisfied with our performance in the Americas and in particular in the U.S. where we are proceeding at full speed following our strategic priorities to transform our network from franchise to direct retail. Thanks to the latest acquisitions today, we can count on a directly operated store network of circa 400 stores. Finally, I'm also active with our performance in Asia Pacific, which continues to deliver strong and above market growth.

Regarding the EBITDA recurring, we delivered around EUR 160 million with the margin stable at 26.6%. Here, let me underline that we were able to protect our profitability despite the market environment I described earlier as well as offsetting the dilution related to the acceleration of our growth of the Miracle-Ear direct network only thanks to the different productivity measures taken to realign our field structure in Europe in the second half of last year. Overall, let me say that I'm generally happy about how we responded quickly to the volatile market demand in Europe I described earlier.

Now I will hand it over to Gabriele to give you more details about our numbers.

[Gabriele Galli, executive]

Thanks, Enrico, and good afternoon to everybody. Moving to Slide #4, we have a look at the group financial performance in Q2, which, as already commented by Enrico, posted a strong revenue growth at 7.1%, constant ForEx, with an above-market organic growth at plus 3.5%. Despite flattish and softer than expected European market, the U.S. market growing at a healthy plus 5%, though at a lower pace than Q1. M&A contribution from bolt-on acquisition mainly in France, Germany, U.S., Canada and China was at a remarkable 3.6%, strongly accelerating since the beginning of the year.

ForEx had a negative impact accounting for minus 1.8%, though reducing versus Q1 due to the depreciation of the Australian dollar, New Zealand dollar and moreover, Argentine peso. EBITDA recurring came in at EUR 160 million, with margin at 26.6%, thanks to the field productivity measures, successfully implemented in H2 2023, which continued to deliver good results and offset the lower-than-expected European market and the dilution from the accelerated growth of our direct retail network in the U.S.

Looking at our financial performance in H1, revenues were up high single digits or 8% at constant FX versus H1 '23, with a strong and above market organic growth at circa 5% and the remarkable M&A contribution at over 3% with circa 290 points of sales acquired year-to-date. ForEx posted a negative contribution of 2.3% and decreasing throughout the period. EBITDA recurring amounted to EUR 297 million, up around 8% versus H1 '23 with margin at 25.2%, up 40 basis points versus prior year, thanks to the already mentioned as the field productivity measures, which more than offset this lower-than-expected European market and the dilution from the accelerated growth of Miracle-Ear direct retail network.

Moving to Slide 5, we have eluded EMEA performance. In the quarter, revenue growth at constant FX was 1.5% versus Q2 '23, with organic performance reflecting the general market softness in Europe and in particular of the French market. As well as some contingent operational challenges in Spain already mentioned by Enrico, which are now entirely resolved. M&A contribution related to both [indiscernible] mainly in France and Germany was 2.1%. The performance in the other European market was solid. EBITDA amounted to EUR 117 million, in line with Q2 2023, with margin at 30.7%, still among the group's highest level of profitability, even if 50 basis points lower than in 2023.

Field productivity measures taken in the second half of 2023, delivered strong results, limiting the impact of the lower operating leverage due to the softness of the market. In H1, revenue growth was 3% with organic growth at 1.1% and M&A contribution at 1.8%. EBITDA amounted to EUR 227 million, up 4.2% versus H1 '23, with margin improving by 30 basis points to 29.9%, driven by the just mentioned productivity measures.

Moving to Slide #6, we have a look at another strong performance of Americas. Revenue growth in the quarter was 15.9% of current FX, with strong and above market organic growth across different markets. And with both Miracle-Ear and Amplifon Hearing Health Care posting a strong performance in the U.S. M&A contribution was over 9%, with acquisitions in Canada, Uruguay and above all in the U.S. where we completed since the beginning of the year, 3 sizable acquisitions totaling around 100 shops, thus bringing the Miracle-Ear direct retail network to 400 points of sales.

The FX impact was minus 8.8%, mainly due to the depreciation of the Argentine peso. As you may remember, last year, in December, the peso was strongly devaluated to circa [ ARS 890 ] per euro from [ ARS 370] at the end of Q3 and [ ARS 280 ] at the end of Q2. Therefore, we may assume that moving forward in the year, the very negative ForEx effect will reverse partially in Q3 and significantly in Q4, also because Q4 will be accounted as the difference between 2024 full year, where the FX impact will be negligible assuming a further devaluation in the first 9 months of 2024.

The other component of inflation accounting price index adjustments accounted in Q2 for less than 2%. EBITDA amounted to EUR 35.5 million, up almost 10% versus Q2 '23, with margin at 27.4%, down 150 basis points due to the accelerated growth of Miracle-Ear's direct retail business in the U.S. and due to the integration of the circa 100 points of sales acquired since January.

In H1, revenue were up 13.1%, driven by a strong organic growth despite the remarkable '23 comparison base when the region grew 18% versus 2022. EBITDA amounted to EUR 62 million, up 8.1% versus H1 '23, with the margin decreasing by 120 basis points for the reasons I just mentioned.

Moving to Slide 7. We have a look at the Asia Pac performance, where we posted an excellent revenue growth as well as a continued expansion of profitability. In the quarter, revenue were up 9.1% at constant FX, mainly driven by a strong and well above market organic growth. Despite a very challenging comparison base with a '23 Q2 organic growth at 15% versus 2022.

M&A contribution was 3.3%, mainly related to China, where today, we count on over 450 points of sales. FX headwind was 0.7%. EBITDA reached EUR 23.1 million, increasing by 10.4% compared to '23 with margin at 24.8% up 50 basis points higher versus Q2 '23, also after the very strong growth of China. In H1, revenue were up over 11% at constant FX and over 8% of current FX driven by an outstanding organic growth of over 7% and M&A for 4%. EBITDA amounted to EUR 47 million, up 10.8% versus H1 '23, with margin at 26.4%, posting an expansion of 60 basis points.

Moving to Slide #8. We appreciated the Q2 profit and loss. In the quarter, total revenues increased by 5.3% at current FX and 7.1% at constant FX to EUR 604 million. EBITDA recurring came in at EUR 160 million, with margin at 26.6% in line with Q2 '23. As previously mentioned, the profitability reflects the implementation of field productivity measures offset in the slower-than-expected European market and the dilution from the accelerated growth of our direct retail network in the U.S.

EBITDA reported was around EUR 158 million, up around EUR 9 million versus '23 after EUR 2.4 million one-off cost primarily related to the implementation of the changes of the company Article of Association with particular regard to the enhancement of the increased voting rights mechanism.

D&A, including PPA grew by EUR 7 million versus last year in light of the increased investment in network and infrastructure and innovation leading the recurring EBIT to EUR 87 million versus EUR 86 million in Q2 '23. Net financial expenses amounted to EUR 13 million versus EUR 12 million in Q2 '23 primarily due to the higher interest charges on short-term credit lines on the variable rate components of medium, long-term debt as well as on rent cost in application of IFRS 16 to network leases. Tax rate posted a 40 bps reduction versus Q2 '23, leading recurring net profit at around EUR 55 million, slightly above 2023.

Moving to Slide #9, we see the H1 profit and loss evolution. Total revenues increased by 5.7% at current FX and 7.7% at constant FX to EUR 1.18 billion. Recurring EBITDA increased by EUR 7.7 million to EUR 297 million, with margin at 25.2%, up 40 basis points versus H1 '23, thanks to the productivity measures, which more than offset the market softness in Europe and the dilution from the accelerated growth of Miracle-Ear direct network. D&A, including PPA, increased by EUR 16 million, leading the recurring EBIT to around EUR 152 million with a growth of around 3.5% or EUR 5 million versus H1 '23.

Net financial expenses accounted for EUR 27.5 million in light of the previously mentioned reason leading profit before tax to around EUR 125 million slightly above H1 '23. Tax rate ended at 27.7%, a leading recurring net profit to EUR 90 million, slightly above H1 '23.

Moving to Chart 10, we appreciate the cash flow evolution. Operating cash flow after lease liability was in the period equal to EUR 112 million, EUR 26 million below the EUR 138 million strong level achieved in '23, following the higher cash out for taxes, financial expenses and the lower generation from working capital. Net CapEx increased by around EUR 3 million to circa EUR 65 million leading free cash flow to EUR 47 million.

Net cash out for M&A more than doubled versus -- to almost EUR 143 million versus EUR 59 million last year following the significant acceleration of bolt-on M&A with over 240 shops acquired in the first half of 2023, primarily in France, Germany, U.S., Uruguay and China. NFP ended slightly over EUR 1 billion, posting a seasonal increase versus December '23, after strong investment for around EUR 275 million in CapEx, M&A and dividends.

Moving to Chart 11, we have a look at the debt profile trend and financial ratios. As mentioned, the net financial debt closed at around EUR 1 billion with liquidity accounting for EUR 155 million, short-term debt accounting for around EUR 487 million and medium long-term debt accounting for around EUR 678 million. Following the IFRS 16 application, lease liability amounted to around EUR 512 million, leading the sum of net financial debt and lease liability to EUR 1.52 billion. Equity ended up at around EUR 1.14 billion.

Looking at financial ratios, net debt over EBITDA ended at 1.7x, slightly increasing versus 1.5x at December last year after the strong investment in CapEx, M&A and dividends. Net debt over equity ended at 0.89x.

I will now hand over to Enrico for the outlook and the closing remarks.

[Enrico Vita, executive]

Thank you, Gabriele. So we are at the last chart of today's presentation, where you can find our key comments regarding the second half of the year. Firstly, even after a softer Q2, we still expect the European market to normalize and gradually return to solid growth. As we do not see any specific and structural reasons why this should not happen. We also expect the U.S. market to continue to grow healthily and in line with our expectations. Hence, we see a global market growing at around plus 3% this year.

In consideration and notwithstanding these market developments, we confirm our goal to grow high single digit at constant exchange rates thanks to our continued ability to overperform the market. Regarding profitability, we see the company EBITDA margin improving versus last year at around 24.3% as a result of the positive contribution of the productivity measures taken in 2023, which more than counterbalanced the dilution effect of the accelerated and above plan growth of our Miracle-Ear direct retail network in the U.S. as well as the potential need of higher marketing investments to respond to the potential continued softness in the European market.

Finally, as usual, I wanted to share some insights about how we started the third quarter. In July, we saw stronger momentum in sales. Also in Europe, which could signal that the weakness of May and June was related to contingent situations. Clearly, we need this trend to continue in August and above all, in September before drawing any final conclusion.

With this, we thank you for your attention, and we look forward to taking your questions.

[Operator]

[Operator Instructions]. The first question comes from Julien Ouaddour of Bank of America.

[Julien Ouaddour, analyst]

Enrico, just maybe to start with just a quick follow-up from your last comment. Could you maybe give us a bit more genuity on EMEA organic growth for this quarter? So you mentioned the -- like the continent impact in Spain. So what would have been the Q2 growth if we exclude this issue? And also, any kind of reason you can mention for the French market weakness and why do you -- I mean, like what supports your view that the EMEA markets will recover in H2?

And then the second part of it is on the full year guidance. So you kept the full year guidance of high single-digit sales growth despite could say, Q2 was weaker, like EMS softer. And you said in your comment that the market -- you expect the market to be up 3% this year versus I think it was 5% before. So should we understand that the fair growth would be in the low end of the high single-digit range.

[Enrico Vita, executive]

Thank you. Thank you, just a second, I'm taking notes. Okay. So with regards to the performance in quarter 2 of the EMEA region, basically, 2 elements. The first one, we saw general softness in the European market, in particular, as I said earlier, starting from the end of May, the second half of May to the month of June. And this is something that, to be honest with you, we did not expect. And also to be very honest with you, I can't really tell you concrete path to explain this softness apart the fact that -- you may recall that in many European countries, we had several weeks of bad weather. But this is not something that I can say is a definitely the reason for this kind of market softness.

Also, of course, during Q2, there were the European elections. So you also know that during the elections, maybe there is some turbulence. So this might be also another reason why we saw this kind of softness in the second part of the quarter. And this is something that we saw, let's say, generally spread across all the different main markets with plus and minuses. What I mean is that, as I mentioned, we saw France being negative while we saw Germany being positive. So a scattered picture with -- leading to an overall European market that we estimate to be basically flattish in the quarter.

In addition to that, I need also to be very clear on the fact that we did not perform well in Spain for internal reasons. And it's basically 2 reasons that affected our performance in Spain were related to the implementation of the new IT front office system where maybe we became, I mean, too confident in the rollout. So we accelerated the rollout, but perhaps that was not a good idea. What I mean is that perhaps a more prudent approach in the rollout would have been better. This definitely affected our performance in Spain as well as the change in the leadership of the country that we also carried out during the quarter.

So I would say that the Spanish performance was definitely below our plans. The good news is that, first of all, in relation to the rollout of the new front office system, now we are almost -- we have almost completed it, and we have learned our lesson so that I do not expect any disruption going forward as well as we have already in place a new general manager for the country that has taken over the responsibility of the market since July. So let me say that I think that the both issues have been resolved.

Then coming back to your second part -- to the second part of your question. To be honest with you, I don't have a clear explanation for the French market to be negative after those ones that I mentioned earlier on, generally speaking, about the European market. And I definitely still expect the European market to gradually normalize throughout the year because honestly, I do not see any specific reason or contingent situations that should prevent the European market actually to gradually return to growth.

With regards to the final part of your question, I think that during our last conference call, we were estimating the European market to be in the region of about -- sorry, we were estimating the European market to be more in the region of the 3% -- 2%, 3%. While now, we see the market to be more in the region of 2%. So slightly -- 1%, 2%, so slightly lower than that. But this does not imply any, let's say, further guidance about if we will be in the lower part of the range or in the upper part of the range because I'm still confident that, as I said, we can definitely overcome any potential market slowdown, thanks to our ability to overperform the market.

[Julien Ouaddour, analyst]

Perfect. Perfect. Just maybe like a quick follow-up on like on France. So I mean, despite some let's call it like one-off weakness here. Are you still confident that next year, we should see a sort of important benefit from the reform anniversary in the country?

[Enrico Vita, executive]

Absolutely. Absolutely. Absolutely, yes. What I mean is that it's a matter of fact that next year, we will anniversary the reform RAC zero of 2021. So I expect next year, substantial growth in the French market and all the -- all the EMEA region actually to benefit from this substantial growth in what has become in the meantime, the biggest market in Europe. Absolutely.

[Operator]

The next question comes from Niccolò Storer of Kepler.

[Niccolò Guido Storer, analyst]

Thanks for taking my 2 questions. The first one is on your EBITDA margin guidance which has been slightly revised downwards. And I was wondering if you can comment in a quantitative way, the contribution to discuss what you mentioned, such as marketing, additional marketing expenses or dilution from direct point-of-sale integrations in the U.S.

And the second one is still related to M&A. Year-to-date, the cash outs related to acquisitions have totaled more than EUR 140 million. What should be expected for the second part of the year, considering that we are already at a level probably never reached.

[Enrico Vita, executive]

Thank you, Niccolò, for the questions. So with regards to the first question and the EBITDA outlook, basically, we have dreamed our expectation in terms of EBITDA margin by, let me say, a negligible amount because it's about 1% on our total EBITDA basically for 3 reasons. First, in order to take into account our performance in Q2. Second, because of the dilution, which is related to our accelerated growth in U.S. related to the transformation of the Miracle-Ear network.

In this regard, I think you can appreciate that we are progressing very fast. We are progressing faster than ever. We are progressing even faster than we were planning. I think that we should not slow down just because of some potential effect on the percentage margin actually because we see, as we discussed also, I think, a few times in the past, we see an opportunity actually to take the moment of the fact that we see more and more franchisee actually willing to talk to us, willing to sell to us. And also what I can tell you is that the pipeline has never been so rich as in this moment and therefore, we wanted to take advantage of the current situation, which is in a way pushing some of our franchisee actually to be more inclined to sell their businesses to us.

Then with regard to the third reason, we wanted also to take into account, as I said, I'm -- I don't see any structural reasons why the European market should not normalize going forward. But we wanted also to take an approach of -- if this -- if the European market continues to be below expectations. We might need perhaps to increase our marketing investments to respond to this kind of weaknesses. So the 3 reasons why we have trimmed our EBITDA margin expectations is related to basically that. And let me say you're speaking about 30 basis points, which is, as I said, around 1% of our total EBITDA. So very limited.

With regards to the last question, in terms of M&A, yes, of course, I think that we are at record levels in terms of M&A for the semester. The reasons are exactly the same in general term speaking, we see an opportunity actually to accelerate our M&A because of the current situation, I don't think that the right number is to double the number that we have we have spent in the first half. But for sure, we will be above our historical levels in terms of M&A.

[Operator]

The next question is from Hassan Al-Wakeel of Barclays.

[Hassan Al-Wakeel, analyst]

I have 3, please. Firstly, following up on EMEA. Could you talk about the key markets driving the weaker growth outside of Spain .And how this headwind splits across returning in new customers and/or down trading, if at all? How do these markets exit the quarter and into Q3? And how should we should we be thinking of EMEA growth in the second half given some of the tougher comps that you face at least versus Q2?

Secondly, M&A has accelerated. Can you talk about the landscape here and the pipeline of deals, particularly in the U.S. in converting franchisees? And how confident are you around more meaningful margin expansion in 2025, if M&A continues to build the pace that you are running at?

And then finally, can you talk about the development in China in the quarter given when we caught up in London last quarter, China was a key area of outperformance for you versus peers.

[Enrico Vita, executive]

Absolutely. Thank you. Thank you, Hassan, for your questions. So with regards to EMEA region, as I said, we estimate the European market to be basically flattish. We see the French market to be negative low single digits, while the German market being back to grow more or less of the same amount, so low single digit. And basically -- the 2 market basically offset each other. And we see also plus and minuses across the different markets. For example, Italy was positive. Spain was slightly negative.

But let me say that one of the key reasons for the organic growth of the EMEA region was our performance in Spain which, again, I must be very, very transparent with you by saying that most of it is, let's say, self-inflicted in a way. What I mean is that I'm not happy about our performance in Spain in the second quarter. But let me say that I'm happy about how we responded to that. And also in Spain, we already see the result of the different actions that we put in place basically starting from the second half of the quarter.

With remaining on the question about the EMEA region in the second half I would say that we should see the market actually recovering and progressively normalize. Of course, this is something that we were already expecting after the first quarter. But as I said before, I do not see any structural reason why this should not up. With regard instead to the different trend between returning customers and new customers, I would say that nothing in favor of the others. So nothing really special there.

With regards to the second question and therefore, the M&A landscape. As I said, I mean, we see more and more targets becoming -- I mean, at least willing to talk to us. The pipeline is very rich. It has also reached -- very rich in the U.S. definitely, it is not our intention actually to slow down there. We wanted to continue to -- on our strategic direction regarding the transformation of the Miracle-Ear network.

Clearly, we have been -- in terms of percentage margin, this acceleration had an impact in the Americas region, basically for 2 reasons. First, because as we discussed many times, direct retail in terms of percentage margin as a lower profitability than wholesale franchise. And then also, we have performed many different acquisitions this year and also during the last the final part of last year, the last quarter of last year. So we need also some time actually to integrate the different targets.

With regards to the third question -- and therefore, China. In China, we continue to perform well. we have delivered a solid organic growth. We also added a significant contribution from M&A, basically, all the contribution in the region is coming from China. So we are doing well, profitability, although is lower than the average of the region Australia and New Zealand is improving. And in fact, in this regard, I see also the performance of the APAC region as a good one in terms of margin expansion, taking into consideration the fact that we are growing very fast in China, which, as I said, has a lower average profitability. Today, in China, we have developed just in few years a network, a solid network of over 450 point of sales, which has become one of the major networks in the country.

[Francesca Rambaudi, executive]

Can I kindly ask for the next analysts to limit your questions to maximum 2 initially in order to give everybody the opportunity to ask questions.

[Operator]

The next question is from Hugo Solvet of BNP Paribas.

[Hugo Solvet, analyst]

I ask 2 then. First, a clarification follow-up on the renewals in France. Can you maybe give us a bit more details on the precise timing that you would expect to see renewals kicking in next year? And second, your guide suggests 30, 40 basis point margin improvement in H2, while you should theoretically see the reversal of about 150 basis points margin impact last year from investments. So I guess my question is how confident are you that margin improvement, not margin improvement shouldn't be higher in the back half of the year and conservative? Do you see the new guidance?

[Enrico Vita, executive]

Thank you for the questions. With regards to the first one, and in particular, with regards to the expectation regarding the French -- the French market for next year. Well, actually, next year, we will be anniversarying the RAC zero reform, which happened in 2021. The estimation that we have got with regards to the potential growth of the French market next year because just of that is something which tell us that the overall market actually should grow next year at least double digit, definitely more than 10%. This will not happen starting from the first of January, but will be more happening from the second, I would say, second quarter, so in the second, third and fourth quarter. So definitely, we expect the French market to have substantial growth, substantial growth next year.

With regards to the second question and in particular our expectations in terms of EBITDA margin as I said before, our expectation for the second half is taking into account a couple of effects that actually we have now taken into consideration with regards to our -- to our outlook for the margin. So we are definitely confident in that.

[Hugo Solvet, analyst]

Okay. But just a quick follow-up. So the step-up in investment that the new full year margin suggests for H2, Should we expect that to continue next year in 2025?

[Enrico Vita, executive]

Sorry, say again, please, which kind of investment?

[Hugo Solvet, analyst]

As it seems that your guide suggests a slight step-up in investment in H2, should we expect that to continue? So higher investment also into '25 or not?

[Enrico Vita, executive]

Alright, marketing investments. Well, no, in reality, this is something that we wanted to take into consideration in case of potential continued weakness of the European market. And since -- sorry, I didn't get to your question before, so since -- as I said, we do not see any structural reasons why the softness of the European market that we saw in the second quarter actually should continue going forward. No, I think that our plan is to continue to grow our marketing investments, maximum at the level of our revenue growth.

[Operator]

Next question is from Shubhangi Gupta of HSBC.

[Shubhangi Gupta, analyst]

Just on the North American market. So Q2 has been decelerating compared to Q1. So -- and you're expecting healthy markets in H2. So do you expect similar levels of growth as Q2 have some deceleration there?

[Enrico Vita, executive]

Thank you for your question. Yes. So no, it is true that there was a deceleration in the U.S. market, although this was something expected. You may recall that after the Q1, I said that despite the reported numbers were telling us that in Q1, the U.S. market grew by 10%. We were not expecting the U.S. market to grow double digit for the remainder part of the year, and we were expecting the U.S. market to grow this year something in the region of 6% to 7% which is exactly the value here to date.

So for the second half of the year, we expect the U.S. market to grow more or less in line with what was the growth in the first half, so something in the region of 6% to 7%, which is, in this case is -- I mean, the U.S. market has developed exactly in line with our expectations.

[Shubhangi Gupta, analyst]

So H2 business mix would be more weighted towards North America. Is that a fair assumption?

[Enrico Vita, executive]

Let's say that for sure, I mean, going forward in the second half, but also in the coming years, we expect the Americas and, in particular, of course, the U.S. to be the main driver of our growth going forward.

[Operator]

The next question is from Veronika Dubajova of Citi.

[Veronika Dubajova, analyst]

I have 2 please. One, can I -- I'm going to be very annoying, but could we get the EMEA growth rate for you guys if you stripped out Spain? And the same, I would love to know what your U.S. organic sales growth rate was a rough approximation, it's just the Argentina hyperinflation accounting makes it hard to see. So if you could comment on both of those, that would be great. That's my first question.

And then my second question is sort of a philosophical one on the European market growth rate. I mean, we've been now for 2 years in a row in a subdued market growth environment. And while there's been sort of unique circumstances in certain geographies like France and Germany, this is something that's dragged on for quite a long time now. And I'm just curious what your thoughts on why that is.

I know there's weather and elections and this or that, but I mean, if I look at the trend now for 2 years, we've been in a lower market growth rate environment. Do you see any risk that we've hit sort of peak penetration for hearing ads in Europe? And what we're seeing here is more of a kind of new normal, something that we kind of need to get used to? And if not, why not? So I'd love to get your thoughts on that.

[Enrico Vita, executive]

Right. So with regards to the first question was... sorry?

[Veronika Dubajova, analyst]

What was the U.S. organic and what was the European organic, excluding Spain.

[Enrico Vita, executive]

Yes. Yes. Sorry. Sorry. Excluding Spain. So I can't really give you precise numbers. But what I can tell you is that Spain definitely was the major let's say, offender of the organic growth in the EMEA region. Unfortunately, it is our it was driven by our internal issues. Of course, I'm very personally very disappointed about that. But let me say that certainly, without the performance of Spain, our organic growth in the EMEA region was going to be much more positive than what we reported.

With regards to the second question and therefore, Argentina impact, et cetera, et cetera, what I can tell you is that -- also here, I can't give you precise numbers [indiscernible]. In the region, the organic growth was driven definitely by the U.S., where we continued to outperform to outperform the markets, both thanks to the performance of Miracle-Ear retail and also to the performance of Amplifon Hearing Health Care in the managed care.

The third question, it's more difficult to answer because it is true what you said about the fact that now we have seen the EMEA market to be subdued now for a while. And that's why also we are expecting actually the EMEA market to gradually normalize. It is also true that if you think that the main offender in this case, is France, because France now has become the biggest market in the European market.

And in a way, I can suppose that the French market now has been negative for many quarters in a row due to I would say, rebalancing to a normalization of the -- after the growth that we saw starting from 2021 due to the RAC zero reform. What I mean is that after such a significant growth, perhaps there has been, let's say, a rebalancing in the demand. And of course, clearly, if you have the main -- the biggest, the European market being negative, then this, of course, affect all the growth of Europe.

Going forward, I don't see actually structural reasons why the European market should come back to a growth of -- in the region of 3%, 4% actually and also in some markets, we still see this kind of growth. But overall, I would say that we should see a normalization going forward.

[Operator]

The next question is from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

Two quick questions. The first is on the profitability. So if you can give us some ballpark indication on the profitability by region. I presume that North America will continue to be a bit diluted by M&A given also the continued progress on both on M&A.

Second, on -- just on free cash flow generation, that was weaker than last year. I saw working capital drain. Can you just elaborate on why it was so negative? If there is any less recourse to factor or any other thing.

[Enrico Vita, executive]

Thank you, Domenico, for the questions. So with regards to the first one, and then I will let Gabriele to answer the second one. With regards to the profitability of U.S., yes, for sure, there is an effect related to the acceleration of the transformation of the network from franchise to direct -- directly operated stores, which is, as of today, well above our initial plans.

As you know, we have performed already a number of different acquisitions. But what I would like to underline here is that is not just the fact that we are consolidating a business with a lower percentage margin. The effect is also related to the fact that, of course, we need some time actually to integrate the acquisitions. So we expect that the profitability of the acquired companies will improve going forward.

As I say, the year, I don't think that to slow down in order to protect the percent of margin would be a good idea at all, actually. So definitely, we will continue to acquire. I have to say that this year, we have already done quite a lot. The pipeline is rich, but we have done quite a lot.

With regards to the second question and for the free cash flow, I will let Gabriele to tell you all the details.

[Gabriele Galli, executive]

Absolutely. So basically, we had some differences compared to last year. The main differences were some higher taxes -- cash taxes compared to last year, amounting to around EUR 5 million -- sorry, EUR 13 million. Then we had some higher financial charges as we were describing also in the explanation of the profit and loss and these financial charges amounted to around EUR 5 million.

Last year was a particularly good year in terms of a reduction of working capital. So there is, of course, a seasonality in the working capital across the year. So it was negative last year, but I mean, we implemented some measures in order to improve. So this year, the comparison is suffering because of the, let's say, tough comparison period last year.

Then, of course, we had some higher rents as we were explaining, we increased significantly the network base by a lot of M&A. So this was another reason. And going down to the free cash flow, we had some higher CapEx compared to last year, amounting for around EUR 4 million.

[Domenico Ghilotti, analyst]

Okay. And just a follow-up on the profitability. I mean, I was trying to get your sense on what is driving for the full year. So America is not a big driver probably, but the recovery in Europe should be expecting even if you are not, say, having a strong quarter.

[Enrico Vita, executive]

Europe and Asia Pacific as well, absolutely.

[Operator]

The next question is from Robert Davies of Morgan Stanley.

[Robert Davies, analyst]

Most of my questions have been answered, just 1 or 2 left. One was just on your view on the Americas margins kind of over the medium term given the dilution effect from the M&A you're doing, I just wondered how you're thinking about that profitability over time.

And then the other one is just generally at group level, margin progression has obviously been a struggle for the last few years. We're sort of stuck in that sort of 24% to 25% range, the guidance at the low end or lower end of that range again this year. Can you get profitability going without European growth coming back? Or what's the kind of key trigger? Because I thought this year was where you were really going to start to see the effects of operational leverage coming through, but we haven't really seen that yet.

[Enrico Vita, executive]

Thank you for your questions. So with regards to the Americas margin, I think we always said that our objective for the Americas was definitely focused on growth, and we were not expecting margin expansion, significant margin expansion. Actually, we said also that the goal was to be flattish in terms of margin going forward. This because of the fact that we were, of course, pursuing our strategy of transformation of the Miracle-Ear network from franchise to directly operated stores.

And this is, let me say, still valid as assumption. This year, of course, absolutely. This year, of course, we have been very fast -- much faster than in the past in the acquisition of franchisees. And also, as I said earlier on, of course, we need also some time actually to integrate the additional franchisees that we have acquired in order to get the benefits in terms of profitability. But let me say that in general terms, the assumption for the medium term of America's profitability to be at stable levels, it's something that is still definitely valid.

With regards to the second question and this is for the margin progression for the group, this is definitely our goal, I mean, to continue our path of profitability expansion, we need some support from the growth of the EMEA market, which, as I said before, it's something that we do not see any structural reason why this should not happen at least to be better than what we have seen in the last couple of years.

Let me say that France, as I was saying -- answering the question of Veronika, has been the main offender for the sluggish market demand in Europe in the last couple of years. France should instead on the contrary, the main driver of growth of the European market going forward and in particular next year because of the anniversary of the French reform.

[Francesca Rambaudi, executive]

We have last analyst to go, please.

[Operator]

The final question, Madam -- sorry. Okay, is Giorgio Tavolini of Intermonte.

[Giorgio Tavolini, analyst]

Just a follow-up on profitability. I was looking at the corporate cost line that saw an important reduction below 3% of sales in the second quarter. I was wondering if we should look at this line in light of the new margin guidance, so we should expect an increase in the second half for the higher marketing investments or if you are thinking the marketing expenses directly related to each region. So it was just a matter of understanding the foreseeable evolution at this line.

And the second one is on the free cash flow evolution. I saw a significant decrease in the repayment of lease liabilities in this quarter and also in the first quarter, I guess, mostly due to the higher M&A activity and inflation. So should we expect this line increasing going forward beyond the current levels due to the higher M&A push.

[Enrico Vita, executive]

Thank you for your question, Giorgio. I will leave Gabriele to answer both.

[Gabriele Galli, executive]

Yes. So I mean, starting from the corporate cost, of course, I mean, we have some flexibility in the way we manage our projects. And due to the softness of the market in EMEA, we decided to, I mean, do some lower activity during Q2. And I want to say that, I mean, this level of around 2.5 percentage points is the level at which you can expect the group moving forward, because in the past, we saw some quarters at around 3.5 to 4 percentage points.

But of course, it's also true that moving forward, I mean, the group is growing. We did a lot of development in the past years. So we can expect, on the one side, some scale effect. On the other side, we can expect also some flexibility. So the day when EMEA will start growing again in terms of market at a normal rate, of course, we can push a little bit further on corporate investment.

When Enrico was mentioning about the marketing investment, this is mostly in the region. It's not something, I mean marketing is something linked to the performance -- commercial performance in the region. So it's not included in the corporate side.

Looking at the free cash flow, of course, I mean the repayment of lease liability is very much a function of the number of shops. So it's perfectly true. I mean, if we are going to increase our shop space at a much faster pace, of course, rents are increasing proportionately. So we can expect an increase linked to the increase in M&A, of course.

[Francesca Rambaudi, executive]

Thank you. So this concludes today's call. Thank you all for your interest and attendance, and we kindly ask sheri the operator to disconnect. Thank you.

[Enrico Vita, executive]

Thank you, everyone. Thank you.

[Gabriele Galli, executive]

Thank you.

[Operator]

Thank you, ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.