Company announcement no 2020-07
Interim Management Statement covering the period year-to-date
Very strong start to the year driven by strong performances in all hearing healthcare business activities
Significant negative growth since mid-March due to severe market impact of coronavirus
Level of unutilised funding facilities significantly expanded on terms similar to terms of existing facilities
Outlook for 2020 remains withdrawn due to continued uncertainty of impact of coronavirus
- Year-to-date, the Group’s performance has been extraordinarily mixed as a result of the global coronavirus pandemic. Until mid-March, the Group (excluding EPOS) saw double-digit organic growth significantly above the estimated growth rate of the hearing healthcare market. However, the lockdowns of virtually all our key markets in
Europe andNorth America in response to the spreading of coronavirus have almost completely eliminated the ability to service patients and have had an unprecedented negative impact on the hearing healthcare market since mid-March. We estimate that the global hearing aid market is currently seeing a sales run rate of around 20% of what we would normally expect. - The negative impact on the Group accelerated in most major markets in mid-March, and since then revenue has been approx. 30% of our original expectations (including EPOS). Consequently, revenue and profits have year-to-date been significantly below the levels in the same period last year.
- Our hearing aid wholesale business started the year with double-digit organic growth driven by broad-based success generated particularly by Oticon Opn S and Philips HearLink. However, sales have declined very significantly since mid-March, as lockdowns across the world have forced most customers to temporarily close their clinics or materially reduce their activity level. In the first quarter as a whole, organic growth was roughly flat, but the current revenue run rate is only approx. 20% of our original expectations.
- In our hearing aid retail business, the year started with strong organic growth driven by
Europe , particularly byFrance where comparative figures were low as a result of the negative effect last year of the new hearing healthcare reform. However, the lockdowns of almost all our markets have led us to temporarily close the vast majority of our shops and the impact has been severe. The current revenue run rate is approx. 20% of our original expectations. - In Hearing Implants, the continued success of the Ponto 4 sound processor helped drive exceptionally strong growth in our bone anchored hearing systems (BAHS) business until mid-March, whereas growth in our cochlear implants (CI) business was slightly negative due to lower-than-expected sales in
France . Coronavirus has had a very negative impact on both businesses since mid-March, particularly on the CI business, and the current revenue run rate is approx. 20% of original expectations. - Our Diagnostics business started the year with strong and broad-based organic growth, and even though the impact of coronavirus has been significant, the orders placed in past periods and a recurring stream of revenue from services and disposables have supported the business. Year-to-date, organic growth has – despite the impact of coronavirus – been slightly positive thanks to the strong start to the year. However, the current revenue run rate is only approx. 60% of our initial expectations.
- Communications (EPOS) faced supply chain headwinds in the first months of the year, which hampered sales. However, sales have since then accelerated significantly driven by Enterprise Solutions, which has benefitted from the working-from-home trend that has followed in the wake of coronavirus. The current revenue run rate for EPOS is approx. 120% of our initial expectations of strong double-digit growth.
- Year-to-date, the Group’s gross profit margin has been below the same period last year. This is to a large extent caused by expected dilutions due to the consolidation of EPOS and an increasing share of sales of rechargeable products. In April, we started to reduce our production level, and with a lower coverage of fixed costs in operations, the gross profit margin will temporarily see significant headwind until the production level normalises, despite actions taken to reduce costs at our production sites.
- In terms of OPEX, we saw low double-digit growth until mid-March of which organic growth accounted for around half and the other half was attributable to the consolidation of EPOS and to acquisitions. Since then, we have taken numerous actions to reduce our costs. These include significant savings in staff costs due to the availability of publicly funded salary compensation schemes in most major markets as well as savings due to significantly reduced sales and marketing activities, mainly in Hearing Devices and Hearing Implants. At this point in time, the OPEX run rate is around 60% of our original plans. The savings are obtained in both distribution costs and administrative expenses, whereas R&D costs are deliberately kept more in line with our original plans.
- As a result of our strong start to the year, the free cash flow has year-to-date been positive, but after acquisitions and share buy-backs, the net cash flow has been negative. We expect a significant negative impact on cash flows in the coming months, and available credit facilities have been expanded considerably since the beginning of the year. As of today, unutilised credit facilities and other available liquidity amount to around
DKK 6.0 billion compared to aroundDKK 2.1 billion at the beginning of the year. The Group’s debt to credit institutions with maturity in 2020, which excludes rolling short-term bank facilities, amounts toDKK 1.0 billion compared toDKK 2.0 billion at the beginning of the year. - As previously communicated, we believe that the negative impact of coronavirus will be temporary, and we see no changes to the fundamental drivers of demand for hearing healthcare products and services. However, we believe that the hearing healthcare market will only see a gradual recovery, which will likely carry over into 2021. Uncertainty as to whether any pent-up demand will start materialising in 2020 has increased over the last couple of weeks due to the fact that it has taken longer than initially expected to re-open society after the lockdown.
- The Group’s outlook for 2020 was withdrawn on 15 March as a direct consequence of coronavirus, and we still lack visibility when it comes to the duration of the lockdown in individual markets and the pace of the subsequent recovery. Consequently, we are still not able to provide a financial outlook for 2020.
“The Demant Group entered 2020 on a very positive note with high growth rates and market share gains in all hearing healthcare business activities. However, our good momentum came to a sudden halt when the hearing healthcare market almost completely stalled with the outbreak of coronavirus. Governments’ restrictions to prevent the spreading of the virus have particularly affected the elderly, who are staying at home. We make a huge effort every day to serve customers and users in the best possible way with remote services, and in countries that are open, we meet people with safety procedures as well as innovative solutions for delivering our services and products. But the situation for the Group is very challenging as we are facing a long road towards normalisation. It is difficult to estimate the time horizon, but it could carry over into 2021, and we are dedicated to doing what we can to get through this as fast as possible – with very high concern for people’s well-being,” says Søren Nielsen, President & CEO of Demant.
Hearing Devices
Market trends
We estimate that the market growth rate was at the high end of our general expectation of 4-6% unit growth until the outbreak of coronavirus, which had a substantial, negative impact on demand in key markets from around the middle of March. Currently, we estimate that the sales run rate in the global hearing aid market is around 20% of what we would normally expect.
According to statistics from the
We estimate that unit growth in
In
In many countries, governments have announced plans to partly re-open society, and while we are monitoring the developments closely, it is too early to estimate the impact and duration of the gradual market recovery.
There are no reliable industry statistics available on the development of prices in the global hearing aid market, and given the current market environment, we are unable to accurately estimate the development in average selling prices (ASP) for the hearing aid wholesale and retail markets.
Wholesale
Year-to-date, our hearing aid wholesale business has seen significant negative organic growth. In line with our plans, the business saw double-digit organic growth in the first months of the year, but lockdowns of
almost all markets have forced most customers to temporarily close their clinics or materially reduce their activity level. In the first quarter as a whole, organic growth was roughly flat, but we are currently seeing
a revenue run rate of only approx. 20% compared to our original plans. While our customers have materi-
ally reduced their activity level, we encourage and support their use of virtual solutions, such as Oticon
RemoteCare, to service the users in the best possible way.
The increased momentum that we saw towards the end of last year carried over into the beginning of this year where we realised very strong, broad-based organic growth in line with our plans up until mid-March despite the fact that a number of our small markets were impacted already at the early stages of the outbreak of coronavirus. Growth was driven by our highly competitive product portfolio, including an increased uptake of Oticon Opn S. Geographically, growth was driven particularly by the US,
We continue to broaden the reach of Philips-branded products by adding rechargeability in additional price points as well as by roll-outs in new markets, and at the beginning of the year, we launched Philips HearLink in
We also recently launched new mid-priced rechargeable products in our Sonic and Bernafon brands to meet the increasing demand for rechargeable solutions. Naturally, these launches have also been affected by the outbreak of coronavirus, but they will support our overall growth when we see a normalisation of the market.
Since the middle of March, the global outbreak of coronavirus has triggered a significant deterioration in market conditions, as quick lockdowns of all major markets have severely impacted the hearing healthcare market. In
In
The outbreak of coronavirus has also had severe implications for sales in
We had a very strong start to the year in the Pacific region, but market conditions have also deteriorated in this region as a result of coronavirus, albeit so far to a lesser extent than in
Retail
Our retail business had a strong start to the year with strong organic growth before the outbreak of coronavirus. The lockdowns of almost all our markets have led us to temporarily close our shops or dramatically reduce our activity level, and year-to-date organic growth has been significantly impacted and is thus negative. The current revenue run rate is approx. 20% of our original expectations. In markets where we are unable to meet the users in person, we focus on servicing them in the best way possible at a distance through our call centres, by delivering batteries directly and through virtual solutions, including Oticon RemoteCare.
In
In
Performance in the Pacific region in the first two months of the year was in line with expectations in the first two months of the year, as we delivered solid organic growth in
In many countries, governments have announced plans to partly re-open society, and we are monitoring the developments closely and evaluating on an ongoing basis when and where it is safe to open our clinics. We are therefore preparing our clinics to ensure that they work optimally and meet the increased safety and health precautions required when we re-open the shops.
Hearing Implants
Our Hearing Implants business activity has seen negative organic growth year-to-date. Growth in the CI business was slightly negative at the beginning of the year due to strong comparative figures, lower-than-expected sales in
In our BAHS business, the momentum from the second half of last year carried over into 2020, and we saw exceptionally strong organic growth rates at the beginning of the year driven by the Ponto 4 sound processor. The growth momentum was interrupted by the outbreak of coronavirus, and we are currently seeing a significant impact on sales, albeit to a somewhat lesser extent than in our CI business. The current revenue run rate in Hearing Implants as a whole is approx. 20% of our original expectations.
Diagnostics
In Diagnostics, we saw strong organic growth in the first months of 2020, as our momentum from last year continued into 2020. Growth was broadly based across product segments, brands and geographies with US as the primary driver. The outbreak of coronavirus has naturally impacted sales of diagnostic equipment, and we have seen a material slowdown in new orders for instruments and other equipment since the middle of March, which may result in a somewhat lagging effect of coronavirus. Still, orders placed in past periods and recurring revenue from services and disposables have supported the business. Year-to-date, organic growth in Diagnostics has been slightly positive thanks to the strong start to the year. However, the current revenue run rate is only approx. 60% of our initial expectations.
Communications
EPOS, our premium audio and video solutions business for enterprises and gamers, was fully consolidated into the Group with effect from
Other matters
Gross profit and OPEX
Year-to-date, the Group’s gross profit margin has been below the same period last year. This is to a large extent caused by expected dilutions due to the consolidation of EPOS and an increasing share of sales of rechargeable products. We have also seen a temporary negative impact of increased shipping costs related to coronavirus. In the first months of the year, we continued to produce hearing healthcare products at close to full capacity to ensure healthy local stock levels in all markets and to mitigate the risk of constraints in our supply chain in this unprecedented situation, but in April, we started to reduce our production output. Consequently, the gross profit margin will due to the lower coverage of fixed costs in operations temporarily see significant headwind until the output normalises. Meanwhile, we maintain strict focus on recalibrating the activity level in production to accommodate lower demand, including actions taken to reduce costs at our production sites.
In terms of OPEX, we saw low double-digit growth until mid-March of which organic growth accounted for around half and the other half was attributable to the consolidation of EPOS and to acquisitions. Since then and in response to the impact of coronavirus, we have taken numerous actions to reduce our costs. This includes significant savings in staff costs due to the availability of publicly funded salary compensation schemes in most major markets and a significant number of employees having been temporarily furloughed or working under similar arrangements. The vast majority of these furloughed employees work in our distribution activities, primarily in retail clinics that are temporarily closed, and some work in administrative functions. Our R&D activities are unaffected. Also, we have significantly reduced our sales and marketing activities, mainly in Hearing Devices and Hearing Implants. At this point in time, the OPEX run rate is around 60% of our original plans. The savings are obtained in both distribution costs and administrative expenses, whereas R&D costs are deliberately kept more in line with the original plans made.
Remuneration to the Executive Board and the Board of Directors
To support the business and the employees in this challenging situation, the Executive Board have voluntarily decided to reduce their salaries by 10% for the remaining part of 2020, and the Board of Directors have decided to reduce their fees by 20% in the same period.
Financial position and share buy-backs
As a result of our strong start to the year, the free cash flow has year-to-date been positive, but after acquisitions and share buy-backs, the net cash flow has been negative. As a logical consequence of the currently low level of revenue generation and an expected delay in payments by customers, we anticipate a significant negative impact on cash flows in the coming months until market conditions approach a normalisation.
The Group continues to have ample access to funding, and in order to ensure some degree of financial flexibility, we have expanded our available credit facilities considerably since the beginning of the year. As of today, unutilised credit facilities and other available liquidity amount to around
Share buy-backs have been suspended since 15 March. Prior to the suspension, the Group had bought back shares worth
One-offs related to the consolidation of EPOS
As a natural consequence of the withdrawal of our outlook for 2020, we are also unable to guide on one-offs related to the consolidation of EPOS. However, in the first half of this year, we expect to recognise a material, positive fair value adjustment related to the demerger and a negative revaluation of inventory purchased as part of the demerger. None of these one-offs will have cash flow effects. We also expect to incur one-off costs related to extraordinary spending on the branding of EPOS, which will impact cash flows and are likely to be back-end loaded. In summary, we still expect a positive net effect on reported profit this year, but a negative net effect on cash flows.
Hearing healthcare market outlook
We believe that the negative impact of coronavirus will be temporary, and we see no changes to the fundamental drivers of demand for hearing healthcare products and services. However, we believe that the hearing healthcare market will only see a gradual recovery that will likely spill over into 2021. The duration of the market recovery will depend not only on the timing of the re-opening of society, but also on how quickly people – particularly the elderly population – will start to feel comfortable leaving their homes to buy hearing healthcare services. Uncertainty as to whether any pent-up demand will start materialising in 2020 has increased over the last couple of weeks due to the fact that it has taken longer than initially expected to re-open society after the lockdown.
Outlook for 2020
On 15 March, we withdrew our outlook for 2020 due to uncertainty of the impact of the current outbreak of coronavirus and the resulting changed outlook for the hearing healthcare market. We still lack visibility when it comes to the duration of the lockdown in individual markets and the pace of the subsequent recovery. Consequently, we are still not able to provide a financial outlook for 2020. Thanks to our strong competitive position, we delivered organic growth significantly above the estimated market growth rate until we began to see the effect of coronavirus in mid-March, but we lack visibility when it comes to guiding on our performance for the full year relative to the market.
We maintain the suspension of share buy-backs, pending a better overview of the financial implications of the current situation.
As soon as we are able to properly assess the impact of coronavirus on the hearing healthcare market and the derived impact on our own business, we will release an updated outlook for 2020, and we will publish any material new information as it becomes available.
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Demant will host a conference call on
Further information: Søren Nielsen, President & CEO Phone +45 3917 7300 www.demant.com | Other contacts: |
Attachment
- 2020-07 Interim Management Statement
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