Demant A/S: Interim Report 2020

Company announcement no 2020-10                              17 August 2020
Interim Report 2020

Very strong start to the year disrupted in mid-March by coronavirus – organic growth of -27% in H1
Strong recovery towards end of H1 has continued after the reporting period
Material cost containment in response to coronavirus driving -14% organic growth in OPEX in H1
EBIT of DKK -193 million before net positive EPOS one-offs of DKK 307 million
New outlook: 5-15% revenue growth in local currencies in H2 (including EPOS)

• Group revenue in the first half-year amounted to DKK 6,078 million, corresponding to a decrease of 17% compared to last year. Organic growth contributed -27 percentage points, whereas acquisitions added 9 percentage points, including 7 percentage points due to revenue generated in EPOS. Exchange rate effects contributed close to 0 percentage point. After a very strong start to the year, we saw a significant revenue decline due to the severe negative impact of coronavirus. Since the low point in early May, market conditions have improved significantly, and we have seen strong recovery in the revenue run rate (please see table on page 2).
• Revenue in Hearing Devices declined by 28% in local currencies. In our hearing aid wholesale business, we saw strong double-digit organic growth until mid-March thanks to our broad and highly competitive product portfolio, including Oticon Opn S and Philips HearLink. However, due to the severe impact of coronavirus, revenue declined by 25% in local currencies in the first half-year. The decrease was driven by a 30% decline in unit sales but was partly offset by an increase in the average selling price (ASP) of 5% due to mix effects. After the low point in early May, we saw strong recovery in a number of markets, particularly among independent hearing care professionals.
• Despite a strong start to the year, our hearing aid retail business saw negative revenue growth of 31% in local currencies in the first half-year. Organic growth contributed -35 percentage points driven by widespread, temporary closure of our clinics since mid-March in response to market lockdowns, particularly in North America. As lockdown restrictions were eased, our retail business recovered significantly towards the end of the reporting period driven by France and Australia, in particular. Acquisitions contributed 4 percentage points to growth.
• In Hearing Implants, revenue declined by 18% in local currencies. Sales in our cochlear implants (CI) business declined by 34% in local currencies, as elective surgeries came to an almost complete halt due to coronavirus and the recovery in CI has so far been slow. Our bone anchored hearing systems (BAHS) business saw a modest decline in sales of 3% due to significant growth at the beginning of the year and a strong recovery towards the end of the first half-year driven by the uptake of the new Ponto 4 sound processor.
• Diagnostics saw a modest decline in revenue of 3% in local currencies, including a minor positive contribution from acquisitions of less than 1 percentage point. The negative impact of coronavirus has been less severe in this business activity than in our other hearing healthcare businesses aided by our existing sales pipeline, and we have seen strong recovery and market share gains in the business since the low point in early May.
• In Communications, our headset business, EPOS (demerged and fully consolidated into the Group with effect from 1 January 2020), delivered sales of DKK 546 million, corresponding to significant double-digit growth. After supply chain headwinds early in the year, EPOS benefitted from a surge in demand for headsets following the outbreak of coronavirus, resulting in a certain level of backorders at the end of the first half-year. For the reporting period, we have recognised net positive one-offs related to the demerger of DKK 307 million, which comprises a positive fair value adjustment, a negative inventory revaluation and extraordinary spending on the branding of EPOS.
• The Group’s gross profit margin was 70.0% adjusted for EPOS one-offs, a decrease of 7.6 percentage points compared to the first half of 2019. This was primarily due to the significant drop in revenue but also to the consolidation of EPOS, which diluted the gross profit margin by slightly more than 2 percentage points.
• Due to the strong execution of numerous cost-reduction actions, we were able to reduce Group capacity costs by 14% in the first half-year in organic terms (excluding a provision for additional bad debt of DKK 150 million). Cost savings were realised in distribution and administrative functions through publicly funded compensation schemes and through a significant decrease in sales and marketing activities, while we deliberately maintained our strong R&D commitments. In the second quarter, capacity costs decreased by 29% in organic terms.
• Operating profit (EBIT) before one-offs related to the consolidation of EPOS was negative in the first half-year and amounted to DKK -193 million, including the provision for additional bad debt of DKK 150 million. After net positive EPOS one-offs of DKK 307 million, reported EBIT amounted to DKK 114 million.
• Cash flow from operating activities (CFFO) before EPOS one-offs decreased by 27% to DKK 766 million driven by the significant drop in profits, but CFFO was less severely impacted than profits – primarily due to working capital improvements. Free cash flow was positively impacted by the suspension of non-essential investments, and M&A activities have been very limited since mid-March. Over the coming months, we expect to see an impact on CFFO of the low revenue level in the second quarter. The Group continues to have ample access to funding, and as of 30 June, unutilised credit facilities amounted to DKK 6.1 billion.

Update on the effects of coronavirus (mid-August)

After the reporting period, the strong recovery of the hearing healthcare market has continued. The current revenue level for the Group (including EPOS) represents growth in local currencies of -5% to 5% compared to last year, and the Group is profitable at this level.

* Please note that we have previously disclosed revenue run rates compared to initial expectations.
However, growth rates shown above compare to the corresponding period last year.

However, we still see significant uncertainties about the normalisation of the hearing healthcare market and thus of our business. In the past few months, the strong recovery of the hearing aid market has primarily been driven by users that were not serviced during the period of widespread lockdowns, while uncertainties persist regarding new lead generation at retail level. Furthermore, the Group’s exposure to developments in large government systems and hospitals – not least VA in the US and the NHS in the UK – pose a risk due to slow recovery in these channels. Lastly, reinforced lockdown restrictions pose a risk, as local outbreaks continue to occur in a number of markets, including in our main market, the US, and in emerging markets. In contrast to the severe impact of coronavirus on our hearing healthcare businesses, EPOS continues to benefit from the surge in demand for virtual collaboration tools. While we intend to materially ramp up sales and marketing activities to drive sales, significant uncertainties persist when it comes to the actual sales and marketing costs and to the pace of new hirings in the second half-year. Additionally, there is high uncertainty on freight costs.

New outlook

The Group’s outlook for 2020 was withdrawn on 15 March as a direct consequence of coronavirus and, as mentioned above, we still see significant uncertainties when it comes to the normalisation of the hearing healthcare market. However, based on an assumption of no further widespread lockdowns occurring before the end of the year and of sales in the hearing healthcare market approaching normalisation in the fourth quarter of the year, we now expect to generate revenue growth in local currencies of 5-15% in the second half-year (revenue in the comparative period was negatively impacted by the IT incident). This includes revenue generated by EPOS (not consolidated last year). We expect to see improvements in the Group’s EBIT before EPOS one-offs in the second half-year compared to the first half-year, reflecting an expected revenue improvement. We expect to recognise negative EPOS one-offs of DKK 75-125 million in the second half-year related to extraordinary spending on branding. We maintain the suspension of our share buy-backs, pending more visibility on the pace of market recovery.

“Thanks to a strong and innovative product portfolio, we saw high growth above expectations and very positive development in all our hearing healthcare activities in the first months of 2020. In the unprecedented period from mid-March and onwards, our revenue was severely hit, and the hearing healthcare market came to an almost complete halt. I am proud to note that with our ability to control costs and stay in close contact with our customers, we are in a solid position that will enable us to ensure continuous recovery and steer through the corona crisis. With the working from home trend, we have also been favoured by strong tailwind in our new headset business EPOS. To my great satisfaction, we have been able to keep our roadmap and pace when it comes to new product development and launches through a challenging half-year, and our employees have been dedicated and done an excellent job in supporting our company,” says Søren Nielsen, President & CEO of Demant, and continues:

“I’m especially thankful for the trust and loyalty that our customers and users have shown us, resulting in current performance at the same level as last year. Bearing the improved recovery situation in mind, we expect to approach normalisation this year, however, with a potential spill-over into next year, as it is uncertain how and when the demand will materialise.”

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Demant will host a conference call on 17 August 2020 at 14:00 CET. To attend this call, please use one of
the following dial-ins: +45 3544 5577 (DK), +44 3333 000 804 (UK) or +1 6319 131 422 (US). The pin code
is 74309912#. A presentation for the call will be uploaded on www.demant.com shortly before the call.

Attachment

• 2020-10 Interim Report 2020