Demant A/S (DEMANT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for participating in this conference call held in connection with our announcement this morning. The duration of this call will be a maximum of 45 minutes, including Q&A. Today, the company is represented by Søren Nielsen, President and CEO; René Schneider, CFO; together with the IR team. And with that, I will hand over to you, Søren.

Thank you very much, Christian, and welcome, everyone, to a short walk-through of basically exactly the same information as we have written today, but just with a little more so, and then we'll quickly go to Q&A. Slide #2 is an updated version of the stage model we have developed to keep track of where we have the majority of our markets. And we have seen, in particular, during the last 3 weeks' time, I would say, a significant progress in a high number of countries, so that we, today, only consider U.K., Ireland as well and then Brazil, markets that are under strict lockdowns and virtually no activities. We remain to have Finland in early-stage recovery despite of the pandemic not being continually strong and wide-spreading. Finland, for some reason, the market has a little more resistance in reopening and the business reopening, and we see that generally up there, it's not us. It is general. And then we have seen a big number of countries accelerating into recovery. And basically, it's easier to say that the ones that are even beyond there is China, South Korea that for long have been in a good position. But also Denmark and Norway are very close to normalization, meaning that it's basically difficult until you get some kind of market statistics, if ever, to judge whether you are back or whether you are back in the way that the traffic coming is actually a good mix of new or things that were already in progress. And that's basically the most difficult thing right now. In own retail, we can, of course, track it, but in the wholesale side, we cannot, whether the people that are serviced in the shops, whether they are people that were already in the funnel and pipeline, for instance, having a scheduled appointment or first test fitting, et cetera, or whether they are coming in as a new user raising their hand. We're still under the impression that most of it comes, of course, from existing pipeline. That's natural that, that's where you start. Therefore, we cannot really tell how the underlying market is and whether the ability to regenerate traffic through marketing is, in fact, and whether we can also, at normal levels, still reschedule with an equal amount of kind of existing users already hearing. There are people that need a replacement or whether -- and the other half coming from the scratch development. But at least in markets like China, South Korea, where we, for longer, have been in a more normalized situation, it seems to be able to do that without a setback, meaning that it dries out -- the world dries out when the existing funnels have been serviced. So a good recovery. We also don't still know much about the pent-up demand. Of course, all the users not serviced in the 3 months period -- past 3-month period should need the same service. And again, we'll have to see during fall to what extent this pent-up demand come back in or whether it will run into 2021. And we have really no new transparency into that. We still need more months to pass to also on own retail get much closer to understanding those dynamics better. But at least there is a positive -- the actions out there from the users we see that they all feel some relief of actively being able to go out again. And again, hearing it, the stores are generally seen as a safe place to go. Next slide, Slide #3, gives an overview of the updated run rate numbers. This is with a little more interval this time as, of course, things change from week-to-week as normal. There's a difference between beginning of a month, end of the month. So in order not to just take the last 3 days, which would not be accurate to the actual kind of run rate, we have an interim. And the hearing aid wholesale business have moved from beginning of May around 20% to here mid-June, first part of June, the 60% to 70%, with big variation across countries and channels. We see independent come up quite quickly. The cost base level is low. This complexity of the system is low. We've seen some of the larger chains taking a little more time to get up to speed. And then we see big precautions in public channels, whether it's the NHS for national regions in U.K. or the VA in U.S. and also other public health care systems simply due to being in a hospital setting due to general safety and precaution and prioritization of other areas, where they are all behind after their spending a lot of resources on COVID. On retail, we have moved it up from 20% to 40% to 50%. An element of that, despite of being in the same countries as the wholesale, is both -- is about ramping up on large-scale retail. But more importantly, there is, of course, a delay, the invoicing at wholesale level into the channel, where a lot of retail is, so to say, invoicing out of the channel and in some countries, not allowed to invoice until you have actually had the instrument on trial for a while, France being an example. So the real, let's say, business run rate much more is attributed to test appointments and scheduled appointments. And there, we see activity level being somewhat closer to what we have seen on the wholesale, but it comes delayed on the revenue side. Implants have moved up but not to the same extent, and that is exactly primarily in the CI business, where we still see things relatively slow. However, some improvements, hospitals are opening, but it's a much flatter curve than we have seen on the more commercial wholesale/retail side, and we are currently around 30% to 40%. And again, our bone-anchored business is more globally spread and, therefore, more in tune with the global market where we, on CI, are quite sensitive to a few countries' state. And we are having a big business in Italy, Spain and France, which are -- and U.K. was a coming-up country. So it is the pattern that these countries are severely hit. So it doesn't really help the Denmark, and to some extent, also Germany, have a more positive curve. It cannot outbalance also our position in the markets we're in. Diagnostics have seen some improvement but still reduced ordering that has been particularly in the areas of school districts as well as dispensing segment, a much lower activity level on the new order side. And this is, of course, natural that hearing aid fitters are cautious. And then on the other side, calibration service business remains to go well, and we see opening in hospital system. Personal Communication, up or remained around the 120%. And why not an interval? That's basically because it's in line with what we saw last time. We see the trend continuing. And 120% is on top of a relatively strong growth as well. So we do really well in that part of the business. All in all, group level, around 50% to 60% of the capacity. And then on Slide 4, we have summarized in -- across the period of the first half year so far, the kind of the different places we have been in. On the revenue side from a strong double-digit organic growth, the lockdown from mid-March, beginning of May around 30% and now 50% to 60%. Gross profit in line with expectations at the beginning. Then we continue to produce for full capacity and, therefore, continue to see relatively, in the beginning of the crisis, high gross margin but then a low point in the beginning of May, as we produce less and, therefore, couldn't recover the overhead structure and, again, could not get the funds and furloughs to cover for that in the central operation and also needed to keep a minimum business going. We continue to see headwinds, but the margin is improving. It is still, as we have said many times, 1/3 approximately fixed cost; 1/3, which is semi-fixed cost, we would have some opportunity of scaling up and down; and then, of course, 1/3, typically material, which is 1:1 scalable to how much we produce. On the OpEx, we saw significant low double-digit growth in the beginning of the year, half organic and half into EPOS and acquisitions. We saw a lot of new things to reduce costs during the past 3 months, and the run rate in May was around 60%. It is difficult in the middle of a month and the beginning of a month to judge the exact run rate, but our best estimates currently is we are probably up in the 75% to 85%. It's obvious we need the staff back in the stores. We need sales reps on the street. We need people in local operation and on the phone, and it is a quite instant need to have for a lot of these resources so you will be ahead of the curve. However, we try, of course, to not do it too fast and make sure it's the most important first. And also some of the traditional, for instance, in wholesale, fairs, trade shows and so on, we basically have decided not to participate in any such events for the remaining of the year, also for safety issues. And that, together with much less traveling and entertainment, et cetera, of course, give a significant cost savings. And then cash flow, a strong start to the year, continued to be strong in March. It's, of course, risk of people not yet paying, et cetera. But as we have reduced the buying of material, et cetera, for factory, we have still had an okay accounts receivable. Cash flow have continued to be positive. But it is going down now, of course, because now we see the cash not coming in from a much lower sales level yet. So we will start to see the real -- the challenge or challenges. But the negative development on the cash flow in the coming months, it's all in line with our expectations and predictions, if anything, slightly better as the -- so far, ability to pay have been good, but it is, of course, with the high risk. And summarizing all this up. The thing we can add is that if you put all this together, I think it'll be no surprise to most that, unfortunately, we will have a negative EBIT before one-offs related to EPOS for the first half of 2020. And we cannot comment on it in further detail. There's still a lot of things that can swing up and down, but it is going to be negative. And then Slide 5, no changes to the fundamental. We definitely believe there is a pent-up demand. We cannot exactly predict the magnitude of it. Is it 100% coming back? Is it 50% coming back? What is it? Is there still a number of people that are scared of going out and, therefore, don't seek help. This is the remaining uncertainty. But so far, things have developed at least in line with expectations or slightly better. So we are having some optimism around the opportunity to see pent-up demand at least partly come in also during 2020, but we cannot predict that. We will have to see. Therefore, Slide 6, outlook remains withdrawn, or we don't have any because the uncertainty is simply too high. We maintain the suspension of the share buyback and pending a better overview of financial implications, et cetera, et cetera. And we will make the scheduled news flow from us, unless something very significant there happens, hopefully not, will be with our interim report in 17th of August this year. And with that, we will move for Q&A.

[Operator Instructions] And our first question comes from the line of Martin Parkhøi from Danske Bank.

Martin Parkhøi from Danske Bank. Firstly, a question on volumes because as you allude to it, it is the commercial retailers which have come back faster, which means that's also the high-priced channel. So could you give some kind of indication on the volume development? You are indexed 60% to 70% on your wholesale franchise, but I guess, there must be a significant gap between volume and value. And then related to this, what -- when do you expect these -- I can, of course, understand that the situation in the U.K. is also bad and also in U.S., but do you have any idea when the stores are opening up in Costco? And then just lastly, on the FDA time line on the cochlear implant that you filed in March, as I recall it. Have you got any kind of indication from FDA if this will take longer due to the corona situation?

Thank you, Martin. You're absolutely correct that with the channel and geographies in play, there is a significant ASP element in the revenue improvement. Very round numbers, we are more like the 50% on the volume. And it is -- the main reason for that is energies in U.K., which is totally that, when it comes to buying hearing aids these days, if they need anything, they pick up a little bit from their Brexit stock. And then export, which is also relatively high volume, lower ASP, that is also still at a very low level. And then also some of the larger channels, as I said, VA, the Costco, larger retailers are ramping up. It has just been a little slower than we have seen on the independent side, but we see most of them coming now. So it is more public. It is more the low price export markets where we are still very uncertain what will happen. We have no real good answer on VA either. So VA energies export remains to be the biggest uncertainty. And FDA time line on CI, no changes. We have actually had the expected questions in mind in coming back. And then there is a scheduled process for that, and it is in the works and happening as we speak. So we seem to be on track with the time line.

Our next question comes from the line of Annette Lykke from Handelsbanken.

And thank you to Demant for the recent updates, and thank you for being as transparent as the situation allows you to be. My first question will be, what kind of assumptions -- I mean, it's my impression that you see a pent-up of demand and also with the potential positive spillover in 2021. And my question is simply, on what assumptions are you working with in respect to second half of the 2020 and potential COVID-19 restrictions, for example, senior citizens? Are you just saying they will be totally normal business? Or do you see maybe some restrictions if we have some COVID-19 second wave? Also, I'd like to see, when you talk about demand, what do you see in respect of a price points also taking recession into considerations? Do you see unchanged patterns? Or do you actually also see some users trading down maybe to the mid-priced segment rather than the high-priced segment? And then on the pent-up in demand you talked about, I understand repairs problems, cleaning and also replacement of existing hearing aids and rescheduling of already made appointments is coming now. But what about first-time users? How big a part -- or how many of those patients are you seeing coming in?

Thank you, Annette. I will try to hit all of them. First of all, 2021 from a planning perspective seems awfully long away. And then there is a huge differences across the various businesses. And we clearly want to...

But you mentioned that you a see a positive effect of pent-up in 2021.

I see the potential for one. I'd say, with -- in the hearing aid side, the hearing aid side, you can definitely imagine that the countries that have gone through this well and where you see a quick recovery, you could have and we do have plan for the option to see it realized partly in this year, but it could also spill into next year. But we will have to see this first. We talk about 3 or 4 weeks. And as I said, it's really difficult to take apart what comes from what. We -- our best insight come from own retail where we, of course, better can track whether it's somebody we have never heard about before that's on the line or whether it's a person we had scheduled for whatever part of the process and now rebooked. We're, of course, still 3 or 4 weeks into a recovery, mainly focusing on pipeline people. So we cannot yet tell whether or not we can generate the necessary new traffic, and that is back to the pent-up demand, whether that will show to be straightforward when we fully fuel marketing or whether we will feel that. Therefore, a number of people, they are still reluctant to engage on acquiring a hearing aid. So that's still open for us, I would say. And yes, of course, we can quickly see things that can change the situation. So we are as prepared as we have been every day during this, that you can wake up any morning and conditions have been changed in the market, and we have to respond to that. We all follow with entirety the reportings from China on Beijing being in renewed cases, but also notice the tremendous urgency and sense of urgency around really coping very fast with situation. You also know we have similar small ones here in Denmark. And our priorities are totally different response than we saw back in February, March, where you try to talk it down to 2 or 3 weeks until you understood how bad it was and then finally did something. So we do work under the assumption that we have to take good precaution. There is still an element of spending a little more time here and there in the process, but I'm sure we'll find ways to optimize also that without running a risk. And then your question on price points, too early to tell. It's really difficult to -- you have to zoom in almost on account level. So again, it's going to be our own retail that can best tell whether there are any movements in product mix. Typically not, but it could be some, if it's a really deep recession in some countries. But globally, I must say, I don't expect it to be significant, but we'll have to see how that plays out as well, which, of course, also is a little bit the chicken and the egg, of course, how is the world economic developing in second half. I think we, at least, in Denmark have gotten also renewed optimism from even the most clever financial economist that believe that maybe it was a little exaggerated the predictions in April, May and to a slight improvement of the outlook. So we'll have to see. And I think with that, I covered most of your questions. Otherwise, Annette, you have to repeat one of them.

No. That is fine. I'll go back in the queue.

Our next question comes from the line of Michael Jungling from Morgan Stanley.

And I have 2 then. Firstly, on the first half EBIT of 2020, you're referring to it being negative. Can you provide some more color? I mean there's only a few weeks to go before the first half ends. Are we talking here about DKK 100 million loss? Or is it going to be a DKK 300 million loss? Some sort of color, please. And then secondly, when it comes to the recovery on -- or the recovery for lead generation, can you comment to what degree you started lead generation? Are we 50% back to normal? Or are you back at 100%? And how long does it normally take for a lead to results in a sale?

Thank you, Michael. We cannot get any closer on the EBIT side. There are still many moving parts in finishing a first half like this. All the calculations on cost of goods sold and provisions and what have you, we have to be very diligent. And with the speed of things changing in June, both sales and costs coming in, we cannot get it any closer at this stage. Yes, we have. If you ask for whether we have started activities to generate leads, yes, we are quite active. We are out very digital but also trying out many different messages to see what works. And again, people are in very different stages. We also try to do some consumer surveys to figure out how the mental stage is among consumers in different countries and what kind of messages people react to or not. So is it effective as it was before? Not fully, but that is where it is really difficult. So -- but then to really zoom in on the lead management on whether it's a totally new name or an existing name. Of course, still, there is a significant overflow of new names -- or existing names because they're booked recent first, but that doesn't mean that we don't start to fill up the pipeline. But we cannot yet tell to what effectiveness level, if that's your question, we are able to create appointments. But looking at the schedules in the mix of existing and new and how that comes out, we have there seen a very quick change in many of our retail countries from basically very little to a very high activity level that give good indications for a further positive development in the recovery. And also, it seems like those that decide to move on, they are more firm in their decision, meaning that we see less cancellations, we see less no show which is at relatively high-level normal business. So we see a positive trend, and that also makes it a little difficult to totally predict. Even if the leads are a little less, they might come out with a better quality, so at the end, a better revenue. And then back to your question on the delay. It is typically between 30 and 60 days country-by-country from -- you have started to flow and booked the first test until you actually see one.

Great. Can I briefly follow-up on the first half EBIT? Do you expect to record a write-off of receivables that is significant?

Yes. So we are continuously assessing the risk on our accounts receivables. And so we are going to look thoroughly on that end of half year. But the size of any potential provision, we would have to assess at that point in time, more based on our expectations towards future defaults rather than what we have seen so far. So therefore, we are not in a position right now to give a detailed guidance on the size of that assessment because it is a forward-looking assessment at a point in time, yes.

And it relates closely to the market recovery, of course. We will see many of the furlough and support schemes roll off, which have definitely benefited the total industry tremendously, also small business owners. If the revenue quickly come up at just 80%, 90% level per store, then people will definitely survive and pay their bills. If at all of a sudden is 60% or 70%, then some will definitely be challenged. And it's that assessment, which is people -- things are very dynamic right now, which is a -- it's a difficult one to do for a further outlook into the remaining of the year where you barely know what the sales is. So a lot of uncertainty, and therefore, we cannot be more precise.

Okay. And may I follow-up on the lead generation question, please? And if I look at the HIA survey, the independents seem to be really struggling. How are they able -- in your mind, able to start lead generation where they're just about surviving, yet having a -- not having a budget that they would normally have to prompt lead generation now? How will that work, you think with the independents?

These -- there are apples that sit high in the tree, and there are apples that sits a little lower on the tree. E-mailing to or the physical mail to your existing database with an upgrade campaign have always been cheaper than -- and actually yielding better. The only problem is you can't do it all the time because then the world dries out. But with a 3 months break, then it is where you start. And that's exactly what we do on the wholesale side. We are extremely active out with very concrete suggestions for reopening marketing and these kind of upgrade campaigns rather than trying to shake between and see if you can get tons of [indiscernible]. So you will see the mixture of leads, just like in our large retail chains from being in the beginning, existing pipeline, people that are ready to move or should be ready to move because there's new reimbursement available for them, or hearing aids have aged, or they are the ideal candidate for an upgrade to a rechargeable mid-priced product, whatever it is. And we try to be very active with our good independent customers in collaborating around the traffic generation.

Our next question comes from the line of Christian Ryom from Nordea.

I have a couple, please. So my first is, when you look at the state of recovery across different markets, can you comment about the differing experience in, say, the Northern European countries and then Southern European countries? And whether you expect that the difference in their current activity level is only a matter of countries having begun reopening sooner and following the same trajectory in recovery? Or do you expect, say, harder-hit countries to follow a structurally different path of recovery than, say, what we've seen in Northern European countries? That's my first question. And my second question is somewhat related, the slide that you have on the staging model. When you talk about approaching normalization, can you give us a little more color about what you actually mean here? Is that markets where the impact of COVID-19 is now indistinguishable on revenues? Are we talking revenues around index 80% or even lower than that? Anything there would be very helpful.

Thank you, Christian. Let me start with the first one. First of all, of course, it is reopening of society. And in the beginning, Denmark was reopening and France was reopening. And in Denmark, you would go to the hairdresser. And in France, you could take your pet out for 2 hours. So of course, what does reopening mean? And structurally, it is important to see where the country actually is for what is allowed for people's behavior. And then secondly, whether it is contained in a few areas in the country, of course, in those areas, it then take a little longer. Or whether there are very significant areas that have just been locked down, but the pandemic never really got there, and therefore, people got -- get back a little quicker. But that being said, then after the time that, that process needs and allows for, the reaction seems to be very similar. What is still -- and I try to get it across here, is impossible, in particular the wholesale side across the space. We have a little bit uncertainty to retail, but we are not all over the place. That is whether this we need to very quick uptake that we have also seen in Italy or Spain. And so once it kind of gets to the point of France, where that is because the 3 months we have not been operating, simply have built up so much immediate demand that you can only get a quick recovery. And whether we will then see, let's say, a slowdown as we move into really having to generate a significant number of new users, where you could have a hypothesis that it sits a little tougher in these years, whether you are feeling it's necessary to go out. Recognizing you need a hearing aid is a long process already. And whether that's 3 weeks longer or 4 weeks longer, I don't think you -- the user will see as dramatic, whereas if you are hearing -- existing user with a growing hearing need, it is urgent to do something. And in between that, people that have a device but maybe for a while, they needed a new one because it doesn't really work. So it is pretty steep uptake also in countries where you would have been skeptical. But on the other hand, you can't really tell whether it's just this pent-up of immediate use. And we only talk about 3 or 4 weeks at a max, if not 2 or 3, in most of these countries. So we'll still have -- need a little more time until we can conclude on that.

Okay. That makes sense. So essentially, just to make sure I understand what you're saying is that -- the sales performance have actually been somewhat similar in pickup. But what you're uncertain about is whether the lead -- the new lead generation is similar between countries that have been affected differently by the pandemic?

In France and Spain, as an example, yes, exactly. And then also channel mix, again, if you take U.S., one thing is the geography where in the countries, of course, New York business is not as good as an area that have never been hit. That is the channel type, back to hospitals, large retail, et cetera, where it just picks up a little bit lower and hospital savings, much lower, and again, implants, much lower. So you also have to take that element in where a pure private commercial type of business. And also, it actually doesn't seem to matter whether it's with reimbursement or not, picks up quite far. And your second question was, what does we mean with approaching normalization? This is when we get into the stone, where it's really difficult to take apart potential market share gains, market recovery, initial hike from repairs and immediate biddings and so on. So you feel you are normal because you're busy. If you talk to the same people, they say it's basic, but you can still be below 100%. You can also be above, but you're not down in the 70s and 80s, then you are still in recovery in our book.

Our next question comes from the line of Veronika Dubajova from Goldman Sachs.

I have 3, please. My first one is just your comments on pent-up demand, and I appreciate you're talking about potential, but I'm a little surprised. My understanding is, for instance, when you look at countries like China so far, and they're tracking a couple of months ahead of rest of the world, there really has not been any pent-up demand. So are you starting to see something else on the ground in places like China that gives you the confidence that we'll see this materialize? Or is this more of a expectation but without any kind of evidence that you see in the market? That would be my first question. My second question is based on the trends that you see. Just curious what your expectations are for the second half. Do you think that you might see positive organic revenue growth in the second half of the year or not? And then my last question is just the negative EBIT comment. Is that inclusive of the bad debt provisions? Or is that an underlying number, and any of the bad debt provisions would come on top of that?

Thank you very much, Veronika. First of all, at least, I don't believe I've said that there's no pent-up demand in China. I think China is a good example of a market where our transparency into whether it is the existing pipeline and, therefore, an element of pent-up demand that's activated, or whether it's true new users, it's nonexisting as we don't run any retail. We don't have market statistics. We can just see that our own business is definitely in good shape. And whether that's because we take share or the market recovers can, to some extent, be difficult to judge. I think we have seen China come back at very good pace and have also shown an indication of pent-up demand coming back. But again, when you have absolutely no market statistics, then that's why I'm a little soft on China. What is actually going on in markets with market statistics, when we add together '19, '20, '21, hopefully, we'll see that we didn't lose much. But you cannot do that on China because we don't have precise data. But the system out there is working, very nice growth. There should also be growth in the market. So it's just impossible to come with any precise guidance on what is pent-up demand and what is what out there. That's a little too dynamic to tell. And then expectation for organic growth in the second half. If we just see, let's say, a complete normalization, then definitely towards the end of the year, half year, we should see organic growth. Do I believe it in the first weeks or months or second half? No. Then we should see any -- a further big acceleration. How the whole second half year come out, very difficult to tell. That is exactly the uncertainty about the balance between pent-up demand and new users coming in and also how these epidemic breakouts impact things. So that we cannot say anything about at this stage. And then the EBIT, that's a summary of everything we are commenting on, including provisions.

Okay. Understood. And if I can just follow-up on China because I think when you said -- sort of the comment you had made in early May was it was running at maybe 75% of normal. I appreciate it's now similar to where it was before. But I guess, I mean, this is precisely my point. In China, you're still only running at last year's run rate not necessarily meaningfully ahead. Or should we interpret your comments as saying, actually, China is now catching up, and we are seeing 120% of normal, and we think that's pent-up demand? I guess that -- I mean that's what I'm trying to understand.

But my point is it's going well, and we are at a high business level. But again, we -- in China, we only own our -- we know our own numbers. And it's really difficult to see it with our customers and be very precise in whether they are doing 110% per store or whether they are doing 95% per store. So the 75% back then was kind of a best judgment for the level of business into stores. We hear, generally speaking, Chinese society have normalized to a large extent, but of course, sensitive to what we see these past days. But whether or not that includes a significant pent-up demand, I think we don't have data points to be very precise on. But we also mix it up with, again, Philips loans and a lot of our stock. So I think we are more basically looking at our own numbers and trying to -- and execute on that in really understanding the underlying market growth because we have never been able to. It's always a big estimate of what is the growth in China as there are no statistics.

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

Thank you very much for taking my question, but they have already been answered. So I'd like to give the space on to someone else.

Our next question in that case comes from the line of Tom Jones from Berenberg.

Cool. I know we're a bit short of time, so I'll just keep it to one question. I just wanted to compare the staging model charts you gave us at the Q1 IMS with the one you provided today. Most countries have moved 1 or 2 blocks to the right, but there are some notable countries outside Brazil and the U.K. So Germany, Japan, couple of the Nordics, for example, which began the recovery but haven't really moved on your chart. Is that just related to local socioeconomical viral factors? Or is there something specific about the hearing aid market in those countries that we need to bear in mind?

Yes. Thank you, Tom. I think the example with Sweden is probably the best example. They never really got deep down, but they are still not fully up. And to some extent, a little bit the same in Germany. So -- and that led back to all this discussion about the pent-up demand, that you have not seen a dramatic day-over-day development like that in Germany. They never lost it all, and therefore, they never jumped up like that. So they are still moving, but the speed of movement is slower. And therefore, maybe last -- may even -- they were to the left of that section, and now they are to the right of that section. But we don't -- we try not to do that detailed description. And there is a big difference in run rate between leaving low activity level and getting into a normalization. There is quite a difference there as well. So mostly like they never got into virtually no activity in Germany, and they are still not fully normalized.

Our next question comes from the line of Niels Leth from Carnegie.

Great. My first question would be, do you expect an immediate boost to volumes when public channels such as VA and NHS reopens due to the waiting list that would be in those channels? And my second question would be, are you seeing any signs of independent clinics narrowing purchases to their primary supplier during this crisis?

Yes, we definitely expect when -- now, yes and no, to your first question. No, VA is not a centralized purchasing department. It is 450 hospitals. So we do foresee that, that will come as the hospitals reopen. But when a given hospital opens, yes, then we foresee that the waiting list is long, and it basically ramps up very quickly when they have found their procedures. We saw Denmark that way. It took 1 or 2 weeks until they found out how to separate waiting rooms and reorganized the way people were called in. But then they were very busy in servicing also their clients waiting outside the door with urgent need. And so a quite steep curve. The NHS could be a bit different. We still don't know whether they will use this to tap into their Brexit stock, however they want, again, will keep that. So that can also be a more -- can be a more brutal ramp up. We try to stay in dialogue with them to avoid that. All of us need to deliver hundreds and thousands of hearing aids, but they can take it in a more gradual ramp-up. Now that we know they have a Brexit stock, maybe we can fill that afterwards, again, if needed. But the actual activity level in individual hospitals come quite steep when it comes on the hearing aid side, basically on CI.

And on my second question, are you seeing any signs of independent clinics narrowing purchases to their primary supplier?

Yes, yes. I guess everybody have a little bit of a loyalty towards whoever they work the closest with during the crisis but very soon, and we are doing that, of course. We have also spent a lot of time in training and discussing with your prospects and so on because they have not been busy with doing business. So it could also come out that you have actually managed to warm up a number of leads that are now ready to take the discussion on whether to change their supplier.

Our next question comes from the line of David Adlington from JPMorgan.

I have questions. Two please. So maybe just a -- if I could ask why you put out this press release today? Obviously, we've got a pretty wide consensus range. I just wondered if today's release was in response to that range and trying to narrow that down as we go into the first half results. And then secondly, just given the operating leverage in the business, I just wondered what sort of sales hit you could take in the second half and still basically get through to breakeven? If sales are down 30% in the first half, let's say, it looks like you were loss-making. Does down 20% take you back into breakeven? Just some sort of gauge there would be helpful.

Why today? Generally speaking, today is just another day, but we had different meetings yesterday where we made a reassessment of our market situations. And we felt that it was a good timing to provide investors and analysts with an update, and it's not much more than that than you could pay a service. There is the -- there's, other than that, another special trigger for why today, except we felt we had a good updated overview of the situation. And maybe, René, you can better comment on that...

Yes, I mean, it's, of course, a super complicated question on what it takes to be exactly on breakeven because it does depend on which types of businesses drive your sales and which channels and so on and so forth. So I think the best sort of assessment that you can make on that is to look at what we have provided updated points here for the first half year in terms of flexibility on the cost of goods sold, how much is fixed, how much is variable and how much is completely variable, and also what kind of potential we have for cost savings when sales are down, having in mind that one might not expect the same level of government support programs for the second half year. So I think those are some of the ballpark figures that you could use for your own analysis and assessment on what it takes to be on a breakeven point.

Okay. Fair enough. And maybe just a follow-up in terms of the reassessment that you went through yesterday. Are you in a more positive, bearing in mind, than you were when you updated the market with the IMS? Or is it -- has the outlook gone a little bit worse?

It's not an outlook. We can only comment on the time that have passed. And I think like when you sit in the darkest point, you are -- you can create very negative scenarios on the link. And the reopening -- and none of us have tried this before. I think it's positive to see, this is a -- I've described it before, it is somewhat of an S-curve. It's definitely steep in the initial phases. What we still don't know is where we'll see a flattening out at 80% or 90% or 100%, or whether we will have 3, 4, 5 months where we'll run above 100% as an index because the pent-up demand is coming quickly. And we have no new feeling for that. But we are, of course, positive to see that, generally speaking, seniors that were in the process, at least, do not seem to be hesitant because the market remains to be with people that have not had any particular contact with us before and where we start from scratch. There, we don't know yet. Simply too early in the recovery phase to tell whether we have too many -- say, no, not yet, but you have to call me back in a month or not interested and so on, whether our sales and marketing activities on the retail side can generate the business level we need.

Our next question comes from the line of Martin Parkhøi from Danske Bank.

Sorry for that. I guess Søren was probably saying that this was the last question, and this is a follow-up question. Just -- Martin Parkhøi on Danske. Just, Søren, that normally, we talk about the industry, there's a lot of glue, and it's relatively difficult to move market shares. But in a situation where we'll see a significant recovery and potentially also significant pent-up demand, do new product launches mean more than it normally we do? Could we actually see a shakeup where we see a significant market share changes during potential pent-up demand?

Thank you, Martin. I think it's always a relative game, whether you are at a low point or high point. And of course, those were the most attractive product program, those that are best in engaging with customers in a good and positive way. In this phase, you can both be too passive and too aggressive. So it is the ones that, of course, master the interaction with the customers the best that will get the biggest piece of the pie. That includes product ranges. It's not all of it, but it does include. Does it only include something you introduce in the future? Or is it just as great with something you introduced in February, March? I think, generally speaking, the width and newness and results that using your products give and drive, and therefore, it will be each customer's assessing who is the right one to work with for me. There's still the glues and much more things than just products in who do I work with. And I think in a time like this, you are even more looking at other aspects of who were there beside me when I was in trouble and stuff like that than just the latest offer. But news is always good for driving activities. I think one more, and then we can finish off. I did actually try to save 2 more in phone.

Our last question comes from the line of Annette Lykke from Handelsbanken.

I'll make it short. Just asking about the appetite for CapEx investments within the diagnostics. Do you see that to also come back to fully normal? Or would you expect that maybe some of the clinics will keep your assistance for longer before they replace and then wait the situation a little bit?

Annette, I heard you talk about -- ask for the diagnostic. Could you please confirm that. So I'm sure I answered the right question, please?

Yes, exactly. Yes. Yes, it was. Yes.

Yes. We definitely expect a normalization and also again, the market being relatively stable. It's a really segmented market where there's a big difference between industrial and schools and dispensers and ENT clinics and hospitals and so on. And as I said, it is mainly in the -- at dispenser area and the schools that we see as things that's largest. But on the other hand, we had a really good fantastic product introduced at EUHA last year. It was called the Affinity Compact in Interacoustics and a number of other good products for that. And I definitely believe once things normalize and people's business recover, the sentiment will still be strong to renew the equipment. And then, of course, there's still a number of markets where it's much more related to expansion in the market and market growth and new outlets being opened. And I see no reason why that shouldn't pick up speed again. But it will take a little longer than on the hearing aid side. How long, it's difficult to predict. But the biggest concern, I would say, the diagnostic business is the distributor export business. We have a bigger proportion of sales coming out of that part of the world on the diagnostic side because so much of it is to non-hearing aid fitting people. And there, we know back to periods, prices and lower oil prices and so on, that there's a strong correlation to general financial stability of the country and situation of the country. And there could be some still, but we'll have to see.

Thank you. And I now hand over to our speakers for any closing comments.

Yes. With that, we will just say thank you very much for listening in. The IR team, as always, is available on the phone, and René and myself also as well. We have a number of activities in the field in the coming periods, so we will see. I'm sure we'll interact over time. Thank you very much for today, and thank you for listening.