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

Good afternoon, everyone, and welcome to our conference call hosted in connection with the announcement this morning of the divestment of our Hearing Implants business. In just a minute, we'll take you through a brief presentation, and I think you should be able to view the slides directly in the webcast or download from our website. After this presentation, we'll open up for a Q&A session. [Operator Instructions] We intend for the call to last around 30 minutes in total. And I kindly ask you to respect that the focus of the call is the announced transaction, whereas we will refrain from commenting -- just given that we're so close to the scheduled release of the interim management statement on Tuesday next week. We have 4 Demant representatives on the call. We're not all in the same location, but it should work. So we have President and CEO, Søren Nielsen; Chief Financial Officer, René Schneider; and then the IR team, Peter Pudselykke; and myself, Mathias Holten Møller. I'm now happy to hand it over to you, Søren.

Thank you very much, Mathias, and welcome, everybody. You can move to the next slide. Yes. I'm sitting here in [ Nice ] where I spent the day today being part of announcing in more details or going through more details of what we announced this morning, which is that Demant intends to divest its Hearing Implants business while ensuring lifelong support for existing patients. And it is important to understand that we have evaluated our situation, and we have come to the conclusion that not without disproportional levels of investment and very significant duration in time, it would be possible to achieve the decisions to say it would be unrealistic within reasonable time and reasonable investments. And therefore, we have decided to withdraw from the business. But as the business hold significant commitment to existing niches, then we have pursued and entered into a potential acquisition agreement with Cochlear to take over the business. So the entire Hearing Implants business of Demant is expected to be divested to Cochlear Limited, and it comprised both of the CI and the bone-anchored product categories. Cochlear is, I'm sure you know, is a global leader, and they hold the capabilities and competencies that it takes to serve existing patients of Oticon Medical now and in the future, including building future products and processes that can also work with the installed base of implants, which has been key in the decision to pursue an agreement with Cochlear. The total enterprise value is DKK 850 million on cash and debt-free basis. Next slide, please. And we have delivered a lot since we established the company in 2007 within the bone anchored product area. We sold the first products in '09 and both within the bone field for conductive hearing loss as well as cochlear implant for severe hearing losses. We had our AirPods added, significant innovation, new products, et cetera. But again, looking ahead, we buckle up both across R&D, regulatory requirements as well as the expected support. And therefore, again, not without the disproportionate long time or disproportionate investment, we could see ourselves becoming the leading -- global leader, which has always been the ambition of ours. Next slide, please. And meaning we then, if you look at Demant after such a transaction, we remain fully committed to our existing strategy. We continue to grow and expand in hearing health care, where we have a very strong position across hearing aids, hearing care and diagnostic. And we also pursue to continue to grow our communication business where we see a very strong potential and attractive fundamental for the business. And in line with our mid- to long-term outlook, we will invest both organically and acquisitive in these now 4 business areas. The share of the business pro forma on 2021 would be 41% hearing aids, 42% in hearing care; 10% in diagnostic; and 7% in communication. And from this point on, René Schneider, he will take you through more of the details of the transaction and the -- how to handle it financially in our accounts, et cetera. So over to you, René.

Thank you. Next slide, please. So on the transaction details, repeating here that the total enterprise value of DKK 850 million is to be paid in cash, of which DKK 700 million is to be paid at closing, whereas DKK 150 million will be paid within 18 months after closing. And they will add to the group's cash reserve and also equal lower net interest-bearing debt. In terms of closing, the transaction is expected to close in second half of 2022 and is subject to regulatory approvals and other customary closing conditions. We will also, prior to closing, do customer consultation with relevant workers' council. Next slide, please. On the financial impact of this transaction. So as a consequence of this decision, going forward, Hearing Implants will be recognized in our accounts as discontinued operations, meaning that Hearing Implants will neither be included in the group's EBIT nor in the group's outlook for continuing operations. Below on the left-hand side, you will see what that would mean. For example, our profit and loss in 2021, where you would see the group figures and then you will see the impact from Hearing Implants being DKK 512 million in sales and an operating loss of DKK 117 million. And there, you also see what the group would have looked like excluding the Hearing Implants, thus increasing EBIT by DKK 117 million pro forma in 2021. So the impact for 2022 is summarized on the right-hand side. As we also expected a loss in 2022, the impact of considering implants as discontinued operations would lift our operating profit EBIT by DKK 150 million, meaning that the previous EBIT guidance of DKK 3.45 billion to DKK 3.75 billion. To that, we add DKK 150 million. Thus, the implied range is now DKK 3.6 billion to DKK 3.9 billion. We will then below EBIT have aligned with operating profit after tax of discontinued operations. We estimate that line to be negative in the range of DKK 150 million to DKK 200 million. And that line mostly reflects the previous operating loss in Hearing Implants but also one-off items related to the transaction, meaning fair value adjustment of assets and liabilities as well as transaction costs. Important to highlight here also is that there are no changes to the group's medium or long-term outlook as a consequence of this transaction. So with this, I think we will move forward to the next slide and Q&A.

[Operator Instructions] The first question comes from the line of Veronika Dubajova from Goldman Sachs.

Excellent. Hope you can hear me okay. I have 3 quick questions. One, just wanted to understand your expectations for antitrust. I appreciate it's not an issue with CI, but obviously, in BAHA between you and Cochlear, my understanding is you have quite substantial market share. So just curious what you think whether there are going to be any restrictions or risks around the antitrust process. And how much work have you done on that ahead of that? My second question is on the liability that you'll carry for any future litigation and potential expectations. Just maybe give us a sense for how large you think this could be and whether we should expect a provision that stays on the balance sheet for that. And my last question is the cash that you will receive. Should we anticipate that this drives a higher than previously guided buyback for this year or for now just sits on the balance sheet until you decide whether to deploy differently?

I think René that you'll take all 3?

Yes, I will. So I will just start on the back, Veronika, good to hear from you. So no, this has no indication from -- for our share buyback program. So this, of course, is a net positive to our cash position. But as you are well aware, we are also an acquisitive company. So we think this is within just the overall same management of cash. On the liability side, we still hold the liability for the product recall in CI, but it is important to note that there are no registered even, say, claims in that regard at all and thus also no provisions in that regard. In terms of antitrust, it's important to note that we are considering this transaction in the light of the full implant space, meaning that this is not a matter of a bone anchored and CI transaction. This is a transaction that encompass the entire implant business and should be seen in that light. We have made a diligent effort prior to the announcement, the transaction, of course, and it is our good assessment that this will be approved.

And the next question comes from the line of Martin Parkhøi from SEB.

Martin Parkhøi from SEB. I have 2 questions. Firstly, Søren, when you bought Neurelec many years ago, one of the reason was that you you're trying to diversify your business better being a true hearing health care provider. And now you're, of course, expanding this, which means that your diversification plan is a little bit different now. Can you say -- is one reason are you seeing a stronger hearing aid market or are you stronger position within hearing care now than you saw 9 years ago, so you don't need the same kind of diversification? Or are you looking for other areas now to look at to diversify your business? And then second question, now you're not competing with Cochlear. Does this open up for you to do some kind of strategic collaboration in other areas of your business with Cochlear?

Thank you very much, Martin. I can at least say that, on one hand, this is not because the situation is different between 10 years ago and now on the other businesses. But it is, of course, also true that we have developed very positively in the hearing aids and hearing care in that period and stayed strong there and plenty of growth opportunities. Had the situation around our current position in hearing implants been different, then we would have pursued -- continued to pursue it. But with the point of where we are today, again, the assessment is that I find it within reasonable investments and reasonable time unrealistic to achieve our goal, and that's the driver. But yes, I'm happy that we have a very strong position in diagnostic, in hearing aids, in hearing care and a solid opportunity on the communications side, so plenty of things to do for the group that all have very strong cost perspective. And on your second one, Martin, the future is, of course, different. If you're one day no longer competitors, we still are, until this transaction comes through. But on the other side, of course, you could imagine various kinds of collaborations. We are also a strong player in hearing aids for hearing losses and many have [ regions ] and so on. And yes, there's good reasons why you could look at opportunities. But there's no current plans, and we are not -- we are still competitors. So that's probably future synergies.

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

A question on the kind of strategic focus in the Demant Group. So would you say that last year's divestment of FrontRow and this year's divestment of the Hearing Implants division is a new strategic direction for Demant, focusing more on margins and return on invested capital compared with what we have seen historically?

Thank you, Niels. I will not call it a new strategic direction, but I would say it's become even more apparent, especially on the hearing health care side, that the difference in the business's profitability and success rate does definitely come with scale and the position as it has always had. And again, when we today have -- when we now have come to the conclusion to do what we do on the implant side, it is driven by, again, that, if at all possible, it will take too long and too many investments. And that effort and focus and attention and investments that can definitely give a better return on investment in other parts of business that I'm also convinced of. So we still take good care of all the businesses we are in, it takes what it takes. But there's no doubt, when you look at Demant without implants, the profile is different.

But would -- or should we expect the Demant Group to commit more firmly to higher margins in the future, say, through long-term EBIT margin targets or other medium-term financial targets that would point in the direction of higher profitability?

I think we stick to what we have just guided on the more soft guidance we have just given on our Capital Market Day on that, and there are no changes to that. But again, I think the group is with 4 businesses well positioned in each of the businesses to grow the margin. And therefore, unless the entire business mix change dramatically, yes, there's also both change of focus on growing the margin of the business.

Great. And then just lastly, can you comment about whether you have been doing kind of an open bid process for this business? Or has it been an exclusive process with Cochlear from the beginning?

I cannot comment on the details, but I can repeat that what has been very important for us is to make sure we found a partner that we're willing to commit to the obligation for many years servicing the installed base. It is very important for Demant that once we have given a promise to users and a commitment to lifelong treatment that, that actually becomes a reality. And that has been important in the evaluation of various options.

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

I have one question. You are giving us an indication on the margin impact for 2021, but 2021 was obviously a bit of an odd year if we think about still some costs savings and then the impact from the product recall in the implant business. Could you maybe give us a rough indication what it was prior to the more turbulent times at Demant? So more like '17, '16. I guess it must be probably less than 100 basis points. I'd just like to confirm that.

Yes, Maja. No, so I think we have consistently said in at least recent years that the negative margin impact on Demant on a group level is around 100 basis points. So similar or slightly lower than what we have seen in '21, but not far from. And that's all we can say in that range, the implied effect for this year.

And the next question comes from the line of Oliver Metzger from ODDO BHF.

Okay. Three questions from my side. The first one is about the deal. So the divestment of cochlear implants alone, was it also an alternative for you just because I'm thinking that the bone-anchored side has, at least from a distribution perspective, a much closer overlap to audiologists than your hospital-driven cochlear implant business? Second question is when did your internal process about the divestment start? Was it after your voluntary recall, which acts as a kind of wake-up call that medical devices are more complex than hearing aids? Or when did you start with the [ relation ]? The last question is more a big-picture question. So the hearing aid market has evolved. The implant market has also evolved over years. So if you look on the cochlear implant market compared to 2013 as you acquired Neurelec, did you see any fundamental changes which make the hearing aid market to be more attractive or on the other side, which makes the cochlear implant market to appear less attractive from a relative perspective?

Thank you, Oliver. We consider implant business, a total business. And I know there are little more distinct treatment areas depending on whether it's a conductive hearing loss or it is a profound and severely profound hearing loss. But there is also an element of conversion going on where there is a lot of effort into more implementation on the bone-anchored side as well. So we see this as one business. It is the entire business that we have evaluated, and we have not considered looking at it as 2 individual businesses. And when does an evaluation, you always look at your businesses and the outlook and what you believe in. But there is, of course, no doubt that with first COVID and then the volunteer corrected action, we lost time. So the conclusion is relatively new. The evaluation, as such, you always do as much operating new business. But the conclusion that it was the right thing for us to discontinue our total implant business is relative. It is a new conclusion. And then a change in implant hearing aid since 2013, no meaningful and significant differences in the balance between the 2. I think both sectors, the bar goes up mostly because of technology, but definitely also on the CI side, what it takes on the customer, the support side because many of the customers have limited resources for all the aftercare. No doubt that the diversity of the business has significantly grown, the implant business, since then. But fundamentals are basically the same growth perspective, is the same global business and so on so -- so fundamentally, it's the same.

Thank you. As there are no further questions at this time, I will hand the word back to the speakers for any closing remarks.

Yes. Thanks for that. That was it for today. So thanks very much all for participating, and we look forward to speaking with you again next week. So have a good day. Bye-bye.