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

Good afternoon, everyone, and welcome to our conference call held in connection with our interim management statement, covering the period Q1 '22, which we released this morning. This is obviously the first time we report quarterly revenue and growth rates. So I hope you found that useful. We'll run through our slides, which are available on our website, and then we'll turn to Q&A afterwards. As usual, we plan for this call to last no more than 1 hour, including the Q&A session. We are the usual 4 Demant representatives today. So President and CEO, Søren Nielsen; CFO, René Schneider; the IR team, Peter Pudselykke; and myself, Mathias Møller. I'll now hand it over to you, Søren.

Thank you very much, Mathias, and welcome, everybody. We'll head straight into it. I'll go through key financial takeaways, talk a bit more about Hearing Healthcare business, Communications business, our discontinued operation, meaning our implant and then iterate a little bit on the outlook for 2022, and then we'll open up for questions and answers. If we look at the first quarter this year, I think one could say we are off to a good start. Overall group growth is 9%, of which 6% is organic, and that is driven primarily by the Hearing Healthcare business and in that, the Hearing Aids at wholesale level that continue to gain share and deliver 9% organic growth as well as Diagnostic that deliver an impressive 19%. Hearing Care, 2% organic growth, 5% in acquisition. And then as expected, a headwind in Communications, 25%, which mainly relates to a very high comp in Q1 last year, basically the last of the COVID intensive years -- quarters. And therefore, in line with expectations, we will see another picture going forward from this point. Gross margin and OpEx are developing in line with expectations, slightly higher cost of goods sold, driven by freight costs due to COVID and all these things, nothing new. And OpEx normalization that have continued. And therefore, growth over period last year, but nicely in line with how things came in from second half last year. Despite of negative impact from our hold of sales to Russia. EBIT in Q1 was in line with expectations. The outlook remains unchanged also despite of the expected impact -- full year impact of DKK 100 million, related to the holding sales in Russia as well as the provisions we have made for expected losses on receivables. Key events in '21 -- first quarter '22, sorry. To highlight is that we still are part of a dynamic world with significant differences, regional differences related to corona. Generally speaking, we see continued nice recovery and some release of pent-up demand, most predominantly in Europe. And then we -- in the other end of the scale, see Asia, particularly China, still lagging and in particular, China being in lockdown situations in some of the regions. Sales to Russia, Belarus, et cetera, is currently halted. It's less than 1% of sales, but we have little cost savings that can be done. And therefore, you could say the incremental loss of sales has a significant impact on the EBIT. But again, we have been able to cover up for that by other areas exceeding expectations, also some coming from currencies. We announced the 20% acquisition of ShengWang, the leading network with around 500 clinics in China. We still expect the transaction to complete before the end of first half '22. And then we also, last week, as I'm sure you're all aware, announced our strategic decision to leave the Hearing Implant business area. And as part of that, to ensure lifelong support for patients have chosen to divest the business to Cochlear. And therefore, the business area is now classified as discontinued operation. If we go into Hearing Healthcare, starting off with the hearing aid market, a very solid development of the Hearing Aid market here in first quarter. With the statistics we have available and our own estimations, we see Europe growing 20% above Q1 last year, which is strong. It is the NHS that is coming back, but it's also a number of other European markets, U.K., France, Germany, but also in South Italy, Spain, that are developing nicely and also solid growth in North America. However, they are primarily driven by VA coming back. So government channels delivers the strongest recovery but are still below, you could say, pre-pandemic levels. So in reality, have not started coming back on pent-up demand. Rest of the world continues to be affected by coronavirus, especially as I said earlier, in China, we don't have statistics for that, but in particular, in the Shanghai region, where the lockdown has now been for more than 1.5 months, it, of course, has a severe impact on the market, just as we saw in Europe, you cannot even get out to get hearing support, and therefore, it is significant. So compared to '19, growth in Q1 was 12% and then slightly above expectations of normal growth rates and growth was negatively impacted by a slow start to the year. Hearing Aids' very strong performance, market share gains driven by our continued expansion of our product portfolio based on same core technology as we have seen in Oticon More -- or seen in Oticon More and Philips HearLink et cetera. Our other products in Europe, very good performance in many markets, of course, especially the strong growth coming from NHS that comes from a very low level. And then France also delivered good growth in Q1. On the wholesale side, we see a continued strong market and also above our expectations for the first quarter. However, still remember that most of the effect last year was some in March and then a lot coming as well in April and May. North America increased in VA market share, which is back to the introduction of Oticon More back in May last year. Good performance in North America with large [ change ]. That's primarily in the Philips brand. And then strong growth in emerging markets, and that's a lot of, you could say, catch up as well, demand that has been held back that we now see being required. Growth in Pacific and Japan, slow in the first quarter. And again towards the end of the quarter, very slow in China, negatively impacted by COVID. And then to the right, you can see the overview highlight is sales to external customers. We have always a bit of a fluctuations in the internal sales related to timing of invoicing and so on. So the 14% external customer is clearly expressing taking share. And then you can see the quarterly development and how we have developed the business significantly since first quarter 2020, where the corona effect was marginal. Hearing Care, growth in France was less negative than anticipated in Q1, so strong performance. Strong contribution from acquisitions in a number of countries, but especially U.S. and Canada. Slightly negative impact from coronavirus in some markets, especially towards the beginning of the quarter where we saw cancellations and also had staffing issues in the clinic. It seems far away now for European businesses, but that was how it was. And so we see strong performance in Spain, Poland, a number of other European countries, also U.K. We see slightly negative organic growth in Q1 in North America. That is both due to the start to the quarter with COVID, but also some headwind from our strategic decision to reduce the number of managed care instruments that we fit. Some of these ends up being other brands and the fitting fee we get is too low that this business is an all basically attractive and profitable for us. And therefore, it's also important to stress that despite of this negative organic growth, we have maintained the profitability in the business. And therefore, you could say we wash out less attractive business. And we, of course, focus on growing from this point on. Financials, again, you can see the growth in the business also over time here and see the profound impact in especially first half '20 on corona. Diagnostics continued to perform very strong, very strong organic growth, continuous market share gains significantly above the estimated structural growth rates of 3% to 5%. We have above growth in many markets and particularly in the field of hearing aid fitting and balance testing. And we see very strong performance in U.S. that is the biggest contributor to [ overall ] growth. Our intake remains strong. And at the end of first quarter, we have still a very strong order book. And again, to the right, you can see the development over time, very steady and solid development and impressive recovery also after COVID. And then in Communication, our EPOS business negative organic growth in Q1 due to very high comparison figures, Q1 '21 was the last big COVID month or quarter. So it was negative. It was negative 25% organically, which is in line with what we expected. And maybe most clearly, you can see that if you look back in time, Q1 2020 was DKK 219 million, and now we are approaching DKK 300 million. So we're underlying seeing a nice development in the business. We have in the [ period ] this year had issues on our Gaming business, where we have had some supply chain challenges related to production in China as well as getting necessary chipsets for production. The Enterprise Solutions business have seen solid performance and deliver according to plans. So there is, we believe, a situation in supply chain around this type of relatively generic electronic consumer goods, still shortage of critical components, such as Bluetooth chipsets, et cetera, that could prevent that we reached the estimated structure level of 12%. What it exactly is, then we don't know, there is not [ good ] statistics, but our estimate is that we will be below that this year, but time will show how it develops for the rest of the year. And then to discontinued operation, Hearing Implants, we announced Wednesday last week that we have decided step out of Hearing Implants and therefore, decided to divest the business to Cochlear. And the total enterprise value is DKK 850 million, some will be paid in cash at closing and the rest over time as the following details come in place. It is very important that we can ensure lifelong support for patients, and we assure that Cochlear can lift this. The transaction is expected to close in second half subject to regulatory approvals, et cetera. And then to the right, you can see the effect of taking it out of the group P&L. If this was for '21, just for comparison figures, we would have taken out DKK 512 million on the top line and added in as it was a loss-making company, DKK 117 million to the EBIT. So the EBIT margin instead of 18.4% would have been 19.6%. And then outlook very shortly. Outlook assumptions, a lot is unchanged. And therefore, we have highlighted the changes in bold. And following the positive momentum here in first quarter. The French hearing aid market could develop more favorably than we anticipated for the full year. However, we have only seen the first quarter, meaning only March as January, February was low last year, then there is, of course, growth coming there from. And therefore, I would say we are much better in estimating this once we have completed the full first half year. On the headset side, as I just said, we think the current supply chain situation could impact the market growth simply because nobody will be able to fully deliver what customers want. We have seen some on Gaming. It could be other parts of the businesses in the future, but so far related to Gaming in enterprise. It has not had a material impact and then the divestment of implants expected to close in end of '22. And the outlook for the group, the only changes here is we expect now that FX currencies will have a slightly bigger effect other than that. And then, of course, the natural following EBIT outlook as implants is not in, we estimate a -- we had a DKK 150 million in and therefore, simply just add that in, we end at DKK 3.6 billion to DKK 3.9 billion as communicated last week. And that is that. I think that's it. [indiscernible] for questions.

[Operator Instructions] Our first question comes from the line of Martin Parkhøi of SEB.

Now didn't put a limitation on how many questions you can ask so I have four. First of all, with respect to France, Søren, maybe you can discuss a little bit. Because I can understand that the market growth in the first quarter has been a positive where your business has been slightly declining. Can you just elaborate a bit on the deviation? Is it due to the comparison or what is it? Then on the Diagnostics slide, so 19% organic growth in first quarter is fantastic. It was Q1 last year a relatively easy comp or should we expect a double-digit growth rate throughout the year? And then a [ furthermore ] strategic question also about [ usan ]. It seems like you're removing loss-making business, managed care implants, other businesses with low-hanging fruits, where you can add to your earnings by [indiscernible] way that you would like to highlight? And then finally, maybe for René, the DKK 100 million in negative impact then you are guiding from Russia and Ukraine. And some of that will -- let's assume that you will never get back in these 2 countries. Should I then assume that it's only the provisions for the trade receivables, a loss on trade [ receivables ] that will be recurring costs, which will not be recurring. And then the other one, I should just remove for forecast.

Yes, Martin, thank you very much. I'll elaborate on France. Yes, it's correct. We have seen growth above our expectations. And I think what you see is when things really boomed last year. Of course, those that already have stores, they gained the most and we saw a very significant step-up in our own business. And I would say, way above market growth rates. And then during the past 12 months, a lot more outlets have opened not the least within opticians and so on. So I think it's a fair hypothesis that the growth has just been stronger outside of our established network. We still have a very busy business down there. And therefore, also less negative than anticipated. On the wholesale side, we still deliver a very nice growth. So when you talk about our business, I assume you mean our retail business. That is the main explanation. We are still seeing. It's quite amazing France first quarter that's bigger than Germany. And Germany is much bigger than France, and there's also free hearing aids in Germany. So we still expect that we'll see a normalization of some kind coming in front of us. But there is, of course, here when the changes there also quite a lot of advertisement and that is less and learned from all markets. The more different outlets that do advertisement, the more traffic you drive in the market. And therefore, you still tap into this, you would say, pent-up demand from people that for years have refrained from getting hearing healthcare support or hearing help. Diagnostic, it is impressive. No, we cannot guarantee. We can continue to do around 20% growth. It would be very nice. It is not the comparison figures that drives it, it is a continued solid market share gain. We clearly see that. So it is still because we gain share. And then no, we are not in some spring cleaning here. It is a very careful strategic considerations business by businesses. And yes, you highlighted too, it is really the long-term assessment on the medical that our assessment of the chance of succeeding was too low. And therefore, rather step out early than a long painful -- continued long painful journey. And on the managed care, that is a very dynamic element. I think what I would like to stress is don't see this as the structural change in the market. This is much more. Because currently, some holds more contracts than others and funnel it through a certain brand of hearing aids. And for us to sit and fit competitive hearing aids for a very low fitting fee simply doesn't make financial sense and that's why we push back a bit and say no to being a, you would say, a sub-supplier to a number of contracts. And that cost a bit on the top line, yes, but there is no effect basically on the profitability on the contrary. So it is a focus of making sure our energy is used where there is the best return. And I can take the Russia question, no problem, Martin. Yes, you said it right. You should only deduct going forward, assuming it continues forever the element related to the ongoing business and not the provisions. That is a one-off and it's as [indiscernible] then it's also the last one unless we start selling again.

[Operator Instructions] Our next question comes from the line of Maja Pataki of Kepler Chevreux.

My first question is about the momentum in Diagnostics. Do you have any visibility on what was driving this outstanding growth? I mean, of course, you have been gaining market share, but as you pointed out in your press release, the market has been growing above the 3% to 5% structural growth. Do you have any idea why that was? Or has it been just underfunding for 2 years and now there's a catch-up momentum? That's my first question. And then I was wondering if you could give us some indication on the momentum in France in April. Have you started to see a slowdown? Or is the market still trending above last year?

Thank you very much, Maja. On Diagnostic, there is an element from 2020 also pent-up demand. No doubt about that. That gives the better than normal market growth. But we are still seeing a very big difference between our growth and the assumed market growth. So it is here again. But it is, of course, also, you could say, the diversity of the business that we keep on investing in -- so we do a bigger and bigger share of selling disposables, doing service calibration, and that's also part of the growth journey. So it is moving into balance that keeps on growing, where we have, over the years, invested a lot in growing the market. This is, in many countries, still very underdeveloped health care and infrastructure to deal with balance issues. So it is a little bit all of the above, that really comes fantastic into play. And on France, no, we cannot say anything on April. We have -- there is a certain lag on market statistics, so we cannot say anything yet.

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

I have 2, please. My first one is just on the U.S. dynamic. I appreciate the sort of strategic decision to [ wide ] down some of the managed care contracts, but just trying to understand the kind of magnitude of this? And maybe if you can comment, if you stripped out managed care, what would the retail performance have been? I'm struck by the fact that the market was incredibly strong actually in Q1 both on the VA and I mean, which is less relevant for the retail business, but also on the commercial side. So we've seen some pretty impressive growth from Amplifon. So just kind of trying to understand underlying what's the performance in the retail business? And are there any particular factors that would explain the relative soft start to the year that you think will improve as we move through the rest of the year? And then my second question is just sort of [ what ] probably on the competitive dynamics and your desire to refresh the pipeline or the product portfolio. I guess, you're still seeing pretty good momentum, but we are now starting to see incremental product launches from [ WSA ] and Sonova. So just curious, Søren, if you look into April and remainder of the year, how strongly you feel about your ability to win market share on the wholesale side of the business?

Yes. Thank you very much, Veronika. And it is a detailed answer to U.S. First of all, we also do acquisitions and therefore, continue to expand our business and are focusing a lot on the profitability of the business, you could say, short term rather than the organic growth. So that is why -- and managed care is and has become a big part of the business, it's important that you run it in a profitable way. So that is it. The remaining business have developed nicely underneath. We are [ basing ] in our clinics. There was a bumpy start to the quarter, no doubt. And if we compare with some of our competitors that fundamentally is a franchise set up, meaning that the organic growth is selling into it if this channel or is this set up, also do acquisitions out in the front line like we do, then it will for Amplifon specifically count as organic growth. So I think in all fairness, you need to look both organic and acquisitive. For us to gain share, you need to open more stores, you need to have more outlets. So that's what we are focused on in U.S. And again, the underlying business is developing nicely. Then competitive dynamics. Yes, of course, we see a product introduction from competition. We feel comfortable that we have the ammunition we need to drive growth in our hearing aid business. The biggest uncertainty relates to, of course, the loss we have now taken in Russia and also, I would say, there's still a soft development in Asia. And also when we compare and maybe back to the retail question, the U.S. market development compared to Europe and the whole issue of pent-up demand. I'm not as impressed by the U.S. market development of 6% in the commercial side, as I am of the European 20% growth. That's really solid. So I'm maybe not as positive about the U.S. market development, as I heard you indicate.

Understood. Understood. And can I just ask a quick clarification on the wholesale revenue growth, can you quantify what was the tailwind from the NHS?

No. But it's not -- let me put it this way. It's not the dominating factor in what we are really seeing good momentum across most markets that we operate in. The biggest drag on top of Russia is the situation in China, which I would like to highlight for our wholesale business, we operate out of Shanghai. So we basically have had our office closed for 1.5 months and we have to do a number of tricks or efforts to try to and all get goods out to customers, but it is the biggest COVID impact in single country we have seen so far. So it is for us a very impacted situation. So all in all, the rest are doing well and doing well because we are growing in almost all markets and channels.

Next question comes from the line of [ Christian Reham ] of Danske Bank.

This is [ Christian ] from Danske Bank. A couple of questions from me. So first is to sort of the overall impact on hearing care markets from these sort of declining consumer confidence rates that we've seen, whether you've seen that translate in also to weaker demand in the U.S. and in Europe in particular? And then my second question is to the guidance for the Communications business. As I read your announcement today, you've downgraded the top line guidance, but the guidance for the EBIT performance of the Communications business is still -- the wording is still unchanged. Is that a matter of -- you're intending to cut back investments in Communications? Or is it simply a matter of, say, a fairly broadly defined EBIT guidance for Communications?

Thank you, Christian. No, we don't see uncertainty and inflation and so on, convert into the hearing aid market, broadly speaking. There is -- and most countries have some kind of support, including U.S. looking at managed care. And therefore, it's not just out of target spend that could make people hold back. So it's relatively stable. When we see growth rates vary as much as they do here in first quarter, there is, of course, a dynamic in the world. There is, again, Europe in front, U.S. in the middle and Asia Pacific behind. And you never know exactly what is what effect. But no, I don't see any translation into demand for hearing aids across the world back to weakening consumer confidence in the future. That's -- and typically never seen. On Communication and guidance, I think we are -- let's put it a little soft on the top line, mainly due to the supply chain challenges that we just can see are still there. It is a small part of the smallest business we have. And therefore, the EBIT translation, we have to be a little careful with, we don't do [indiscernible]. So we just don't think we can give anything better than what we have already done. I think it's within the uncertainty that we described from the beginning.

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

Oliver Metzger speaking. On Diagnostics, you have commented about your performance in the past of higher value than volume growth. So you are now the strong global #1 and some competitors have not really done their homework. So could you comment about the further potential of market and also of yourself. At which level do you see some [ glute ] for technological upgrades, which would mean that value and volume growth becomes more aligned. Second question on the hearing aid market. So you commented already on stronger growth of governmental channels. At the full year results, you said it's -- there might be some higher potential pent-up demand. So my question is to which extent has this strong development in the first quarter already eaten up some of the pent-up demand in your view?

Thank you very much, Oliver. I think on Diagnostic volume versus value. I think the value component is more coming historically from, you could say, forward-going service calibration, disposable and not units. And that's still part of the 19% growth that the share of, let's say, non-instrument revenue is growing more than the instrument revenue. Technology is still a reason for the driver here when we speak about growing nicely in the fitting area, that is an example of a major launch now soon 2 years ago of what's called Affinity Compact which is seen as highly attractive and leads to upgrades. So the effect you talk about is there, that is why things grow. It's also the case in the balance business where you could say, a value come from the type of equipment for the treatment being quite expensive. So yes, it's better to sell a rotary chair for treatment of balance issues than it is to sell a screening audiometer in the other end of the scale. And this way, you have right. Other than that, it's not that it's flat for a long time. And then all of a sudden, there's innovation that then drive value upgrades. I think that's a very continuous effort. On the hearing aid market, I think what we kind of softer guided for when we spoke to our outlook was roughly speaking, that 10% of pent-up demand would come into 2022. And it's always difficult to take it a little bit apart. Now we blend China in lock-down with some pent-up demand in U.S. But still, if you look, for instance, at VA and NHS, they're still just approaching past history run rate. So they are theoretically not yet releasing pent-up demand. So the 10%, I think, is still a good estimate for the year. We have seen some of it. Had we seen more than anticipated? No, not at all. So I think this follows our expectations.

And we have one further question. [Operator Instructions] And that next person is Daniel Jelovcan of Mirabaud.

The first question is -- maybe still [indiscernible] question, but is volume-based procurement in China, is that the topic for the hearing aid industry or an upcoming topic on the agenda, like in other medical devices, dentals, heart valves and so on? And the second question, you mentioned that some emerging markets have done very well, which were the most important emerging markets in your business, which did very well? That are the 2 questions.

Yes. Thank you very much. No, we are not affected by volume-based procurement in China. This is primarily a private business hearing aid. So no great exposure to that. Emerging markets, I cannot actually pull out some. We have Latin America, South America, northern part of Africa is probably the biggest, yes. Obviously, not Russia. So I think it's.

And we've had one further question [indiscernible], that's from Veronika Dubajova at Goldman Sachs.

Just a quick, quick follow-up on China, if I may. One, can you just remind us what your exposure to China is in the business as it stands today? And what you are seeing given the walk down kind of a mark-to-market either in March or April, where you'd say the market, or your own business was in China? And then just as a follow-on to that, I guess, the acquisition that you have where you expect to make more progress as we move through the first half of the year. I know you've not given us a ton of information on the financial performance here. But I'm just kind of curious if you could give us a little bit of flavor, especially with the current backdrop on how we should be thinking about the impact of that transaction on EBIT?

Yes. Thank you very much, Veronika. It is 2% to 3% of group revenue coming from China. And yes, short-term impact is quite profound. But we expect a recovery soon. We start to hear indications that Shanghai will open up again. And the reason for us being as hard hit is, as I said, our headquarters there. So even if you would still see local lockdowns around in the country, our business will not suffer to the same way going forward. And on the acquisition, there are some practical things about completing a transaction in a city full of lockdown from getting the right stamps on the papers, et cetera, that we work with. But it will, assumably complete as scheduled here in the first half. It's obvious the business is also affected by local lockdowns, but this is a long run. So short-term yes, it could have a slightly negative EBIT impact. But let's see when we get there, we'll share information.

Thank you. As there are no further questions in the queue at this time, I'll hand the floor back to our speakers.

Thank you very much. Yes, Mathias?

Yes, thanks for that. That's all we had then and all you had apparently. So thanks very much for participating and please reach out if you have any further questions. So we have a number of roadshows lined up the rest of the week and next week. So we look forward to seeing you on the road. Have a good day. Bye-bye.