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

Good afternoon, and welcome to our conference call today as we released our Q3 Interim Management Statement after market closed last evening. It is a business as usual with the call, and we plan to run through a presentation, and then we'll proceed to Q&A. On a practical note, we should have the presentation uploaded to our website. And as usual, we plan for the call to last no more than one hour and that includes the Q&A session. In the room today, it's the usual Demant representatives. So we have Søren Nielsen, our President and CEO; René Schneider, our CFO; and then [ Gustavo ] and myself, Peter Pudselykke from the IR team. That's it for the practical stuff. Over to you, Søren.

Thank you very much, Peter, and welcome, everybody, and welcome to the call here today. We have an agenda where we'll first take you through key events and financial takeaways. I'm sure you've already familiarized yourself with them. I will speak you through the 3 business areas, reiterate on the outlook, which is unchanged. So also there, an element of repetition, and then we'll get to the Q&A. Key events in Q3, highlight Hearing Care performance, very strong performance with significant organic growth, also outperforming market. And I would also say compared to peers. And in addition, still significant acquisitive growth as well. So very well done. We have 2 external customers, a slightly negative growth in the hearing aids, partly due to strong comparison figures, but also reflecting an increased competitive environment and a soft market in the third quarter in the lower end, if not a little bit upside the normal 4% to 6%. And then, as earlier highlighted, it continued as expected. Nothing changed as expected, a negative effect from our changed brain strategy in U.S. when it comes to interacting with the Managed Care segment. In Diagnostics, we have seen a negative growth, particularly in China due to our, you could say, not broad enough product range when it comes to Made in China approved products and also a negative market development in general, which we think we have good evidence for, and we estimate we take outside China, still market share in the quarter. And then we have welcomed and are welcoming these days, our new President of the Diagnostic business area, Anne-Karen Hunt, who joined the group in November 1 and bring a broad MedTech international experience to the group that I'm sure will benefit from the years to come. Key financial takeaways, group organic growth of 2% reported growth of total 4%. Gross margin developed in line with expectations and was flat compared to same period last year. OpEx saw organic growth in line also with our assumptions of a lowered growth rate supported by various initiatives to lower the growth rate, and we are now in the low- to mid-single digits growth rate as we also have hinted to earlier. EBIT before special items was slightly below our expectations due to in the period isolated in unfavorable change in exchange rates related primarily to U.S. dollar, things that have again normalized. So at least for now, for the remaining of the year, not the same effect, it was isolated to the third quarter. Very solid cash flow, although, of course, cash flow from operations and free cash flow were lower than last year primarily due to higher financial expenses. And based on this and our expectation for the rest of the year, our outlook is maintained -- unchanged. We guide for an organic growth rate of 2% to 4% and an EBIT before special items of DKK 4.3 billion to DKK 4.6 billion. Going a little deeper into the business areas. We start with the development in the hearing aid market here in the third quarter. And overall, we estimate a unit growth of 3% around that. And this is approximately, as always, 2/3 known statistics and 1/3 estimation. So very good underlying statistics at least comparable to the past. And this means that we are in the lower range and a little bit outside the range when it comes to units. On the ASP level, we, on the other hand, see a slightly positive due to simply geography and channel mix development. So all in all, probably around or just south of 4% value growth, which again is a soft market. Europe, slightly positive, but only slightly positive in the quarter. France was flat. Germany was also flat. U.K. was negative in total, driven by the National Health Service being low and then strong private on the other hand, in North America, we have seen a lowering of the growth in the commercial channel, but still healthy, whereas VA continued to be very soft around the 0% in this quarter, minus 1% and Canada also saw positive growth. Rest of the world, growth in Japan was slightly negative whereas easier comparison figures led to some growth is our best estimate in China, but it is just estimates we have statistics there, but market dynamics definitely remains challenging, and we see no inflection point or anything that significantly changed the development in China in the short [ term ]. Australia, we saw good growth. Again, that's also a little bit to do with comparison figures. So all in all, putting it all together, a little bit soft market development in the quarter compared to normal expectations. Diving into hearing aids. Again, as I said, organic growth to external customers of minus 1%. We, of course, benefit in the Wholesale business from a strong development in our own Hearing Care that, of course, spills over, and it is a significant part of our business. So therefore, we say underlying, it's slightly better. This is, again, increased competitive environment driven by very intense competition from a number of our competitors. We, of course, all try to to hold stand and fight into other peoples -- other companies territory. And I would say this has increased the competitive environment. But again, we are happy to see that we are on a sequential basis, seem to have maintained unit share in a global perspective. Positive ASP development, very positive. This is, again, mix effects, it's not the price increases as such, it's a mix effect between channels, product mix, geography, et cetera, but it was more than offset, of course, in revenue by a similar negative unit growth. And we also -- that's, of course, again, where there is something we win and something we lose, we do have, of course, a bit of scale effect on that back to the gross margin discussion. But on the other hand, we have tailwind from Hearing Care. So good performance in Europe in many of our medium-sized markets, negative growth in Germany and U.K. due to lower sales to certain larger accounts, so not general, but to a lower number of high-volume accounts, slightly positive growth in Canada, negative growth in U.S., partly due to very strong comparison base, increased competitive environment and then, of course, the changed managed care strategy. Positive growth in Asia despite the continued weak market dynamics in China, and we saw a negative organic growth in the Pacific region, again, also to some extent due to interaction with larger accounts there. Hearing Care in third quarter, very strong performance, slightly outperforming -- outgrowing the market, again, continued support from acquisitions, primarily in the quarter in Germany and Belgium, in line with our strategy and a continued strong pipeline there. This growth has primarily been unit driven, but also a slight ASP effect coming from, I would say, a concerted effort to sell in our own new premium platform that have lifted ASP and product mix EBIT. Europe, strong organic growth in midsized market, flat growth in France, in line with the markets, but basically for the rest of the Europe doing well. North America, strong organic growth in the U.S. despite spite of the continued shift away from referrals from insurance-based patients managed care and still growing number of people with private pay, and this is healthy for the business and part of driving growth. Continuously good strong momentum in Canada, a stronghold of ours. Very strong organic growth in Australia, negative growth in China due to the underlying market dynamics and also with an increased number of players as part of why the wholesale market is still then holding in. Diagnostics in the third quarter growth lower than originally -- our original expectations, which are normally higher. And no doubt, the market is soft. We see actually a good strong pipeline and quotation flow, but we simply see an extension of the time it takes from -- we have the first quote until we are able to close the deal and get the order and actually get installation. And I think we see that in many diagnostic medtech type of instrumentation businesses that people are postponing capital investment as long as possible and hearing health care is maybe not the highest priority in a number of places. Continued negative growth in the balance equipment back to some transitions between what product brands we carry and acquisitions we have done, but we see improvements every day in that field. So as time go by, we expect, of course, a growth again in this. We have seen nice growth in service and calibration consumable business. We have seen positive growth in particular, in Germany and France, very much driven by the fitting area where we have new good products in the Affinity Compact, et cetera. Positive growth in Canada, negative growth in the U.S., partly driven by negative development exactly in the balance business where we win changed partnership, lost some business. Particularly negative growth in Asia, which predominantly relates to China. So all in all, market development and China is the root cause for the performance in the Diagnostic business. And then to outlook, there is really no major changes. It's important to reiterate that for the full year, we still believe in the 4% to 6% growth, meaning a slightly stronger fourth quarter and this both have to do with the comparison figures, et cetera. But we think there's good reasons why we should end in a relatively normal year. And yes, other than that, no changes. You have heard it all before. and the outlook is maintained unchanged, so the organic growth of 2% to 4% and the EBIT before special items of 4.3 to 4.6. Share buyback around DKK 2.3 billion. We are also on track to deliver on that and acquisitive growth around 2% minus 1% on FX. So also no changes there. And also no changes to the loss after tax from discontinued business, et cetera. So all in all, no changes and on track to deliver the full year guidance. Yes, we open up for Q&A.

[Operator Instructions] Our first question comes from Martin Parkhoi with SEB.

Martin Parkhoi from SEB. A couple of questions. Firstly, to understand the 18% growth in sales to own retail, how much is this volume driven? How much of that ASP driven? Because 18% is a lot more than the 7% that Hearing Care are driving and I guess you already have a pretty high share of wallet in your own clinics already. So can you talk a little bit about the dynamics on that very high growth rate? And then second question, just on the development. Could you discuss a little bit what kind of development you have seen in particular among U.S. independent following the big blast of a launch from [ POMAC ] in August. How much have you felt pressure on U.S. independent share? And then just finally, maybe you can also a little bit discuss again the push and pulls for you if you should deliver more than 2% in the fourth quarter. Of course, I understand that you hope the market growth to be slightly higher in Q4, but are there other factors of your own business that you believe can perform better in Q4 than what we saw in the first 9 months?

Yes. Thank you, Martin. The 18% is predominantly volume. I cannot say they are not smaller and minor. ASP elements is also a mix issue, what the geographies are growing the most, and they are product mix. So it's never neutral for ASP, but it's predominantly volume. Some of it is because part of the acquisition takes extra share from us. But there's always inventory fluctuations quarter between quarter. You have to at the end, ultimately, look at it on a full year basis. And maybe this quarter was a little more inventory building than it was shipping out, which is also to some extent preparing for a busy fall. We see always a lot of invoicing towards the end of the year in the Hearing Care business. And yes, this is measured at wholesale level. So there is always a little bit of delay until you see it come out in the other end. U.S. independent, we for sure noticed the Sonova launch, a competitive launch in August, and there's always a lot of instruments coming out for trials and demos and so on and it cools off a little bit in our end, but I would say, without saying too much that we have a good, stable business in U.S., and I think we come through well against this and do effective argumentation for our own -- the value of our own products. Push and pulls, of course, as you say, market is one thing. I think there is also always a strong year-end effect and maybe it can be a little stronger this year than last year, at least we have the potential, I would say, in the Diagnostic business with a good, strong order book, and we will have to see if we can make people to close before year-end. I think in general, also Hearing Care has a strong finish and now the business is bigger. So relative in that mathematical equation, it can be part of it. So I think there are good levers why we could see a stronger organic growth in the fourth quarter than we have seen in third quarter.

And the next question comes from Hassan Al-Wakeel with Barclays.

I have 3, please. Firstly, on the margin, given the incremental FX headwind and share losses in higher-margin wholesale and a launch into the VA to come this month, is the lower end of the range more likely? And can you speak to your confidence around Q4 EBIT? Secondly, what to your mind drove the stronger performance in Hearing Care? Are you seeing any signs of improvement in France throughout the quarter? And what are you assuming for Q4 and into next year given the anniversary of changes in 2021? And can you talk to the performance in China and whether this got worse in the quarter? And then finally, how are you thinking about Sonova's return to Costco? And do you expect any changes to your share dynamics over time? Or do you view this as relatively limited given they're replacing another player and this is only in select stores at this point?

Yes, that was at least 3 questions, I would say, I will try to address as mainly as possible of them. Thank you for your question, Hassan. Low end versus high end, we have no detailed comment for that. I think you can create various scenarios from FX to growth in the various businesses and so on. it is our best estimate that we will be within the interval, and that's what we can say today. Stronger performance in Hearing Care. It is operational excellence. It is going through the business and expanding on best practices from IT systems to training to marketing excellence and all of the above, we -- I think we honestly just performed really well across the business. It is France where we have a flattish development because of the market, and it is in China where we have our challenges because of a very weak market. But other than that, we're in good shape. On France, we still don't comment a lot on 2025. We would have to see the first months or so going by. But it's for sure not expected that we will see a jump out of the block January 1. Even if there was a lot of clients that were ready to renew, it would take time until invoicing started, et cetera. But there's never like all of a sudden pent-up demand and people come running. That's not how it works. So I assume some kind of buildup, we will see conversion rates and so on and we will, of course, comment on that as soon as we have factual things. Then I didn't write enough actually. Yes, that was the China worsening in the quarter. No, things are relatively stable and have maybe plateaued at a low level. But I would say the wholesale business is gaining share and therefore, benefiting despite of tough market conditions, but the diagnostic picture is unchanged. It is limited access to public tenders. And in Hearing Care, It's just a tough market with a lot of players that want to have their share of a much smaller pie. On the Costco, I think it's too early to tell. Yes, it's a trial. Yes, we are still in the game and fighting the best we can, of course. And I think we stand well for that with Philips and our newly introduced 9050, it's top-of-the-line technology. So I think we are highly competitive in that system. So no, I don't expect fundamental changes, but we will, of course, have to see how this Costco system react to this new product introduction and the trial.

And the next question comes from Graham Doyle with UBS.

Just one from myself. Sort of following up to the point that Søren made there, which is when we think about the dynamics into the end of this year, you've obviously got to start formulating an expectation for next year. And it doesn't feel like a lot will change in certain segments. So the question we keep getting asked is, in a kind of cautious scenario, do you still think you can grow wholesale next year?

Yes. I think that's definitely the ambition to grow our wholesale. You have to remember that the laws in the Managed Care segment was significant this year and an example of a channel now at a very low level, and we work every day to regain momentum in that channel. '24 is just off the table and in a number of the plants but we are definitely working with the ambition to get back in the channel in '25. Nothing concluded yet, but that's what we work hard on every day. And yes, we also believe a number of other channels, not the least, the private independent channel, a VA channel that there are good growth opportunities. So yes, we definitely believe our Wholesale business can grow next year.

And the next question comes from Stephanie (sic) [ Maja ] Pataki with Kepler Cheuvreux.

This is Maja from Kepler. Two questions, please, from my side. First, Søren. Traditionally, new launches create a lot of bots and then you have a lot of orders, and then it's a trial period of around 3 months and then the verdict comes whether -- how many people are reordering. Now first of all, is the 3-month assumption correct? Or does it take longer? And by when do you believe that you will have a bit more of an understanding of what has been the hype created around new products? I mean, we had Sonova, but we had also others. And we're -- to get a bit of a better understanding of how the market landscape going to look for you going into 2025? That's number one. And then number two, we continue to see relatively weak numbers in Europe and that has been going on for a certain period of time. And it seems a bit counterintuitive given the fact that there seems to be quite good reimbursement systems in place in Europe. So what is your take on why markets have been soft? And when do you anticipate those to recover?

Yes. Thank you very much, Maja. First of all, I think you're right with you around 3 months, let's call it that. In the specific case of the latest competitive introduction, we for sure heard about some more sequential launches across geographies. And therefore, you will have on a global basis, it will take a little longer until we fully know how it lands. But again, as I said before, I think compared to the effort done I think we stand pretty well so far against what we have seen. There are good things to be said about our competitive products. There's also downsides. And we, of course, try to highlight our benefits. And I think we get well across that. I think the bigger confirmation is, as I said before, that AI-driven signal processing definitely holds a big potential. We have a certain number of algorithms run them at a lower power, smaller instrument and I think that's the trade-off people out there are very aware of. And yes, you can do some other things if you put in a significantly larger battery. But I think that's very transparent now to customers what's going on and what's not going on. And nobody -- everybody will not choose the same, but I think now we have created a -- people know what's out there, and we see the pro and cons getting clear to people. Then Europe, I think the #1 explanation is France. It's the second biggest market, and it's not growing. Really, we have also seen a weaker U.K. due to lowering of inventory in the NHS channel after a buildup in COVID or after COVID. So these are some of the examples. Then you can discuss whether Germany is a little cautious right now on the consumer front in general due to -- despite of reimbursement due to inflation and maybe a little bit negative view on national economy, et cetera, I think that's it.

And the next question comes from Niels Granholm-Leth with Carnegie.

First question, could you talk about your discussions to reenter managed care? How far you -- any open doors, any breakthrough that you can talk about so far? Secondly, could you talk about any potential considerations around expanding your own TPA? And then just thirdly, if you could comment on your bone-anchored business and if you intend to keep that business?

Yes. Thank you very much, Niels. Just making final notes here. So I remember all of it. I would say, the right formulation around managed care in U.S. is a good constructive dialogue. Nothing is signed, nothing is closed, but we are in a good constructive dialogue about how to best utilize our offerings. And of course, it differs from plan to plan and company to company, what is the right thing to decide upon. So nothing is agreed and decided, but we're in good constructive dialogues. We have a few plants that have started with Bernafon, but it's still relatively soft and not broadly out and there is a little bit of getting comfort in product quality, et cetera. But we are going in the right direction. I cannot speak to timing of it, but we are in the right direction. Expanding own TPA, it's right. We have some TPA activities. We have historically had that. They are relatively small and you have to win contracts, and that's much more a play for '26 and beyond to significantly expand that then it is a potential '25 theme. And then Oticon Medical, the bone-anchored business, keeping note, we stick to despite of it's really being a good business and we get very good feedback on the Sentio, the size of the business is where we feel we get too much complexity compared to the long-term upside. And therefore, there is no change to our fundamental decision to step out of implants in total, including the bone-anchored business.

And the next question comes from Giang Nguyen with Citi.

It's Harry here instead of Giang from Citi. Three questions, please. On hearing aids, you mentioned in the release that positive ASP was offset by some lower sales to more price-focused channels and segments. Could you elaborate on that point a bit further for us? Secondly, can you comment on any geographic differences that you're seeing when it comes to competitive pressures from peers? And third, can you give us an update on how the European market is sort of starting to looking up here or what are you've seen in October and into November versus third quarter exit? Do you see any inflections in sort of the German market or is it sort of business as usual?

Could you repeat the first one? I didn't get the full question. Sorry.

Yes. Sorry, in the press release, you mentioned that the positive ASP in Hearing Aids was offset by slightly lower sales to a more price-focused channels and segments. So I was just wondering if you could elaborate a bit more on that point.

Yes. Thank you very much. The first one, it's the ASP is offset to lower volume. So revenue in total gets to the minus 1%. And that is, you could say, lag of sales into more high-volume price-sensitive channels as we have also commented on earlier in the year. And then NHS being weak in the quarter, of course, also hits our unit sales. So the 2 just outbalance one another in this quarter. But it's still a very strong ASP development, which, as I said, initially is good for gross margin had we also had the other units, we wouldn't have lost the scale effect and things would have looked quite impressive, I would say. Geographical differences in competitive pressure. Of course, many of the technologies we come with are focused on markets with the biggest potential, meaning a lot of premium products are being sold. So that is traditionally in North America. It is a number of the bigger European countries. But of course, in rank of priorities, people introduce their products according to that potential. So I would say we see it in all bigger markets now. It's been a long enough time that it seems to be out basically broadly. European market in Q4, no, we have no statistics. We have no information on October. We just closed the month ourselves have end of last week and have no numbers or anything that helps us in taking a take on the market development.

And the next question comes from Andjela Bozinovic with BNP.

This is Angela on for Hugo. I have 2. The first one on your guidance. So in your press release, you have pointed to the lower end for the hearing aids and market growth of 4% to 6% and also the deteriorating FX assumption. In this context, what's your level of confidence in delivering the top end of the guide versus the lower end? And just in France, the EUHA, you hinted at a small investment to capture the renewal opportunity. Could you give us some more details given that this has been one of the reasons where a guide cut at one of your competitors?

Sorry, I would have to have the second question. I'm not sure I got it fully.

Sorry, the second question on France. At the EUHA, you hinted at a small investment to capture the renewal opportunities. Could you give us some details, given that this has been one of the reasons for your guide cut at one of your competitors?

You are asking whether we need to do additional investments in France ahead of the reform into next year in Hearing Care, correct?

Asking whether we need to do additional investments in France ahead of the reform into next year in Hearing Care, correct?

Yes.

Well, as I said before, there are many things that could -- or there are many factors for the outcome in the fourth quarter and with that, the full year. So we have no more color to add, you can basically take any of the parameters you mentioned and turn them around and they will work positively for us in the fourth quarter. So market development, FX, et cetera, they can work both ways. So no, we have no more color to where in the interval we stick to our guidance, and we think we will be within. And on France, no, there's no particular. We have a big, large well-operating network. We are ready to take as much clients as the market will have. And we will, of course, pursue significantly upgrades to our installed base. We sold a lot of the instruments. We got a very big share in Italy because we were already there. A number of people have opened since. So the spread could be a little bit different this time, but at least we know a very big share of the people that got a new instrument free of charge in '21. So we feel well prepared and don't expect any significant new investments in connection with that.

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you so much, operator. That was a shorter session today, but we appreciate it's busy times here in the reporting season. So thank you so much for joining us. And in case you have further questions, you know how to reach out to us, and we look forward to seeing you on the road in the coming weeks. Have a good rest of the day. Thank you.