Good afternoon, everyone. From Copenhagen, welcome to this conference call held in connection with our release this morning, Danish time, of our interim management statement. As always, the statement covers the period year- to- date. We plan for this conference call to last a maximum of one hour, including Q&A session.
We are represented by President and CEO Søren Nielsen, our CFO René Schneider, as well as by the IR team, Christian Lange, and myself, Mathias Holten Møller. With this brief introduction, I'm very happy to hand it over to Søren Nielsen, and later René for a quick run-through of our presentation.
Thank you very much, Mathias, and welcome everybody to this session. I think it's obvious to everyone that the past eight weeks are significantly different from the first 10/11 of the year, and therefore we come with an extraordinary mixed message of mixed performance year- to- date. Prior to corona breakout in Europe and North America, meaning mid-March. We saw a very strong development in the group.
We saw double-digit organic growth driven by an innovative and strong product portfolio, as well as generally good performance. In particular, our hearing aid wholesale, our bone-anchored sales, as well as our diagnostic sales, were off to a really good start. Everything has basically turned upside down since mid-March due to this very severe market impact of the coronavirus that has basically put a significant part of the hearing healthcare market to a, if not complete stop, then very close.
And therefore, year- to- date, revenue and profits are significantly below last year. It is a key priority, of course, to ensure health and safety of our employees and other key stakeholders and working with both end users and our customers in the best possible way, servicing clients, including utilization of new remote services. However, reason to keep some optimism. The fundamental drivers of the hearing healthcare sector, I believe, is fully intact.
Hearing loss is a physical phenomenon, and the prevalence is exactly the same. So there will be a market recovery. What is very difficult to predict at this stage is the speed by which the market will recover, as it depends so much on the opening of society and how people will react once society reopens. We could therefore, but we don't know, see a spillover into 2021.
It is also somewhat uncertain how pent-up demand will materialize. There are many users that have not had the hearing test done, and when will they come in, and when will marketing again be able to drive significant traffic? This is, of course, very, very uncertain. We can look at China and see a positive and good recovery, but we cannot translate that one-to-one into the rest of the world.
It might be slightly different across Europe and North America, and again, countries are in very different situations, and therefore, we remain to be very cautious in predicting exactly how this will recover, but recover it will. We have a very illustrative and indicative stage model for how we see the various markets in our industry. Nobody are in the approaching lockdown anymore.
Countries are either in virtually no activity, strict lockdown, some kind of early recovery with low activity level, or an accelerated recovery with some activity level. We still have main markets like U.S., France, Italy, U.K., Canada, Brazil, Spain, Poland, in virtual lockdown. I know there are initial steps to opening up, a number of states in U.S., and we do also see some movement, but still, very, very early and not materializing, broadly speaking.
Then we have Switzerland, Australia, Scandinavian countries, and Holland in early recovery. Again, activity level coming, a lot of response from unserviced clients that need to see a hearing care professional, where we have not been able to solve it over the phone, etc. So actually good response, I would say, but still not materializing in sales at significant level, and it is still very early days.
Denmark have only been open for a week, Switzerland the same, so we cannot take any early conclusion for these very first days. Sweden, China, Japan, Korea, Germany is seeing some activity level. Sweden never turned into total lockdown, and Germany as well, what I would call a soft lockdown and a relatively quick reopening. China been open again since mid-February.
Japan never really finding out where it exactly is, but still a decent business level, however below China and Korea. We just expect it to develop from here. Hopefully, due to the many constraints maintained, we can avoid a you know second iteration. I think the world has learned how powerful it is and how cautious we have to be.
Key takeaways year- to- date: strong organic growth in hearing aid wholesale until mid-March, driven by the strength of Oticon Opn S and its new rechargeable solution, as well as Philips HearLink further being introduced in the world and also picking up market share in the comparison numbers as we move into H1 and above our expectations. So very good performance at the beginning of the year, but of course significant sales decline since mid-March.
Also a strong start in retail, good organic growth, mainly driven by Europe, of course in particular France, due to the comparison numbers where we saw a significant decline in 2019 due to the French reform. Then exceptional strong growth until mid-March in the bone-anchored product area in the implant business.
We saw a continuation of the very strong performance of Ponto 4 into the Q1 , whereas CI was off to a slightly negative start with tough comparison numbers and also some issues on the technical side that need to be resolved and have been resolved. Still, good expectations for the future. Strong start to the diagnostics, very broad-based organic growth, and orders placed prior to mid-March, as well as service and calibration business and disposables, have kept revenue in this line on a decent level.
Then we have seen a significant sales acceleration in EPOS, our headset business, due to working from home trends, and as supply headwinds from the beginning of the year due to lockdowns in China has been removed, we see current sales significantly above our ambitious growth plan.
And if we look across the various businesses, the current run rate in hearing aid wholesale is around, and this is round numbers, 20% retail, 20% hearing implants, 20% diagnostics, 60% and EPOS communication headsets 120%. All in all, current run rate around 30% of original plans. If we look at the financial sides, key takeaways is we have seen the expected dilution coming on the gross margin coming from inclusion of EPOS, as well as further growth in rechargeable products.
But on top of that, we have seen further dilution temporarily during April due to less, you would say, production efficiency and less volume going through the system. Even though we have scaled down somewhat, we have not, we cannot fully recover our overhead, and therefore you see a temporary drop in gross margin.
On the OpEx side, capacity cost outside operation, we have seen numerous actions taken to reduce cost, and we have achieved very significant saving of staff cost through application for government salary compensation to people that are sent home part or full-time, as well as significantly reduced activities, of course, within sales and marketing. And therefore, a current run rate of total OpEx around 60% of initial plans.
We in that light have kept OpEx unaffected and are in line with original plans. So the majority of this is happening within distribution cost. Positive cash flow year-t o- date due to the strong start of the year and the cancellation of our share buyback, but we expect significant negative cash flow in the coming period and month.
And therefore, to ensure we get through that, we have expanded our credit facilities considerably, in terms in line with existing facilities. Negative impact from coronavirus is expected to be temporary, as I said, and therefore, no change to the long-term picture, but the recovery will take longer than initially anticipated, where we saw it more like, you know, a U-shaped recovery with as fast a pickup as close down.
We are sure it's gonna take longer. We can see how society is only opening up in small and careful steps, and therefore we have to anticipate it will take time. We can, however, not judge how long, and therefore we remain to withdraw our outlook for the year. We simply lack visibility to give any kind of qualified guidance. We don't have experience with a situation like this and therefore, cannot give a guidance.
Few more details on the different business areas. If we look a bit more detailed on the market development, we only have statistics from some markets, but we have no reason to believe that our own level of business is not reasonably reflecting the world market. Then we see North America, U.S. around 10%, Europe around 20%, but that comes because there is a lot of instruments in trial and consignment.
Meaning your invoice delayed compared to the actual fitting, and therefore business level is around 20%. That will, of course, mean that the recovery will also drag out a bit longer, because it will take time until you start invoicing at high level again. Asia, we see currently around 75%. In particular, China have done a strong recovery in the past weeks, and we foresee that to continue.
So could we transfer the Chinese development to the rest of the world one-to-one? One would be relatively optimistic, but I don't think we can do that, or at least I don't know if we can do that yet. It's still to be proven, and then Pacific is slightly better than Europe, but not at all at the Asian level. If we look at wholesale double-digit ASP increase, solid unit growth.
And if we look at NHS and our export business, which is traditionally low ASP, there's no real growth from Q1 2019 to Q1 2020. There was this build-up for Brexit in 2019, so that's flattish. This is coming from a better product mix, better country mix, better channel mix, generally good solid business, and both as unit growth and ASP growth. So very positive.
Strong growth in U.S., Germany, France, and in export that counterbalanced the negative in NHS, and it is again HearLink and Oticon S that drives that. We launched new mid-price rechargeable during February, but so far it has had very limited impact on sales. It could be, of course, a strong rebound when we come out, but so far it has not really been part of the growth. Severe impact from corona.
Despite of that, I would still highlight a flat organic growth in first quarter. We basically come out flat on the hearing aid wholesale side, of course, year-to-date negative, and again strong focus on maintaining R&D and a run rate around 20%, and of course we try to service clients in the best possible way, and we have had a long approach to remote care and have had a strong solution out for a while.
No secret we have co-developed that with the Veterans Administration, and therefore, we have seen, you know, a real pickup in the interest for this solution and get very good feedback. It is very reliable, it's easy and intuitive, and it works really well. We have always had the focus on a live consultation where you can basically do all aspects of hearing healthcare, and, we have seen a nice pickup on that. It is still, however, mainly focused on servicing clients, existing clients that have need for consultation, follow-up, adjustments, whereas we believe that, real from scratch new sales to a first-time user will be challenging.
We do, however, also have solutions for initial test and screening through what's called an AMTAS Flex, which is a tablet-based, high-quality and very accurate screening tool that is self-operated, which you use in connection with calibrated headphones and therefore get a very close to real audiogram picture. But one have to remember that still there's a risk of false positive.
If your hearing loss is quite mild, you cannot do larger hearing losses. This way it's simply not safe. And there is also a significant element of mechanical fitting. Ears are very different, so dome sizes, lengths of speakers, what have you is essential in a good fitting. Some need a dome, an earmold, etc., and this is part of the face-to-face consultation.
So again, this is a temporary solution for when it comes to the sales side, but I'm sure we have seen a more long-term acceptance and pickup of this tool as beneficial for service. We have also seen VA now listed, and we can happily also state that the VA have now onboarded these services. And again, also from the VA system, we get very good feedback. The system is running also at very low activity level, but again, also serving clients this way.
Retail, strong start to the year, in particular, in Europe and driven by France. Due to comparison numbers in U.S. we were slightly behind plans, due to work on acquired shops in 2018. The rest of the U.S. clinic network in line with plans and we're still coping in a good way with growing managed care. So all in all, a satisfactory development.
Performance in Pacific had been in line with expectations, and we can now say that the IT spillover effect is a thing of the past. There's lockdown in most markets leading to temporary closure. We try to use remote services and others. Sorry, audiologists online, on phone, etc., to help out the users in need of use. But it is at very low level, and current business run rate is around 20%.
Also here, there is an element of invoicing users on trial without seeing them, and therefore the underlying activity level is somewhat lower. CI has a slightly weaker start to the year, but again, we have launched a connectivity solution. We had some technical issues that are now put behind us, and therefore, we expect a good strong start once things open up again.
We have had to, or we have chosen to close down our factory in Nice temporarily as we have enough stock to meet the demand. The application for approval in the U.S. has been handed in and completed now, and therefore it's up to the FDA what the next steps are. A continued very strong performance on bone-anchored. Ponto 4 is doing extremely well based on the Velox S platform.
We see very strong connectivity and audiology and small size from the device and very, very positive feedback from users. We are clearly taking market share in this sector. Current run rate across the two product lines is 20%. Diagnostics strong organic growth until mid-March, and it carried over from last year. It's the U.S. is a primary driver. We have seen a material slowdown in new orders.
I think naturally as this is an investment good, but of course we fight hard to keep the order pipeline going. Positively we see again recovery in China indicating that once things are opened up again, we can see there is a certain backlog we can tap into. We also have good revenue, recurring revenue from service calibration disposables. Year-t o- date there is a modest organic growth. Revenue is currently around 60%.
EPOS, our headset business, was fully consolidated with financial effect from 1 January 2020. The supply chain headwinds that hit us a little bit in the beginning are behind us, and we now see a significant increase of demand because of more collaborative meetings, Zoom and Teams and what have you. Therefore, a strong demand for good high-quality headsets. We are very busy in supplying these, and current run rate is at 120%, compared to initial expectations for the year. With that, the word to you, René.
Thank you, Søren. Initially just a few comments on our gross margin, which we have seen year- to- date be below the same period last year. The most significant and main effects is related to the consolidation of EPOS, our communications business, but also a smaller effect of the increased sales of rechargeable products.
In terms of the coronavirus impact since mid-March, we have also seen temporary negative effects of increased shipping costs, as well as an effect of the fact that we have headwind from lower coverage of fixed cost, given that we are currently manufacturing at lower levels.
We did maintain production at close to full capacity in Q1 to ensure sufficient stock levels and to mitigate any risk of supply chain constraints. We have globally taken numerous actions to reduce our cost run rate in response to the coronavirus. Up until mid-March, we did see a low double-digit growth in operating expenses, around half attributes to organic growth and the other half to EPOS and acquisitions.
Thus, an OpEx growth rate significantly below what we saw on the revenue side up until mid-March. Since then we have taken actions to reduce cost. On the R&D side, broadly speaking, cost and activities are in line with the original plans. However, we do, of course, also there see general savings on travels, conferences, etc.
The main savings we do see on distribution and administrative side, where a significant number of employees have been sent home on furlough, working under government subsidies, various sorts of schemes that provides a significant saving for the company. As a natural consequence of the lower activity level, we have also of course reduced sales and marketing activities. All this adds up to what is currently a run rate of around 60% of our original plans on the operating expenses.
And this is currently what we see when we maximize the utilization of government schemes, so we have seen a positive cash flow year to date before acquisitions and share buybacks, but we do expect a significant negative impact on cash flows in the coming periods. As a consequence hereof, we already back on 15 March 2020 suspended our share buyback program.
We did buyback DKK 191 million worth of shares until the suspension. The negative impact that we expect in cash flow in the coming months is, of course, a consequence of the current lower run rate level on revenue, as well as we do also expect some level of delay in customer payments. However, I would comment that, until now at least, we have seen a good both willingness and ability to honor any outstandings on current accounts receivable. But this is our expectations for the future.
As a response to this and to ensure adequate preparedness, we have significantly expanded our unused credit facilities. Coming out of 2019, we had unutilized credit facilities and liquidity worth DKK 2.1 billion. This we have increased to now amount to DKK 6.2 billion. Thus, a significant increase in our unutilized credit facilities.
We have also refinanced some of our loans to increase duration, and thus the debt that matures in 2020 has been reduced from DKK 2 to 1 billion in that context. On the outlook side for 2020, it was withdrawn on the 15 March 2020, and it continues to be withdrawn as we still are lacking visibility to the duration of the lockdown and the pace of recovery.
In terms of our growth compared to market, we have also refrained from commenting on that, but given the performance up until mid-March, we did grow significantly above our estimate on market growth. We continue to suspend the share buyback, also pending a better overview of the financial implications of the coronavirus. In terms of guidance on Q1 or Q3 to the EPOS consolidation, they are also withdrawn.
However, we do maintain the effects of a positive fair value adjustment and a negative reevaluation of inventory that we still expect to be recognized in H1 of 2020. And the extraordinary spending on branding is also sort of maintained, but with the comment that it is likely to be back-end loaded. And with this, we will hand over to Q&A.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to queue . Once your name's announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. So once again, that's 01 to ask a question or zero two if you need to cancel. Our first question comes from the line of Maja Pataki of Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good afternoon, and thank you for taking my question. I would like to start off with the cost side of the business. René, you have indicated that currently you're running at 60% of budgeted costs basically because you know, with all the work adjustments and everything. Can you help me understand how long this low level of cost is sustainable, i.e. when are the government subsidies running out?
When will you start thinking about investing more into marketing? And lastly also, can you help me understand if the market environment doesn't improve significantly in H2 of the year, are you nevertheless going to open up all stores? Is that the plan, going forward? Then just very quickly, a second question for you, Søren.
You have mentioned a couple of times that you have been, or the market has been, somewhat surprised about the slow recovery. How much do you think that the fact that older people have been really put into isolation, if you wanna say so, has an impact on them not, you know, thinking about a hearing aid because it's not something that is too obvious if you're alone that you're having a hearing loss? Thank you.
Maybe I'll start and start with that because I think that's the key into the answer on the other first question. You know, first of all, we don't know. We haven't been here before. And you can get, you know, the optimistic approach from the first shops being open where the phones are ringing and people are coming in at high speed.
You can look at China. And then we are also trying, of course, to be cautious. Say we don't have a Western European or North American tracking of, let's say, six to eight weeks of recovery. So I'm, I'm very comfortable that the underlying demand is there. You will discover your hearing loss, once society normalize. You will again have a lot of social interaction and feel you fall short.
We don't, from the very, very first early indications, and I should be very cautious, we don't feel that people are as such afraid of getting into a hearing aid store if they need service. But again, I'm sure it will be a day-by-day development. So we are not gonna open all stores from one day to the other. There is in most of these support schemes and opportunity to do a very gradual onboarding.
We also in most shops have two employees, both an audiologist and an assistant. We can start with the audiologist maybe one or two times a week. We only open up and work on scheduled appointments. We will not just, you know, keep all days open and see who comes. There will be a need for making an appointment, which is 80% what you do normally, but it will be a bit more strict. That's also what users would like to know that now it's their turn and they will come.
We organize the shops to give a very healthy impression and that safety is a top priority. So I'm less concerned with the comfort of seniors coming out. I think it is much more correlated to general society's reopening and normalizing that will determine.
And there we are more cautious than we were in the very early days of the coronavirus spreading because we can just see that we have all learned that this is not like a new shape where it's fast down and fast up. It will be a more long-term normalizing of society. But hearing care is first. It is much more like a hairdresser or a dentist than it is like a tourism. So I think we will see recovery processes following generally opening of society. But the speed and whether it's to 100% or 110% or 90%, we cannot state or claim today. And then up to you, René.
Yes, sure. So the comments around the 60%, this is really you know an April May-ish picture where activity level is at the lowest and the government support schemes are at the highest. A nd that's the visibility that we have right now. But obviously, you know, many of the government support schemes until now are at least running out June, July-ish. So that will bring back a significant part of the cost base.
And then, of course, as you know, we resume activities and open stores again, as Søren mentioned, then we will also start to incur costs in line with that. So it is really a very short-term picture, the 60% where we maximize out on government subsidies and has the lowest possible, let's say, activity level, broadly speaking.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Kit Lee at Jefferies. Please go ahead. Your line is open.
Thank you. I have two things. I guess firstly, just looking at your run rate today, under what kind of scenario do you think you would be loss-making on the EBIT line in the first half? And then our second question is on the remote services. What's the current uptake rate in your wholesale customer base? I know you mentioned VA being that, you know, a program developed with VA. You saw quite a good uptake. I'm just wondering what's the general, I guess, reception been among the independent retailer customer base? Thank you.
I'm not sure I fully got your last question, but you know, currently you cannot really talk about customer uptake, but you can do that, of course, until mid-March. And there we saw, outside VA, very nice uptake in customers and regained momentum with the independent and very nice growth rates on the hearing aid side.
But if you talk after that, the only thing you can see moving is remote care as an activity, but you're coming from, you know, very, very low base. So even a doubling per week doesn't mean that everyone does it. It's not selling. It is mainly service and support. I would still say it's very few hearing aids in the world that are currently sold to a, you know, user not in contact yet. But of course, you had some in trials. You had people out. So it is a means to keep, you know, some level of business going. And I think that's all covered with the 20% we state today.
Yeah. I guess my question is more around how many of your customers have started using remote care as a way to service their customers.
Yeah. Not remote test. That's very, very limited. I don't think it is the way to do business. And I don't think professionals, you know, the first thing is to get a lead and actually get a contact, and a screening and a test and so on. So it's very limited. And I hear the same from most other retailers that that's for emergency handling, more than ordinary business. Whereas the service and follow-up, it's a very good tool in this period to do, you know, completion of, or work on open order portfolio and support to existing clients.
Okay. That's helpful.
Would abstain from giving scenarios on profitability for H1 year. We don't have the visibility at this point to discuss outlook for profits.
Our next question comes from the line of Martin Parkhøi of Danske Bank. Please go ahead. Your line is open.
Martin Parkhøi at Danske Bank. Just, Søren, you say that you believe this is temporary and we will go back to normal at some point in time. But do you think that this will change the competitive environment? Is someone without naming any names, then do you think that it will change something to the market shares development who somebody's stronger than other in a pure setup?
And then, secondly, all these, René, maybe you can answer that. These government plans or government support programs you have tapped into, are there any kind of restriction on your business later on? Then I'm thinking on both on your ability to pay out cash to shareholders in form of share repurchase programs.
I know that you have canceled 2020, but also going forward, does it also put some kind of limitations when you have enrolled people into a government support program that you're actually not able to lay off people afterwards? Can you maybe also support that? And then finally, just on financial support, I guess that some at least some clinics must be struggling right now. Have you used also this strong liquidity that you have now? Have you used that maybe also more aggressively to secure unit commitment long-term by helping some struggling dispenser practices?
Thank you, Martin. I can answer first and last. Of course, we work with customers to get through this in a constructive way. But generally speaking, we don't wanna be a bank. We more do training and education in what kind of support could exist for our customers.
But of course, there are some out there that, for one reason or the other, have difficulties living up to their promises. And in case we do work on extending payment terms, we of course try to get something in return. And yes, it could be, you know, a longer-term commitment to business. But it's not a general strategy. I'm sure you just increase your risk exposure by doing so. So I don't think that's a sound business to do that.
On the normalization, of course, you never know what things look like, you know, when things open up again, who have gained and who have lost. I think you can both see some that felt they were very strong might have lost something. Some were just about to launch something and might have lost an opportunity.
I don't have. We don't have any transparency that can guide on how things will look. But we feel we will stand well. We have maintained R&D at high level and in line with plans. We just launched something which will still be new. We had good momentum in the products we had on the market. Generally speaking, commenting on our own position, I think we'll be in good shape once we get out again.
In terms of the government schemes, you are right, Martin. So we have been seeking, actually, support in most countries where we operate. There have been various types of schemes. Some of them provide some restrictions on our ability to act locally. We are fully observant on those and take those into consideration once we seek these subsidies. So, we are fully, fully aware of that. But we're not gonna discuss, you know, what are those, limitations, on a local level, at the moment.
Thank you.
Thank you. Our next question comes from the line of Tom Jones at Berenberg. Please go ahead. Your line is open.
Oh, thanks for taking my question. So I had two. The first one is thoughts on the shape of a potential recovery. On slide four, you put the last box on the right-hand side is approaching normalization. But what potentially is there effectively to be a sort of seventh box, which is a period of, you know, above normal growth?
I know you speculated earlier you can't really say, but I guess my key question is if the demand is there, you know, how much additional capacity is there in the system for you to, you know, supply and fit an above normal level of hearing aids? If you know, take for example, an average audiologist sells 10 hearing aids a week, how many do you think he could sell or she could sell, you know, at peak? 12, 15, 20?
You know, just some idea of how much headroom there is in the system to deal with any pent-up demand would be useful, and then the second question was just on the U.S. PMA for Neuro. When, as it sits today, are you targeting a launch of this product late Q4, or do you think it'll probably be more likely 2021?
Yeah. Thank you, Tom. I think you will find that the potentially pent-up demand will come gradually and step by step. There's big national differences as well as even within countries differences across regions. So I think things will build up at a pace where capacity is not an issue. Where there are areas where the pent-up demand would have grown to a very high level.
I'm sure audiologists would take a longer day and a little less new screenings in the beginning and more focus on servicing existing users. So I think it's definitely manageable within the way the market is gonna reopen. It's not gonna be again like the hairdressers where we'll all storm into the shops the first morning. So on that one, on the PMA in the U.S. on Neuro, no news.
This is in line with expectations. We don't expect anything materialize until 2021. But again, there might be some renewed uncertainty on the processing within FDA. We have no indication of that. But, you know, I think it will be natural to be cautious of expecting unaffected processing time in FDA. But we don't know.
Okay. Perfect. And maybe just one quick follow-up question to one of Martin's. I mean, you mentioned that you've been supporting some of your independent retailers with payment terms, etc., but how, you know, some of them must be really struggling and looking for a way out or at least a different way of working going forward. To what extent do you think the current crisis is opening up M&A opportunities in the retail space, both for small and large acquisitions?
And, you know, the other side of that equation, you know, the retail bit's probably been the more difficult to manage, for you at the moment. You know, how has this current crisis, influenced your thinking about using debt to, to buy retail clinics and general use of debt overall?
Yeah. I think, let's start with the other one. I think, you know, it's always like, good businesses survive, well, tough times, and bad businesses, don't. I think, those that, will run into trouble were also somewhat in trouble before. There is, in markets like U.S. and others, also significant support programs that benefit small business owners. So again, we must try to make sure that, that they get, access to that, supportive funding. Will there be opportunities in the M&A space? Yes.
Whether it's voluntary or forced, you know, it can be both ways. That's just a way to convert debt to equity. So, you know, yes, there could be a more short- to mid-term, but I think that's also just a matter of timing rather than much more people. I still think this will be limited in time to an extent where good businesses will continue.
Okay. Perfect. That's very helpful. I'll get back in a few.
Thank you. Our next question comes from the line of Oliver Metzger of Commerzbank. Please go ahead. You're on the line today.
Hi. It's Oliver Metzger from Commerzbank. My first question is on communication. So you basically reported some overachievement with this line rate of 120% compared to your expectations. Is this better performance related only to the extraordinary or ordinary demand from the home office equipment, or can you give us more color about the underlying dynamics? My second question is on the hearing implant business.
So regarding the expected recovery, is the slowdown currently or basically fully linked to the clinics where patients cannot get a surgery? So do you think that as soon as a freeing up of capacities in the clinic also leads to increasing sales? So that means that a recovery could happen much faster than for the hearing aid business. And my last question is just a very quick one on your definition of run rate. Do you refer to the month of April, or which periods do you use for the current run rate?
Thank you very much. I think a run rate is, you know, it is the past weeks, so it's round numbers, but that's how we see the business. And there is always a little bit of fluctuations towards the end of the month. So this is, you know, what we have seen throughout April and looking at averages. And the headset business, no doubt, I think this has stepped up in general or pushed the trend up towards more collaborative meetings and so on. It was a trend going.
We have seen strong growth in many years, but I think it has taken it to a new level. At the same time, there for sure is some kind of bubble over it where you, of course, everybody needs a new headset very quickly.
And we have seen various online shops and so on immediately step up the sales, you know, also of more mid-priced, medium-priced, home type, as well as businesses going for the higher end. So there will be some decrease in demand again, but I, I think full year we will see a, a much stronger than anticipated market growth in this segment.
How long that then will last is, of course, also at this stage difficult to judge. And you're right on the point on the implants that most clinics that is on hospital or are on hospitals on the CI side where surgeries are just shut down. And as soon as you open the waiting list is longer. I think you will see a prioritization of children first that have been scheduled for a surgery and, and have been postponed.
We are least exposed towards that, but then immediately after, you will see adults, whether they can, you know, eat off the waiting list. Many of them had a waiting list already is more unclear at this stage. But I think, like, most healthcare areas, they are eager to get back to their patients and do the job they're used to. So also there, I would expect some acceleration and appetite on working a little longer and a little faster, with focus on servicing people that are really severely hearing impaired and therefore in desperate need of a solution.
Okay. That's helpful. Thank you very much.
Thank you. Our next question comes from the line of Veronika Dubajova of Goldman Sachs. Please go ahead. Your line is open.
Yes. Good afternoon, and thank you for taking my questions. Hope you can hear me okay. I have three big ones, please, and then one sort of housekeeping, if that's all right. I want to start with sort of follow-ups on the recovery. I think, you know, one of your competitors said last week they think that there is a real risk that hearing aid volumes globally in 2021 will be below the levels we saw in 2019.
Just curious if you kind of share that, do you share that cautiousness? And if not, why not? So that's my first question. My second question is just trying to understand what would be the uptick from run rate if we were to strip out the government support that you're getting? How much sort of flexibility do you have in the rest of the P&L? That would be helpful for us as we think through H2 of the year.
And my third question is just if you can share some thoughts or observations that you've seen in the retail business from geography. I think just, you know, I know we've heard some decent or encouraging commentary in Germany. Obviously, you have a fairly large footprint in France.
So how you're thinking about that, maybe just remind us if you're on the retail side, which of the markets matter for you the most. That would be helpful. And if I can really quickly just housekeeping, EPOS revenues H1 versus H2 breakdown last year just to help us with our model for 2018, that would be great. Thanks.
Yeah. Thank you very much, Veronika. It was actually you talked so quickly that please correct us if we got all the questions right. But you know, the red flag that you mentioned from a competitor last week, I think it, it's a very square and bold statement. I cannot recognize it fully. It seems like they're convinced it will be this way. It's definitely an option, but it's maybe the most negative scenario.
I also think there are more positive scenarios where we will see significant recovery during H2 this year, but where the run rate will exactly be end of the year, I cannot tell. And OpEx run rate, I don't know if you will comment on that, Veronika.
Yeah. Well, one of our operating expenses, you would, for example, be able to see in our annual report that approximately 60% of that relates to salaries. And the majority of the savings that we do on salaries is government support. That would give you some indication of what government support would be of our savings. In terms of EPOS revenue for last year, the guidance we have given would approximate DKK 1 billion, but with a split between H1 and H2 year of roughly 45%-55%.
Maybe just a little more flavor of the OpEx run rate. I think all these government support programs do exactly what they're supposed to, which is postpone decisions and consideration whether to resize companies and businesses, generally speaking. That's, of course, also the case for us, that until we know better what the future looks like, it is a great relief to be able to postpone such discussions and decisions. Therefore, you know, I also find it likely that if things seem to last a month longer in a given country, they are also extended.
We have seen that in Denmark. I think we will see that in a number of other countries. So I think there is a decent chance that we can, you know, maybe slightly ahead, of course, on the cost side than the sales side, do a gradual ramp-up of the cost as well in line with how we see sales develop. And back to your question relating to retail in France.
T his is, of course, exactly what we work on. How do we do a gradual onboarding where we, in the beginning, focus a lot on servicing the immediate pent-up demand, people that were already trial, people that have challenges with existing devices without calling in all the staff, without accelerating marketing sky high from the beginning?
So we plan for a very gradual, day-by-day, recovery process of the business where we adapt and adjust to what works and what not works and where we have high flexibility for accelerating but also decelerating if we went too fast.
Great. And, and René, can I just follow up on the OpEx statement? So is it fair to say without the government support, your OpEx would be fairly close to what you would have planned for anyhow, or are there lots of other savings to add?
No, no, no. So, so, what I mentioned before would roughly add up to that half the savings, related to government support. So 60% of the OpEx is salaries, and the majority of, you know, the salary savings is government support. So that would be 50% in total-ish. And it's rough numbers.
Yeah. There is very significant cost associated to sales and marketing in general, that are spent on marketing, you know, advertisement, travel, entertainment, meetings, sponsorship offers, seminars and, trade shows and what have you. So there is also a correlation when we get to this low level of business between, the OpEx and, the business level.
Understood. Thank you, guys, and hope you, continue to stay safe and healthy.
Thanks.
Thank you. Our next question comes from the line of Michael Jüngling of Morgan Stanley. Please go ahead. Your line is open.
Great. Thank you. I have three questions. Firstly, on the retail, can you comment on what initiatives you intend to take to entice patients, into your stores? And I suspect I'm sort of addressing how you can make them feel safer and what you intend, to do. Also question two on retail.
I think you've acknowledged yourself that the recovery will take some time, and without furlough programs being an indefinite solution, I'm interested in how you view the world in terms of two choices. The first choice being, are you willing to accept a much lower level of profitability for a year or two until the market recovers but retaining most of your staff, or would you expect to undergo a meaningful restructuring program to right-size?
And then question number three, I'm curious how you think about your customer base because if you look at, a survey released by the Hearing Review and published on, HIA, it seems that around 36% of hearing aid stores in the U.S. , highlight they cannot survive for more than three weeks based on their current savings. I'm just curious how you think about this in the context of a recovery and what it means for receivables and cash flow. Thank you.
You know, we do put health and safety as a very high priority. So all stores are preparing, you know, separation in waiting rooms, of course, sanitizers to clean hands, distancing, and, you know, following any guidance on local level as well as best practices that have been stated in different kind of operating standards that are available on the industry level.
And again, you know, the take-up can be gradual, and that's what we plan for. We don't have in our planning a one to two-year scenario where the market doesn't return. If that one day becomes the reality we have to face, we will, of course, have to assess how to best respond to that.
Right now, the planning is to do a gradual opening that follows the opening of society. We have no indications that you cannot do that. One of the approach is, of course, to you know, look in your existing portfolio and database. It's always a mix you are part of deciding yourself how many screenings and tests do you do, and how many new users do you try to get a hold of, and how much is related to current users.
With two to three months of pause, there is a significant pent-up demand among existing user base that will be first priority and can, of course, be done in a more direct marketing way, which is always cheaper than working from cold and scratch.
Then the customer base, yes, I've seen the reports, and I think people are always in their mind under the impression it will not work for long. But I think they also, and that's at least what we experience talking to customers, will see that there are significant funding for them as well. These PPP programs are exactly done to support smaller businesses in surviving. And I think we have actually seen very good funding and immediate cash out in many places in the U.S.. So I don't share the same critical picture as if their cash would run dry in three weeks, as illustrated in the article.
May I briefly follow up on these retail initiatives? Because in the end, offering a customer say maybe hand sanitizer may not be the most effective way. And I don't know what the answer is, but it may not be the most effective way of getting customers back in a store. I think they probably want to feel safe. There's got to be something more perhaps that you can do. Are there some broader initiatives perhaps that you would consider with the HIA and the industry more globally to drive a more meaningful change to restore customer safety, the feeling of safety?
Yeah. You know, but actually, the first indications we have is that people feel in general coming to an audiologist, it's a safe place. You know, most of it is with distance between the user. Yes, you have to touch the ear at some stage and the instrument as such, but you can do that moving in from behind. The rest is, you know, you no longer have wires hanging out the ears.
It is a wireless communication from the computer to the users. So it's actually not that physically interacting, and you know, I think, I think we can, we can execute it in a both healthy and safe way, and I think users see the same. We will, of course, offer remote services for people that are skeptical, for people that are, you know, feel more comfortable in the beginning doing so, but again, I think most hearing aids to first-time new users will be better done in a hearing aid shop, and we will do our utmost to show how to do that and operate in a healthy and safe way.
Okay, and one last question, please, on a follow-up. When it comes to the profitability going forward, I sort of mentioned if the recovery is slower or is slow and you end up with the likelihood of depressed margins for 12 months, is that an acceptable time period for you to keep the cost base as it is, meaning no right-sizing? Is that a reasonable amount of time to accept the margin pain?
I think this is all speculation. I both can create scenarios where we in second half will see return of profitability, at the end of second half that we are used to, and we can also see it going into 2021. We cannot at this stage be more specific on that.
Okay. Thank you.
Thank you. Our next question comes from the line of Christoph Gretler at Credit Suisse. Please go ahead. Your line is open.
Yes. Thank you. Can you hear me?
Yes, we can.
Hi, sir. Hi, René. Two questions. You know, the first relates to, you know, gross margin. Actually, could you also give an indication of where that, you know, is currently, normalized, you know, if you adjust for EPOS, you know, just to give us a sense about, you know, kind of the pressure you've seen there from fixed cost absorption? But the second is, you know, on China. I didn't really get to why is China not a good blueprint, you know, for the likely development for Western Europe, you know, U.S. and Europe with respect to recovery? Thanks.
Yeah. René, maybe if you comment on the gross margin, then I can take China.
Yeah. Well, I think we have mentioned before that the consolidation of EPOS is a negative one to one and a half percentage point on our gross margin. If that was the question.
No, the question was, I get that, you know, kind of, but, you know, kind of if I exclude EPOS, then I just want to see kind of, you know, where would your kind of like-for-like gross margin on the hearing device business or kind of the rest of the business, be, you know, given, you know, kind of, you know, the, the stress in the system right now?
Year- to- date, the majority of the lower gross margin is related to this EPOS consolidation. So that's the overwhelming main effect year- to- date. Looking at, you know, current run rate-ish, the effect of the coronavirus is bigger than that, given the fact that freight costs are high and that we are manufacturing at a significantly lower level.
But you cannot give us kind of an equivalent with a 60% of the OpEx kind of?
No, we have not provided that detail.
And we are also just approaching the phase where volume will go down significantly. So there's still a lot of variables. So we simply don't have a you know data points that can show exactly. It's a quite complicated continuous measurement. So we are cautious to give further flavor on that.
And if I may return to China, I think generally speaking we should believe you know there is some similarity, but I think it's just very difficult to judge whether the epidemic it seems at least from the statistic have been so much worse that also the opening of society will take longer. And I think that's the main difference which makes us a little uncertain. At least we cannot just reuse the timing aspects one-to-one as the epidemic in many European countries and, to some extent, also the U.S. seem to be more widespread at a higher level.
Thanks.
Thank you. Our next question comes from the line of David Adlington at JP Morgan. Please go ahead. Your line is open.
Thanks, guys. Most of my questions have been asked, but maybe I'll just follow up with the strong start that you saw at the beginning of the year. I just wanted to hear if you're able to think about how much of that was due to pent-up demand following the cyber attack.
Yeah, I can do that very quickly. I think nothing. We were out of that before we ended the year, so I think that's a true representation of our competitiveness that you saw.
Okay. Great. Thanks.
Thank you. Our next question comes from the line of Daniel Jelovcan of Mirabaud. Please go ahead. Your line is open.
Yeah. Hello. Just maybe on the recovery in Germany, which you have on the graph, which is, of course, one of the bigger markets. We know it from other medical sectors like dentistry that the dentists are quite keen to get the business back, of course. And I wonder, your experience in Germany with the audiologists, how it developed, let's say in the last few weeks. If you see, I know it's early and so on, but if you see some encouraging trends maybe.
Yeah. I cannot see them in the numbers because Germany is kind of these. You get all the invoicing done the last day, because there is a lot of consignment invoicing where if, you know, you have a certain stock out of the dispenser, and then you say either I invoice you or you confirm you still have it on stock or you have to return it. Generally speaking, Germany never seems to have gotten as low.
The real close-down window was relatively short, and we generally feel a good appetite and, maybe classical German, you know, calmness in opening up in a safe and gentle way. I would foresee that we will see German business improve during May.
So the level in Germany is probably higher than the 20% in general?
Yeah. Again, we can only use invoicing level as the real measurement. Yes, it's above that because there has been continuous invoicing. Whether it then lasts a little longer before it gets up, that's always, you know, a risk. But we have had people in the office. Many small business owners in Germany have kept open. We know the big chains are open again. You saw Amplifon say they were only 30% down, I believe.
You know, generally speaking, I think Germany has been a less affected country, and therefore, the recovery, you know, it was not as deep, and the recovery will be shorter.
Okay. I think we have to conclude the call here with that. We are a little bit over the hour. Thank you very much all for participating. A pleasure. And as always, please feel free to reach out to Christian or myself if you have any further questions that we didn't cover here. We look forward to seeing you on the road over the coming weeks, even if virtual. So, wishing everybody a good day. Thank you.