Demant A/S 123 0 Kommentare Interim Report 2020

Company announcement no 2020-10 17 August 2020
Interim Report 2020

Very strong start to the year disrupted in mid-March by coronavirus – organic growth of -27% in H1
Strong recovery towards end of H1 has continued after the reporting period
Material cost containment in response to coronavirus driving -14% organic growth in OPEX in H1
EBIT of DKK -193 million before net positive EPOS one-offs of DKK 307 million
New outlook: 5-15% revenue growth in local currencies in H2 (including EPOS)

Group revenue in the first half-year amounted to DKK 6,078 million, corresponding to a decrease of 17% compared to last year. Organic growth contributed -27 percentage points, whereas acquisitions added 9 percentage points, including 7 percentage points due to revenue generated in EPOS. Exchange rate effects contributed close to 0 percentage point. After a very strong start to the year, we saw a significant revenue decline due to the severe negative impact of coronavirus. Since the low point in early May, market conditions have improved significantly, and we have seen strong recovery in the revenue run rate (please see table on page 2).
Revenue in Hearing Devices declined by 28% in local currencies. In our hearing aid wholesale business, we saw strong double-digit organic growth until mid-March thanks to our broad and highly competitive product portfolio, including Oticon Opn S and Philips HearLink. However, due to the severe impact of coronavirus, revenue declined by 25% in local currencies in the first half-year. The decrease was driven by a 30% decline in unit sales but was partly offset by an increase in the average selling price (ASP) of 5% due to mix effects. After the low point in early May, we saw strong recovery in a number of markets, particularly among independent hearing care professionals.
Despite a strong start to the year, our hearing aid retail business saw negative revenue growth of 31% in local currencies in the first half-year. Organic growth contributed -35 percentage points driven by widespread, temporary closure of our clinics since mid-March in response to market lockdowns, particularly in North America. As lockdown restrictions were eased, our retail business recovered significantly towards the end of the reporting period driven by France and Australia, in particular. Acquisitions contributed 4 percentage points to growth.
In Hearing Implants, revenue declined by 18% in local currencies. Sales in our cochlear implants (CI) business declined by 34% in local currencies, as elective surgeries came to an almost complete halt due to coronavirus and the recovery in CI has so far been slow. Our bone anchored hearing systems (BAHS) business saw a modest decline in sales of 3% due to significant growth at the beginning of the year and a strong recovery towards the end of the first half-year driven by the uptake of the new Ponto 4 sound processor.
Diagnostics saw a modest decline in revenue of 3% in local currencies, including a minor positive contribution from acquisitions of less than 1 percentage point. The negative impact of coronavirus has been less severe in this business activity than in our other hearing healthcare businesses aided by our existing sales pipeline, and we have seen strong recovery and market share gains in the business since the low point in early May.
In Communications, our headset business, EPOS (demerged and fully consolidated into the Group with effect from 1 January 2020), delivered sales of DKK 546 million, corresponding to significant double-digit growth. After supply chain headwinds early in the year, EPOS benefitted from a surge in demand for headsets following the outbreak of coronavirus, resulting in a certain level of backorders at the end of the first half-year. For the reporting period, we have recognised net positive one-offs related to the demerger of DKK 307 million, which comprises a positive fair value adjustment, a negative inventory revaluation and extraordinary spending on the branding of EPOS.
The Group’s gross profit margin was 70.0% adjusted for EPOS one-offs, a decrease of 7.6 percentage points compared to the first half of 2019. This was primarily due to the significant drop in revenue but also to the consolidation of EPOS, which diluted the gross profit margin by slightly more than 2 percentage points.
Due to the strong execution of numerous cost-reduction actions, we were able to reduce Group capacity costs by 14% in the first half-year in organic terms (excluding a provision for additional bad debt of DKK 150 million). Cost savings were realised in distribution and administrative functions through publicly funded compensation schemes and through a significant decrease in sales and marketing activities, while we deliberately maintained our strong R&D commitments. In the second quarter, capacity costs decreased by 29% in organic terms.
Operating profit (EBIT) before one-offs related to the consolidation of EPOS was negative in the first half-year and amounted to DKK -193 million, including the provision for additional bad debt of DKK 150 million. After net positive EPOS one-offs of DKK 307 million, reported EBIT amounted to DKK 114 million.
Cash flow from operating activities (CFFO) before EPOS one-offs decreased by 27% to DKK 766 million driven by the significant drop in profits, but CFFO was less severely impacted than profits – primarily due to working capital improvements. Free cash flow was positively impacted by the suspension of non-essential investments, and M&A activities have been very limited since mid-March. Over the coming months, we expect to see an impact on CFFO of the low revenue level in the second quarter. The Group continues to have ample access to funding, and as of 30 June, unutilised credit facilities amounted to DKK 6.1 billion.