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DEMANT A/S: INTERIM MANAGEMENT STATEMENT COVERING Q1 2022

3.5.2022 07:27:40 CEST | Demant A/S | Interim report (Q1 and Q3)

Company announcement no 2022-10                                      3 May 2022

Interim Management Statement covering Q1 2022

 

Group revenue growth of 9% in Q1 driven by very strong performances by Hearing
Aids and Diagnostics

Continuing market share gains in the hearing aid market thanks to expansion of
product portfolio

Hearing Implants reported as a discontinued operation following announced
intention to divest the business

Outlook for 2022 maintained despite impact on full-year EBIT of approx. DKK -100
million related to Russia

 

As previously announced, starting with this Interim Management Statement, the
Group will report quarterly revenue and growth rates by business area, by
segment and for the Group as a whole. In line with previous years, full income
statements, balance sheets and cash flow statements will only be reported on a
half-year basis.

 

 

Revenue (DKK million)

 

Growth

Business area

Q1 2022

Q1 2021

 

Organic

Acquisitive

LCY

FX

Reported

 

 

 

 

 

 

 

 

 

Hearing Aids

2,351

2,159

 

9%

-2%

7%

2%

9%

   Hereof sales to Hearing Care

-441

-459

 

-11%

4%

-7%

3%

-4%

Hearing Care

1,898

1,731

 

2%

5%

7%

3%

10%

Diagnostics

503

402

 

19%

1%

19%

6%

25%

Hearing Healthcare

4,311

3,833

 

9%

1%

10%

3%

13%

 

 

 

 

 

 

 

 

 

Communications

292

381

 

-25%

0%

-25%

2%

-23%

 

 

 

 

 

 

 

 

 

Group

4,603

4,214

 

6%

1%

7%

3%

9%

 

 * In Q1, the Group generated organic growth of 6% with additional growth of 1%
   from acquisitions and of 3% from exchange rate effects. Total reported
   revenue growth for the Group was 9%.
 * Hearing Healthcare saw organic growth of 9% driven by very strong
   performances by Hearing Aids and Diagnostics. Hearing Aids continued to gain
   market share following a successful expansion of the latest product families
   into more form factors and price points. Growth was driven by higher unit
   sales, whereas ASP growth was negative, as expected, due to product and
   channel mix changes. Hearing Care saw solid organic growth in most markets
   but was negatively impacted – albeit to a lesser extent than anticipated – by
   very high comparative figures in France due to the hearing healthcare reform
   implemented last year. In Q1, acquisitions in Hearing Care also contributed
   considerably to growth. Diagnostics continued its very strong momentum from
   last year.
 * Communications saw organic growth of -25% due to very high comparative
   figures. Performance was largely in line with our plans driven by Enterprise
   Solutions, but in Gaming, supply chain challenges had a negative impact on
   the sale of specific product families.
 * The Group’s gross margin was in line with expectations as it remained
   negatively impacted by the dynamic supply chain situation. We estimate that
   this impact amounted to around 0.5 percentage point, primarily relating to
   higher freight costs.
 * OPEX was in line with our plans, and at this stage, we see no material
   inflationary pressures beyond initial expectations. The Group’s OPEX saw low
   double-digit growth in local currencies, with part of this growth reflecting
   the previously flagged temporary cost savings in the comparative period,
   which totalled approx. DKK 150-200 million for H1 2021 as a whole.
 * As a result of the war in Ukraine and the current halt in sales to Russia,
   Belarus and the provinces of Donetsk and Luhansk, we expect the Group’s EBIT
   to be negatively impacted by around DKK 100 million in 2022. This mostly
   comprises lost sales to the directly affected countries for the rest of the
   year, which account for less than 1% of the Group’s total revenue, with only
   small realisable cost savings. It also comprises a provision for expected
   losses on all trade receivables, which has been recognised in distribution
   costs in Q1. The negative EBIT impact is expected to have full cash flow
   effect.
 * In spite of a negative impact of the war in Ukraine, the Group’s EBIT was in
   line with expectations driven by Hearing Aids and Diagnostics. Exchange rate
   effects also contributed positively to the Group’s EBIT in Q1. In line with
   expectations, Communications realised a negative EBIT.
 * On 4 March 2022, we completed the acquisition of 20% of ShengWang, a leading
   hearing care network in China with around 500 clinics. We still expect to
   complete the acquisition of the remaining 80% of ShengWang before the end of
   H1 2022 at which point details of the financial impact of the transaction
   will be disclosed.
 * As announced on 27 April 2022, the Group intends to divest its Hearing
   Implants business to Cochlear Limited, and Hearing Implants is therefore
   recognised separately as a discontinued operation. Consequently, Hearing
   Implants is no longer reported as part of the Hearing Healthcare segment, and
   comparative figures are restated to reflect this. In Q1, Hearing Implants saw
   growth in line with expectations, but in the period until closing of the
   transaction, growth is expected to be negatively impacted by the announcement
   of the transaction.
 * As of 31 March 2022, we had bought back shares worth DKK 817 million.

 


OUTLOOK FOR 2022

Our outlook for 2022, which is summarised in the table below, remains unchanged
except for the FX growth, which is updated to reflect current exchange rates.

 

Metric

Outlook for 2022

Organic growth

5-9%

Acquisitive growth

1% based on revenue from acquisitions completed as of 2 May 2022

FX growth

4% based on exchange rates as of 2 May 2022 and including the impact of hedging

EBIT

DKK 3,600-3,900 million

Effective tax rate

22-23%

Gearing

Gearing (NIBD relative to EBITDA) in line with medium- to long-term target of
2.0-2.5

Share buy-backs

At least DKK 2.5 billion

Profit after tax from discontinued operations

Negative by DKK 150-200 million

 

The outlook continues to be based on a number of key assumptions, which remain
unchanged except for comments in bold below:

 

 * The hearing healthcare market to normalise in 2022, resulting in unit growth
   in the hearing aid market of 4-6% and additional growth due to the release of
   some pent-up demand, albeit with significant differences between individual
   markets and channels. Such differences will not least be driven by different
   comparative bases going into 2022. Due to changes in geography and channel
   mixes, we expect ASP growth in the hearing aid market to be slightly more
   negative in 2022 than the normal 1-2% annual decline.
 * Growth in the French hearing aid market to be negative in 2022 following the
   extraordinary demand in 2021, which we estimate benefitted the Group’s
   revenue by DKK 300 million and EBIT by DKK 150 million. We do not expect this
   benefit to recur. Following the positive momentum in Q1, the French hearing
   aid market could develop slightly more favorably in 2022 than initially
   anticipated.
 * The market for enterprise and gaming headsets and video solutions to grow
   below the estimated structural growth level of around 12% due to the current
   supply chain situation.
 * Both segments, Hearing Healthcare and Communications, to gain market share in
   2022.
 * Supply chain situation to remain dynamic throughout the year and to result in
   higher-than-normal component costs and freight charges with an impact that is
   roughly similar to the impact in 2021, but with no material disruption to
   sales activities.
 * The Group’s OPEX base to see no benefit from temporary cost savings in 2022,
   which we estimate amounted to DKK 150-200 million in H1 2021.
 * Communications to realise a slightly negative EBIT in 2022.
 * Planned divestment of Hearing Implants to close at the end of 2022.

 

“Today, on the backdrop of an eventful beginning of 2022 with uncertainties
impacting businesses all over the world, we announce a strong first quarter for
Demant with particularly strong growth in our Hearing Aids and Diagnostics
business areas. During the quarter, we have demonstrated that we are very
successful when it comes to bringing attractive products and services to market
and constantly staying relevant to our customers and users. We will continue to
do so, and despite expecting a negative impact of the halt in sales activities
in Russia, we maintain our financial outlook for 2022, which reflects very solid
growth and profit. Our constantly changing surroundings as well as our own
strategic decisions, such as our recently announced intention to divest our
Hearing Implants business, more than anything demonstrate that our ability to
act dynamically is a prerequisite for success,” says Søren Nielsen, President &
CEO of Demant.

 

 

Demant will host a conference call on 3 May 2022 at 14:00 CEST. To attend this
call, please use one of the following dial-ins: +45 3544 5577 (DK), +44 3333 000
804 (UK) or +1 6319 131 422 (US). The pin code is 70596694#.
A presentation for the call will be uploaded to www.demant.com shortly before
the call.

 

 

Further information:

Søren Nielsen, President & CEO

Phone +45 3917 7300

www.demant.com

Other contacts:

René Schneider, CFO

Mathias Holten Møller, Head of Investor Relations

Peter Pudselykke, Investor Relations Officer

Trine Kromann-Mikkelsen, VP Corporate Communications and Relations





HEARING HEALTHCARE


MARKET TRENDS

Overall, the hearing healthcare market that we address, which now comprises the
markets for hearing aids and diagnostic instruments and services, saw very solid
growth in Q1, albeit with large differences between regions.

 


HEARING AID MARKET

Based on available market statistics, covering slightly less than two-thirds of
the hearing aid market, and on our own assumptions, we estimate that the global
hearing aid market saw unit growth of around 12% in Q1 compared to the same
period in 2021. The market saw significant growth in public channels, such as
the NHS and Veterans Affairs (VA), which had lower comparative bases than
commercial channels. Generally, we continue to see large differences between
individual markets and channels of which some remain below normal and others
above normal supported by pent-up demand. We estimate that such geography and
channel mix changes resulted in a negative development in the market’s ASP,
which is in line with expectations.

 


ESTIMATED HEARING AID MARKET UNIT GROWTH BY REGION

 

2021

2022

Region

Q1

Q2

Q3

Q4

Total

Q1

Europe

   10%

  130%

   12%

14%

    30%

    20%

North America

     9%

  182%

   18%

16%

    35%

      8%

Hereof US (commercial)

   12%

  156%

   17%

15%

    34%

      6%

Hereof US (VA)

   -7%

  522%

   52%

22%

    51%

    19%

Rest of world

     0%

    64%

   11%

8%

    16%

      4%

Global

     6%

  116%

   14%

13%

    27%

    12%

 

Compared to the same period in 2021, unit growth in Europe in Q1 was very strong
with positive developments in most countries. In the UK, market growth was
extraordinarily high, and especially the NHS saw strong growth, which can be
attributed to very low comparative figures, and the commercial market remained
strong. Germany continued the recovery seen in recent quarters and saw strong
growth against low comparative figures. In France, market growth was slightly
positive despite the extraordinary positive impact last year of the hearing
healthcare reform.

 

Unit growth in North America was solid in Q1 and was predominantly driven by a
rebound in VA. The commercial part of the market remained above the normal level
despite regional flare-ups of coronavirus infections, which negatively affected
growth in the early part of Q1. Unit growth in Canada remained on a solid trend
in Q1 and the market was in line with the normal level.

 

In Australia, unit growth was slightly positive in Q1 compared to the same
period last year, despite coronavirus restrictions limiting market growth. In
Japan, growth was also slightly positive compared to last year, but the market
remained below the pre-pandemic level in Q1 2019. We estimate that growth rates
in China and South Korea were negative in Q1. For China specifically, the year
started on a solid trajectory, but recent lockdowns and coronavirus-related
restrictions significantly affected growth towards the end of Q1, and we
estimate that the activity level is currently materially lower than normal with
large regional variations.

 

We continue to expect that the long-awaited over-the-counter (OTC) category of
hearing aids will be finalised by the US Food and Drug Administration (FDA) in
2022. As previously communicated, the content of the proposed rule does not
change our fundamental belief in the importance of providing a combination of
personal counselling, individual fitting, life-long service and highly advanced
technology, but the new category may supplement the existing hearing aid
categories well.

 


DIAGNOSTICS MARKET

The market for diagnostic instruments and services remains very resilient. We
estimate that, compared to the same period last year, the market growth rate in
Q1 was above the estimated structural annual growth rate of 3-5%.

 


HEARING AIDS

Our Hearing Aids business delivered a very strong performance in Q1 with organic
growth of 9%. Growth from acquisitions was -2% due to the divestment in October
2021 of FrontRow Calypso LLC, whereas exchange rate effects were 2%.

 

 

Revenue (DKK million)

 

Growth

Revenue

Q1 2022

Q1 2021

 

Organic

Acquisitive

LCY

FX

Reported

Total revenue

2,351

2,159

 

9%

-2%

7%

2%

9%

Internal sales to Hearing Care

441

459

 

-11%

4%

-7%

3%

-4%

Sales to external customers

1,910

1,700

 

14%

-4%

11%

2%

12%

 

Organic growth was driven by very strong sales to external customers, which grew
organically by 14% thanks to high unit sales in emerging markets and to the NHS,
which recovered significantly from a low comparative base in 2021. We also saw
strong momentum in most European markets. Internal sales to Hearing Care
accounted for 19% of total revenue in Hearing Aids, but growth was negative due
to high comparative numbers last year. In line with our expectations, growth was
entirely driven by an increase in unit sales, whereas the ASP declined due to
material differences in momentum between individual regions and channels.

 

Hearing Aids continued to gain market share following a successful expansion of
the latest product families, Oticon More, Philips HearLink, Bernafon Alpha and
Sonic Radiant, in more form factors and price points. In Q1, all our four
hearing aid brands introduced new miniBTE form factors and expanded all
currently available form factors into the mid-priced product categories.

 

In Europe, we saw strong growth in Q1 driven particularly by the significant
recovery in sales to the NHS after having been heavily impacted by coronavirus
in the comparative period. Commercial sales in the UK continued to see strong
momentum, as did sales in Italy and to a lesser extent in France. The impact of
the current halt in sales to Russia, Belarus and the provinces of Donetsk and
Luhansk only had very limited impact on growth in Q1, but this halt in sales is
nonetheless expected to be a slight drag on growth throughout 2022.

 

North America delivered solid revenue growth driven by sales to VA – where our
unit market share has increased from 10.5% in March 2021 to 15.1% in March 2022
– but also by continuing strong momentum in sales to Costco and independents.
Canada also delivered solid growth in Q1.

 

Growth in the Asia and Pacific regions was impacted by new coronavirus-related
restrictions in some of the large markets. China was impacted most
significantly, and with lockdowns extending into April and the beginning of May
– most importantly in Shanghai, which is a hub for our Chinese activities – our
current run rate in China is very low. Japan, South Korea and Australia were
also impacted by continuing restrictions. Sales to our Other countries region,
which mostly comprises emerging markets, saw very strong growth in Q1 driven by
good commercial momentum and significant, broadly based market recoveries.

 


HEARING CARE

In Q1, Hearing Care saw good momentum and delivered organic growth of 2% despite
high comparative figures in France following the healthcare reform implemented
in 2021. Driven by the US and Canada, growth from acquisitions was 5%, and
exchange rate effects were 3%. In Q1, we continued to see a slightly negative
impact of coronavirus in some markets, leading to an increase in the number of
cancelled appointments, but we believe that this effect is only temporary, and
many appointments have quickly been rescheduled.

 

Europe was the biggest contributor to growth in Q1, driven by positive
performances in most markets. France was a slight drag on growth following the
significant tailwind we experienced last year due to the hearing healthcare
reform, but the impact was less negative than anticipated. We have also seen
good performances in Spain and Poland and in a number of other European
countries.

 

North America delivered slightly negative organic growth in Q1, which was due to
the US where high coronavirus infection rates at the beginning of the year
resulted in an increased number of cancelled appointments and difficulties in
fully staffing clinics. Also, the strategic decision to reduce the share of
sales related to managed care had a negative impact on growth but a neutral
impact on profit. Canada delivered positive organic growth, and acquisitions in
both the US and Canada contributed meaningfully to growth.

 

In Australia, revenue was negatively impacted by lockdowns and
coronavirus-related restrictions in early Q1, which were, however, lifted during
the period. We also experienced a negative impact of floodings in some areas,
resulting in clinics being temporarily closed. In the last part of Q1, revenue
returned to more normal levels in the region.

 


DIAGNOSTICS

Following an impressive 2021, Diagnostics delivered very strong organic growth
of 19% in Q1 and continued to gain market share. In addition, we realised growth
of 1% from acquisitions and 6% from exchange rate effects. Growth was broadly
based across all regions, and the order intake continued to be strong. The US is
still the biggest single contributor to growth, but we also saw positive
developments in Europe, driven by the UK and Denmark, and in Australia. Towards
the end of Q1, sales to China were negatively impacted by reimposed
coronavirus-related restrictions.

 

In terms of product categories, Diagnostics generated growth in all product
categories, with the biggest contribution to growth coming from our instruments
for hearing aid fitting and balance testing.

 


COMMUNICATIONS


MARKET TRENDS

Following very strong developments in the comparative period, we estimate that
the market for gaming and enterprise solutions saw negative growth in Q1. The
decline in the market was, and continues to be, exacerbated by the ongoing
supply chain situation, impacting especially wireless products. We believe that
the gaming market is also seeing some impact of the general weakening of
consumer spending, but that demand for enterprise solutions remains solid.

 

As a result of the ongoing supply chain situation, the market for enterprise and
gaming headsets and video solutions is expected to see growth in 2022 below the
estimated structural level of around 12%. However, in the medium- to long-term,
we still consider the fundamental growth drivers of the market to be fully
intact and we continue to expect the structural market growth rate to be around
12%.

 


COMMUNICATIONS (EPOS)

The Communications business area, which operates under the EPOS brand, saw
organic growth of -25% in Q1. Exchange rate effects amounted to 2%. Growth was
significantly impacted by the high comparative base following a very strong Q1
2021. Geographically, Europe saw the most negative growth rate, whereas the US
and Asia performed better.

 

The negative growth was most pronounced in Gaming where user demand for low-end
products, high inventories in the sales channels and supply chain challenges for
certain product families were all a drag on growth. In Q1, Enterprise Solutions
saw solid performance, which was broadly based across geographies, but with
Europe as the most prominent growth driver. We saw a positive development in the
order intake, and our backlog increased from the end of 2021.

 

ABOUT DEMANT A/S

Demant is a world-leading hearing healthcare group that offers solutions and
services to help people with hearing loss connect with the world around them. In
every aspect, from hearing devices, hearing implants, diagnostics to audio and
video solutions and hearing care all over the world, Demant is active and
engaged. Our innovative technologies and know-how help improve people’s health
and hear-ing. We create life-changing differences through hearing health.

ATTACHMENTS

 * 2022-10 Interim Management Statement.pdf


ATTACHMENTS

ritzau-5227-en.pdf
2022-10 Interim Management Statement.pdf

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