Demant A/S

CSE:DEMANT

Earnings Call Transcript 2019-Q1

[Søren Bergholt Andersson, Vice President of Investor Relations]

Ladies and gentlemen, thank you for participating in this conference call, held in connection with our statement released this morning. The duration of this call will be a maximum of 1 hour, including Q&A. Today, the company is represented by Søren Nielsen, President and CEO; as well as René Schneider, CFO; and together with the me, also the rest of the IR team.I'll now hand over to Søren.

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much, Søren, and welcome to everyone to this 1-hour call, under the headline of life-changing hearing health, the group continue to expand this business across a number of different businesses.Key takeaways year-to-date is successful launch on Oticon Opn drives growth acceleration as expected. After -- as previously announced, slow start to the year due to lost momentum in its predecessor. Oticon Opn, after 2.5 years, ran a little bit short of steam. And we now see how the new product launches drive market share gains, and we are in the middle of launching and have seen so far, a positive effect of that.So a solid organic growth in the wholesale business thanks to the uptake of Oticon Opn since its launch and again, further to come. Also on the Oticon Opn S as well as Bernafon, Sonic that started its introduction in April. And Philips HearLink that have not yet actually been selling anything, but the portfolio and the content of the new product brand was announced also mid-April. We have seen growth in our hearing aid retail business mainly by acquisitions so far but also positive even though a low organic growth and this including the negative one-off effect we saw in the beginning of the year from different healthcare reform on our retail business.We have seen strong organic growth in Hearing Implants. This has been driven strongly by a very nice uptake in the cochlear implant business. But also, solid growth in the bone-anchored business and this is prior to the launch of Ponto 4, that's expected to hit the market end of first half. We continue to see our Diagnostic business, it developed really well and positively. It's also the plan. But we continue to see how the business expands across the world, different -- its different brands and product categories, including a growing service and accessory business that's continued to expand its share of the total business.R&D cost increased due to a full year effects of the decision in '18 to significantly step up the R&D effort that's mainly happened during first half, so we will soon start to see the growth rate go down and normalize throughout the year. The same for the step-up and distribution cost we saw during May '18 as a consequence of the large acquisition we did of a previously partly-owned retail entity in North America. And this -- all in all, the weak start to the year.The French reform and the impact of that leads to a first half result that is significantly less than second half. And we expect the first half to be around or slightly lower than reported EBIT of DKK 1.226 billion in first half '18. And as the guidance for the full year's maintained, you can see a very material skew towards the second half of the year.And assets, we maintained our outlook on reported EBIT from DKK 2.65 billion to DKK 2.95 billion. And expect to generate organic growth above market level as previously communicated and also being able to -- on top of acquisition to do share buyback worth a minimum of DKK 1.2 billion.Looking a bit more into the various business activities starting with the hearing device market. We have seen a market development in the beginning of the year. If we disregard U.K. to be normal, broadly speaking, we have seen a little less than the expected 4% to 6% unit growth worldwide. In U.S., in the first quarter, we only saw a 1.5% in the commercial market, which is relatively low. But on the other hand, VA growing almost 7% in the first quarter, and this is a little bit reversed from the pattern we have seen in the past years. Very strong growth in Europe, but this has primarily been driven by the National Health Service in U.K., making a safety stock across the entire healthcare system in preparation for a potential hard Brexit. So they have basically stocked up products for 3 months' demand in the case that you will not be able to bring in goods into the U.K. And this is, of course, a one-off effects that once Britain have found a solution on the other side and normalize, that they will eat off again. And therefore, we had some states who come back and say now stock is being brought down, but so far the [ odds ] of when that -- it will happen is, of course, as you all know, high.We have seen strong unit growth in Germany, Italy and a number of other markets. And France, even though there was a tough start to the year, a lot of it have rebounded on the wholesale level. And all in all, we cannot say that France have developed negatively. It has actually, for the quarter, it seems like -- to have recouped itself at wholesale level on retail level. There's still no doubt that due to the postponed invoicing days, an actual downwards trend in the market in the first 2 months.Wholesale value, we still expect to grow 2% to 4% because there is a slight negative component coming from channel mix and geography mix, being that especially the regions in the world with lower prices grow faster than those with the higher prices or actually the better product mix rather than pricing. And also, a slight shift towards channels that buy at lower prices than the average aftermarket.Retail ASP, very significantly across market, but other than that, relatively stable. We, of course, last year saw fluctuations in the large market like Australia, product gain mainly product mix-driven rather than actually line-by-line ASP deterioration.A few more words to the healthcare reform in France. We had a one-off negative effect of approximately DKK 50 million on EBIT level, reported EBIT for hearing devices, and this is particularly associated with the retail business. And this is one-to-one linked to the extent -- extended trial period of 30 days as well as a number of users waiting to start their enroll and test of hearing aids to the new year in order to be sure to get better reimbursement conditions. And this also all led to a -- in our view, a tangible and significant negative effect in January and February. But things have now normalized and we see growth and invoicing level in lines with the past. And in general, France being a good and strong market that developed quite positively these years. And no doubt, the reform in France, in general, will further support the market growth. A number of new audiologists are being educated and hold support in terms of reimbursement and so on will, for sure, bring more clients to the marketplace.Looking at hearing aid wholesale. A weak start to the year, but growth acceleration since launch. It's a very good headline for what has happened the first 4 months. We have seen solid organic growth in the wholesale business, estimated above -- slightly above the market value growth rates year-to-date. Strong, very strong, I would say, unit growth year-to-date. And as a consequence of what types of units and the product mix and the channel mix and the geography mix, also a quite negative development to the ASP.But again, this is a very composed number as we have talked about in the past many years, it fluctuates a lot during the years, depending on whether it's a unit or product mix and so on. And these past 4 months, we've seen strong unit sales to National Health Service, but also a very strong development in Asia, particularly China, but also South Korea and Japan. And we have seen weak year-to-date growth in Premium segment, changed, of course, between first 2 months and then the last 6 to 8 weeks, where the incoming momentum was negative then, of course, growth had been positive in the past weeks. Growth in the mid-price products launched in August have been big. This is, of course, both a full year effect and also a strong momentum in many markets around these highly performing new products.Year-over-year, cost impact from step-up in R&D effort will gradually decrease during the year. And what drives it? It is our new flagship product, Opn S, that drives the regaining of momentum. And after having the product out for some weeks, 1.5 months' time, we can see a very positive feedback and the product deliver an unseen level of performance driven by an unmatched, what you could describe as gain preservation due to this paradigm shift in how feedback gets handled. You simply are left with a better detailing of the sound, more details. Less reduction of gain is necessary, if any, and this comes out as a significant improvement of outcome in terms of speech understanding in noise, less listening effort and again, ability to remember what's being said. Topping that off with a very strong lithium-ion batteries rechargeable solution, this product has a very good fit with the current market expectations. And we have a documented effect of, again, a very significant 15% improvement of speech understanding in noise, 10% improvement of a reduction of listening effort and 10% improvement of memory recall. You can remember much better what's being said. The family is quite broad, 4 styles, 3 price points. And except for a little bit of buildup of capacity in the rechargeable area, where we have just launched 2 further price points, then we are basically out now. And during May, first weeks of May here with all opportunities in the Oticon brand, very well received, and we have seen material growth.VN -- VA is yet to come. We started May 1. And with a little bit of pent-up demand, it seems like a good start. However, it's way too early to judge how VA will now come out. There's obviously a number of new products entering, but I'm pretty comfortable that Oticon Opn will gain momentum. We stayed relatively stable with Opn -- Oticon Opn, so Oticon Opn S will definitely drive improvements. We still need to roll on brands and opportunities. And especially Bernafon, Sonic are now out in sales and delivering good performance, but just started up. Whereas in the brand, Philips brand, we have yet to see first sales to come in but are very ready and we'll soon start to see sales pick up.So again, also there, a number of opportunities for the period ahead.Year-to-date growth in retail mainly driven by our acquisitions. And that's the full year effect of the acquisition done in last year of a previously part-owned larger entity in North America. All in all, we have year-to-date delivered positive, however, low organic growth, but that's including the negative impact in the French -- on the French hearing healthcare reform. And we have seen a steady and post-positive development in 2 of our key markets, U.S. and Australia, that both year-to-date have shown positive organic growth. U.S., the continued effort to build a strong corporate entity. And in Australia by improving and adjusting to a business model where there is a bit more free-to-client type of products being fitted. So you basically have to fit more patients to get to the same revenue base. And we have done different adjustments to accommodate for that.We have seen strong growth in U.K. and Poland as well. And all in all, a positive start to the year in our retail business. We do want to remind of the step-up in distribution cost due to the acquisition, but also remind you all that as of mid-May, this is going to an annualized. And other than that, we are more in line with what you could expect as normal growth pattern for a cost base dominated by people and employees.Strong organic growth in Hearing Implants driven by cochlear implants. In cochlear implants, we have seen very strong growth, exceeding estimated market growth, I would say, significantly despite of the decision to reduce activity levels in selected markets with lower prices. Strong broad-based growth in Europe, in particular Germany and then in Brazil and a number of export markets. This is to attribute to [ Neu 2 ] and the whole new implant system. We continue to grow the number of clinics that work with us and also stronger and stronger in a number of clinics and on board some new markets as well and this all in all continue to drive sales in a very positive direction.On the bone-anchored, we have seen year-to-date a solid growth, even though the market growth is expected still to be very modest. We have -- we believe definitely take market share and now look ahead to the introduction of Ponto 4, which is a very exciting product, based on the same Velox S platform as the new Oticon Opn S. And not just it is -- is it delivered in a much smaller form factor, but it will also deliver a lot of the benefits we have seen on the hearing aid side. So a totally new small mechanic, new Velox S-based platform, the Opn sound navigator and the paradigm shift coming with that, wireless connectivities, et cetera, all in all, a very, very strong bone-anchored system. And we have -- to those we have already shown it, we have gotten very positive feedback. And we expect to release it for sale at the way the end of the first half.The Diagnostic business continue a strong organic growth in line with our expectations. It happens across region, brands and different product categories. There's positive market trends and solid competitive situation, both in products, offerings and distribution. And our U.S.-based businesses, including distribution and service business, is so far the most significant growth driver, but we also do strong in the Asian region.Personal Communication. We continue to see strong growth year-to-date in Enterprise Solutions and the Mobile segment. We are still part of the joint venture for the remaining of the year. And therefore, only control about the profit coming in, and this is in line with last year that actually was a little bit skewed because of a lot of sell into stock. But the growth that we have seen since then have been able to compensate for that. So we, again, year-to-date, have seen profit in line with last year.The probation for the separation as of January next year is progressing according to plans. And we have actually gone live in some of our own systems, even though we are still part of the joint venture. We cannot do it all in 1 day. And we seem to be pretty well underway.Other matters. First one, acquisitions. In 2019, we will continue to make acquisitions in Hearing Devices. And we expect the cash flow to acquisitions to -- for the full year to be slightly below '18, but still at a decent level. A significant proportion of these are expected to be as it was with the large acquisition last year, where we have had a -- in businesses where we have had a minority share for a while and where we will then take over full ownership, and this is predominantly in the hearing retail space -- hearing aid retail space that this is going to take place. And then just as a general reminder of the IFRS 16 implementation, which we implemented this year, which mainly has an impact around leases, recognized at the balance sheet and on EBIT, only minor effects, some on EBITDA and then mainly on the gearing multiples that mechanically is increased with 0 effect -- 0.3.Consolidation of Sennheiser Communications also just a reminder. As communicated as of January 1, 2020, we will take over end-to-end responsibility of Gaming and Enterprise Solution. If you have to have some estimation of size of business, if it was in 2018, it is not -- it has grown quite a lot since, but if it was, you would have to take 2/3 of the joint venture revenue, which was just north of DKK 1 billion. Take 2/3 of that and add 1/3 markup and you are almost back at the DKK 1 billion. So this is the mechanics that you can apply to the numbers.The net effect in 2020, we'll see a lot of additional revenue. We'll see relatively apples-to-apples and everything else equal, a neutral effect on EBIT. And with that, of course, a dilutive effect on the EBIT margin but a very positive continued contribution to the absolute EBIT. And we, for sure, expect to improve the business over time and further grow EBIT and, of course, also margin over time.Outlook for 2019, we maintain our expectation to generate organic sales growth above the market level, accelerating through the year as we get the full effect of the mainly new product launches. We expect a positive effect on revenue from exchange rate of around 1%. We maintain our guidance on reported EBIT of DKK 2.65 billion to DKK 2.95 billion with a material SKU towards second half, this we have been through. And the EBIT in first half, the reported EBIT will be around or slightly lower than last year's reported EBIT of DKK 1.226 billion in first half of '18.We will still deliver substantial growth in our cash flows from operation. And aim to buy back shares worth of minimum of DKK 1.2 billion, even with a continued relatively high acquisition level. And we aim for a gearing multiple of 1.8 to 2.3 net interest-bearing debt. And the only reason why that's 0.3 larger than last year is exactly the implementation of IFRS 16 as I just went through.And with that, we'll open up for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Annette Lykke from Handelsbanken.

[Annette Lykke, Medtech Analyst]

I would like to ask little bit into the details of the healthcare reform in France. And just want to know if this is -- 4-years warranty is on market average? Or it will -- this -- potentially be any problems? Or it could be tricky? And does it apply to all kind of form factors, including, for example, CIC? And then you were sort of alluding to your positive response on Opn S. Could you share with us some of the key performance indicators, you probably have both for the Opn S launch that you've just made? And then the Opn launch you made back in 2016, is there any key differences here? Or are they a [ just a par ]? Or how should we read that? That would be my question for now.

[Søren Nielsen, CEO, President & Member of Executive Board]

Let me first speak of France. You know, 4-year warranty is definitely longer than average. So typically, we worked with 2 years. But that is a number of markets, especially, if there is subsidies involved that simply ask for a full covered and that is typically then included in the pricing. And there has been different pricing adjustments as part of setting up products for the new reform. It's quite limited what products you can have on your list. And this is, of course, part of the price calculation. It is simply they reimburse or don't want to speculate in warranty costs and, therefore, insist on having all cost covered for the full period, but that is part of our calculation of pricing.And then Opn S, you, of course, always look at uptake rates and the penetration to customers. And we, of course, on a very continuous basis, make sure that the period we have been through so far is predominantly to customers that are -- our very best customers and work most intense with us, and that's where you typically see a very immediate uptake. And we have also seen the period ahead of us is where we really have to try to gain market share. And therefore, it's too early to exactly judge how that is going to fan out. But we are quite optimistic. We have seen good positive responses, very good feelings. So we are positive for our continued growth momentum driven by the new products.

[Annette Lykke, Medtech Analyst]

I get that, Søren, but I'm just -- if it is different compared to the Opn uptake you had back in '16?

[Søren Nielsen, CEO, President & Member of Executive Board]

You could say, the way -- at least one way it's different was the distance between the announcement and the actual delivery of the first units was much longer. So we saw a much steeper loss of momentum. We saw much more demand being built up, and I think it's the biggest first day invoicing ever in the life of the history of the company we saw with Opn, the first generation. And it has not been the same way this way around. It has been much closer between. So a much more smooth transition from the one product to the other. So this way, it's different.

[Operator]

Our next question comes from the line of Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Martin Parkhøi, Danske Bank. Also 2 questions. Firstly, one related to retail. You state that the retail growth in the -- from year-to-date has been on par with the 1% you delivered last year, but if you adjust for the negative impact in France, I would guess that, that will bring you to an underlying improvement at the tune of 4%, correct me if I'm wrong. Is that a sustainable growth rate that we should see for -- not only for the first 4 months, but also for the remainder of the year? Is this a real trend shift in your retail business as you have been looking for, for quite some time? And then secondly with the Philips. I must say that I personally was a little bit disappointed when you launched the Philips hearing aids because you know, to me, it just sounded like hearing aids. And all the buzz words around connected hearing and stuff like that, I didn't really come into this first launch. So can you elaborate a little bit on how are you on the product side and not only on the brand side will differentiate from your existing products? And in that context, could you give some anecdotals on some wins you have got so far to have been able to come into some new selling points with the Philips brand of solutions?

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you, Martin. On the retail, I don't think we have released specific numbers as you indicate today, so I cannot confirm your numbers. But I can say that this is part of the continuous improvement that we talked about last year. We have not seen a step-up from 1 month to another. This is a steady improvement. But year-to-date, it seems like stable trend. That doesn't mean that retail have all of a sudden become stable and totally predictable. I think that goes for all retail around the world, that there are and can be significant fluctuation. It takes a few glitches and then you see something. But we are in better shape than we were during '18. And I think that's what we have seen and can confirm year-to-date. And this is, of course, thanks to a lot of activities taking place in our key markets to improve performance of the business. And also, underlying in France, we continue to see strong performance from the [ only care ] business there. So slightly positive, slightly optimistic outlook. But again, retail business is a very dynamic business. So let's not make too many conclusions on the time ahead of us.Philips, I think our first product is getting something into the market. The longer-term vision and desire to make Philips -- especially products that integrate with the remaining of Philips' vision and desire to create a strong healthcare infrastructure, where data can be shared, et cetera, is fully intact. It's true that beyond what is known generally in the market about connectivity, Philips offers more or less the same at this stage. But the ambition of doing something more than that is definitely intact and pursued in the cooperation we have with Philips.

[Martin Parkhøi, Senior Equity Analyst]

Any anecdotal wins?

[Søren Nielsen, CEO, President & Member of Executive Board]

No. As I think I said explicitly, we have not sold anything yet. So there's that many anecdotes to share.

[Martin Parkhøi, Senior Equity Analyst]

Maybe you could still strike some deals without selling anything.

[Søren Nielsen, CEO, President & Member of Executive Board]

We talked to customers, and we feel there's good appetite and interest out there. But so far, no material impact on the business.

[Operator]

Our next question comes from the line of Christian Ryom from Nordea Markets.

[Christian Sørup Ryom, Senior Analyst]

A couple of questions from me as well. The first is to your wholesale growth. So you say that the growth year-to-date has been above the market rate and you site these 2% to 4%, which would suggest that your wholesale growth has been in the mid-single digits. And then you also say that the growth was slow in the start of the year and then have accelerated in the last couple of months. So am I completely wrong if I'm assuming that you are now looking at a wholesale growth rate that is in the mid- to high single digits in these last couple of months? Can you comment on that? And then my second question is to your U.S. retail business. So I believe, you previously mentioned that you had a particularly weak first quarter of 2018 due to a high level of returns in your U.S. retail business. Can you comment on what the growth rate in your U.S. retail business looked like if we adjust for that?

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much, Christian. The straight answer to both would be no and no, but I'll try to elaborate a little more. Wholesale growth above market rate, as you say, yes, indicate mid-single digits. The reason why we talk about a very big difference between first half and second half in EBIT also has to come with what kind of growth we have seen. And where we lost the momentum was in the premium sales in markets with very high premium share like U.S. and France. We're actually seeing a decent sales still in the first part of the year. But just dominated by Asian markets, very high number of units and a significant drop in ASP due to the mix, also the NHS coming in. This is also part of the effects. So the change in revenue growth is not fully as dramatic as you might imagine. But of course, from now on, we should see a further acceleration of the growth level from this, let's say, just above market growth. And then U.S. retail. Yes, in particular, U.S. retail or -- and especially U.S. retail -- or uniquely for U.S. retail -- sorry, it's the right one. Yes, we saw a weak start in '18 January, February, but the growth we have seen year-to-date has been beyond the first month. It has actually been even stronger towards the end of the period than the beginning of the period. So I don't see that, that's the main factor in the reason for the momentum that's -- that is much more the improvement of the underlying business.

[Operator]

Our next question comes from the line of Patrick Wood from Bank of America Merrill Lynch.

[Patrick Andrew Robert Wood]

I have 2, please. One on a similar vein. The wholesale unit growth, very strong, I mean even if -- I mean we don't necessarily know how much to the effect on our end was the NHS. But even ex-ing that out, it still looks very strong. So I guess, I'm curious and I hear what you mean about Asia being stronger, but is it that you've lost less volume share than you were expecting to competitors at the start of this year? Or is it more that the take-up of Opn S has been just a lot faster and more aggressive than you were expecting? So which of those 2 things was the more predominant feature of it? That would be the first question. And then on the second question, I'm just curious what -- how much that impacts the France changes had on the retail growth that you guys had? I know you've given an EBIT number. But I'm just curious, would retail revenue growth have approached something like 3%, 4%, 5% if it were France where adjusted for? That would be helpful.

[Søren Nielsen, CEO, President & Member of Executive Board]

Yes. First on this -- about the revenue driven by a strong unit pickup on Opn. Opn is generally following our plans and expectations. We have definitely seen higher unit growth rates. It's primarily because of NHS but also Asia [ than had in ] plans. But again, in a worse product mix, and this is where all these things blend together and end up, it is very material. The unit growth whereas similarly the ASP decline has also been very material. And that's why you end up in this -- just above market growth rate. I cannot really share any more details at this stage on that. On the retail and the French reform, we look at the full period. And sales in France have also been strong since all in all, we are not fully at the level you talk about, slightly below that. I cannot say more than that.

[Operator]

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

[Veronika Dubajova, Equity Analyst]

I have 2, please. I mean first one is on M&A. I believe you acquired EarQ last week. Can you comment a little bit on the motivation for this transaction? And in terms of the impact that you expect on revenues and EBIT this year from that, that would be helpful. And then my second question is on the cochlear implant side of the business. Clearly, very strong start to the year. What do you think has gone better than expected? Where are you seeing in particular, strong demand if you can share some color on that, that would be helpful.

[Søren Nielsen, CEO, President & Member of Executive Board]

In line with tradition, we'll not comment on specific acquisitions and whether we have bought one or the other and what that will mean for the business. So I will not comment on our potential acquisitions of EarQ, except mentioning that EarQ is a value-added wholesaler. It's not retail entity for those that are not aware. And it is a minor entity in the U.S. markets, that's why I don't think we should dramatize it.The cochlear implant business is a combination of strong solid growth in European markets and Brazil, winning market share, gaining momentum, growing the business, et cetera. But then also there has been an element of timing of some significant tenders in the period that all in all make us come out very strongly compared to some extent also on our expectations.

[Veronika Dubajova, Equity Analyst]

Maybe just conceptually, I'm just surprised to see you buy another wholesaler. So maybe you can talk about your motivations for that without specifically talking about the impact of EarQ on the business.

[Søren Nielsen, CEO, President & Member of Executive Board]

We have -- for many years, have been very active like a number of our competitors in value-added wholesale in U.S. The whole asset are -- has been in the group for many years, and it's down that line and I'd have no further comments on that.

[Veronika Dubajova, Equity Analyst]

Okay. And the expected M&A impact for the year, has your guidance for that changed?

[Søren Nielsen, CEO, President & Member of Executive Board]

No.

[René Schneider, CFO & Member of Executive Board]

Well, for the full year, we guide that we expect an M&A level slightly below the level of '18.

[Veronika Dubajova, Equity Analyst]

And that -- René, I think that's from a spend prospective. But what about revenue -- impact on revenue growth?

[René Schneider, CFO & Member of Executive Board]

2 percentage point.

[Operator]

Our next question comes from the line of Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

I have 2 questions surrounding your unit growth. Just from the wording in the press release, Soren, could you just confirm that your unit growth excluding the special impact of stocking in the U.K. was actually also above what is earmarked?

[Søren Nielsen, CEO, President & Member of Executive Board]

Maja, could I have you to repeat the question? It's really a bad line you're on.

[Maja Pataki, Head of Med Tech Devices Sector]

Okay. I was just wondering whether you can confirm that the unit growth excluding the stocking impact of NHS was the -- also above the normalized market growth. And the second question was, if you could talk a bit about the dynamics in the independent U.S. market, where you stated you had a bad performance though. So I'm trying to understand whether you were reporting negative unit growth in the U.S. in the first couple of quarters or whether you have basically over 4 months seen a flat growth since Opn S has been coming through.

[Søren Nielsen, CEO, President & Member of Executive Board]

With the risk of not getting your question exact, unit growth excluding NHS is also above the estimated 4% to 6%. But in general, with a totally different -- or slightly different product mix and geography mix, and again, that's what impacts ASP. And that's basically into -- if I got your U.S. question right, we have not seen a dramatic -- or we are not seeing a setback on units in U.S., we have seen a change in product mix with the mid-priced products growing and a lost momentum in the more premium side of things. And this is the main element.

[Maja Pataki, Head of Med Tech Devices Sector]

That's exactly what I was looking for. Can you just maybe confirm whether you feel you have managed to maintain or increase the market share in the U.S. independent market in unit terms? Because the business makes [indiscernible]

[Søren Nielsen, CEO, President & Member of Executive Board]

The unit growth we have seen, there's no doubt, we have gained share on units as well.

[Operator]

Our next question comes from the line of Michael Jungling from Morgan Stanley.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

I have 2 questions, please. Firstly, on Opn S. Are you starting to see better margins because the product's going from ZPower to lithium-ion? So better margins for wholesale Opn S versus Opn. And then secondly, when it comes to Opn S, I think at your AAA event in the U.S., you specifically mentioned that you noticed the launch of Marvel pretty much immediately on your business. Is Opn S gaining traction and fighting off Marvel in your independent accounts?

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you, Michael. First of all, I think I've also said that there's not a big material difference in the cost of our own developed system versus the ZPower. Over time, of course, we expect to get some scale effects and so on. But as a starting point, there's no major difference in the cost side of things. Regarding -- and more or less immediate effect, it's correct that we saw on Opn quite immediate effect of that introduction. We have seen Opn S pick up very nicely. It's too early to say whether it's pushing back on that or not or whether it's a product mix with our own, but assuming that the market has relatively stable this year, somebody out there have lost. Who it is, I can't comment on.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Okay. And maybe a follow-up on the margins for Opn S. I mean if you talk with some of your competitors their achieving a much better margin on lithium-ion versus ZPower. At what point do you think you'll be able to be in the same position to benefit from greater margins on lithium-ion? Will it be sometime this year? Or do we have to wait until 2020 for this to happen?

[Søren Nielsen, CEO, President & Member of Executive Board]

That I cannot comment on.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

All right. Is that because you don't know? Or is it because you don't want to say?

[Søren Nielsen, CEO, President & Member of Executive Board]

No, because -- it is because there has to be an improvement of -- due to scale and how fast do we get the various components renegotiated and volume pickup and so there's uncertainty to that. So I don't want to give any precise guidance on that.

[Operator]

Our next question comes from the line of Niels Granholm-Leth from Carnegie Bank.

[Niels Granholm-Leth]

So you mentioned earlier that NHS has increased its inventories to 3 months of demand. What would be the normal stock level in NHS? My second question would be regarding the cost that you are building in preparation for the consolidation of your headset business. Where are you incurring those costs? Are they included in associated income? Or are they actually taken on your P&L?

[Søren Nielsen, CEO, President & Member of Executive Board]

First, NHS. I don't know actually what their normal stock level is. But let's assume, it's between 1 or 2 months, something like that, I would assume. There's a relatively rapid turn on the stock. So, yes, it could be 1 month, I cannot tell specifically. The cost has no material impact in preparing for the Sennheiser this year. We take that under the joint venture hood. And it is -- what we do ourselves is mainly manpower, not something that you can see as extra cost. It's prioritization of people in our IT department, et cetera.

[René Schneider, CFO & Member of Executive Board]

All right. Just in addition. Because it is immaterial from an EBIT impact, it will also be part of the joint venture line or the associated line. That's -- even if it is fully owned by us.

[Operator]

Our next question comes from the line of Tom Jones from Berenberg.

[Thomas M. Jones, Analyst]

I think I had 2 questions, more from a cost perspective really. The first was just on R&D spending. You kind of in your prepared comments, talked about the step-up in R&D in 2018 and how that might level off a bit. But if I look at the last 4 or 5 years, R&D spending has increased by, I mean, roughly DKK 80 million or DKK 90 million every year. So it didn't really look like 2018 represented a meaningful step-up in cost terms. So I guess my question is should we expect a leveling off in absolute terms of -- from -- of R&D spending for a period now? Or should we expect another kind of DKK 80 billion, DKK 90 billion, DKK 100 billion increase? And the second question really for René. I mean you spent nearly DKK 900 million last year, primarily buying out businesses where you had a minority stake, but there didn't seem to be a big shift in minority income. So were these businesses really not very profitable? Or were you generating the profits really and transfer pricing somewhere else in the P&L? I'm just trying to understand how spending DKK 900 million last year and the same again this year is going to affect your P&L in the relatively near term.

[René Schneider, CFO & Member of Executive Board]

Yes. So first on R&D spent level. I think a meaningful way of thinking about it is that as we have communicated many times, we took a significant step-up in capacity during -- in particular, '18 with building an R&D site in Warsaw, et cetera. So that level of capacity that we had in the second half year of '18 is a very good proxy for the capacity that we are also entering in '19 with. So in other words, looking at the R&D spent in second half year of '18 and adding very modest growth and some inflation will give you a good proxy for where you would see R&D spent and how you would see R&D spend materialize in '19. In regards to effect of acquisitions, it is obviously very much a function of what the acquisitions are composed of and it could be as it was last year, a significant part of the acquisitions being earned out of payments on previously executed acquisitions. It could be fully taking up ownership of minority investments where we have in previous years, you can say, reap the benefits from increased share wallet or it could be a new and even fully new M&A investments. So you can see as a -- multiple effects from the various kinds. And we do not guide explicitly on which types it will would be other than also for this year, we do expect that a part of it is taking over full ownership of assets where we, today, have a meaningful ownership share.

[Thomas M. Jones, Analyst]

Okay. And maybe if I would just follow up on the M&A front without getting too specific about it. It just feels a bit like the M&A is getting a little bit more exotic, buying a wholesaler here, buying out businesses where you already have a stake. I mean would it be fair to -- let me ask the question slightly differently. How do you think the potential to grow your business inorganically over the next 5 to 10 years compares to how you've grown the business inorganically over the last 5 to 10 years?

[Søren Nielsen, CEO, President & Member of Executive Board]

I don't see any major difference. There is still a huge, directly addressable independent market. We see a lot of growth opportunity in Asia. We continue to see both, a consolidation but also remembering that the market have to expand significantly. And a lot of the market expansion happens as new openings of mom-and-pop shops as well as greenfield in existing channels. So the market's development will lead to enough potential that you will see, I think same opportunities to grow organically. We have also seen a consolidation on the manufacturer side. Our theory says that it would not just be the combination that wins, there will also be opportunity for leveraging around market shares here and there, that's always the case. So I think there is plenty of opportunity for significant innovations driving new products and driving market share movements. I think it has been proven in the past 3 years still to be a highly product-driven, latest innovation type of market, and I don't see any material change to that for the coming 5 years despite of continued high acquisition levels, not just by us, but a number of our competitors as well, I'm sure.

[Operator]

Our next question comes from the line of Oliver Metzger from Commerzbank.

[Oliver Metzger, Analyst]

My first one is just a follow up on the Australian retail business. So the issues, are they now completely soft? Or is there some negative impact in the reported improvement that comes from just a more lowered base? My second question is on personal communication. So you had growth both ahead of expectations, however, profit was only in line, which means, basically, profitability is down. How do you explain that its topline [ performance is ] better than you expected in a, I would say, very good dynamic for this kind of business that you have to touch kind of a [ leg of operating ] leverage?

[Søren Nielsen, CEO, President & Member of Executive Board]

Oliver, let me start with the last because then I've been misunderstood. We are only part-owner of a joint venture, which is a pure R&D and operation company, meaning its sales, revenue out of the joint venture is into a, you would say, it's somewhat internal to the business stock. And last year, we saw a lot of sell into stock at a higher rate than sell out of stock. So you could see the joint venture benefited from a stock buildup. We did not anticipate the same level of stock buildup, of course, this year. And with that, the joint venture revenue going a little bit down despite of a growing business. And what I said was, the total business out of Sennheiser [ measuring real customers ], is growing at a very solid pace. But due to the less impact of selling into stock, the joint venture don't benefit to the same extent as last year from that sales growth. And therefore, the EBIT is in line with last year. So it has nothing to do with scalability of the business or anything. That's still a very scalable business. And there is a, if you go to total EBIT across the business, a very strong correlation between sales growth and growing EBIT and will also be in the future. Australian business, it is a combination, of course, of base being lower, but also from that, an improvement of the business. We have, as I said, adjusted our business model to fit better to a higher level of free-to-client type of hearing aids and a slightly lower top operate. And that is a little bit with how you manage leads and scheduling and what have you. And this adjusted business model is now delivering very nice -- or have year-to-date delivered nice and solid growth. As all things turnover, there's nothing like that. The retail is detail, and you have to be on the ball each and every day. And that remains to be the task as well in Australia.

[Operator]

Our next question comes from the line of Yi-Dan Wang from Deutsche Bank.

[Yi-Dan Wang]

I have a few follow-ups. So on French retail, can you comment on why the EBIT impact is only DKK 50 million? Based on your previous indications that you would maybe lose 1 to 1.5 months of revenue, that would give you a revenue impact of DKK 75 million to DKK 115 million based on our estimates. And given that most of it -- well, actually, all of it should fall through, given that the cost base is going to be the same as it was before. So some color on that would be great. And what is the underlying growth in France excluding this effect? Is it still running at the robust rate of around 10% that it has done historically? And why is it so strong? And how sustainable is that? And on other retail, so given the color you've given on U.S., Australia and France, it would seem that there has been a deceleration in other retail as well. Could you confirm that? And if yes, what is driving that? And then on Opn S, can you comment on the timing of market share gains from customers who you have -- you don't do much business with? And what sort of benefit could we expect from those activities? I'll leave it there for now.

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much. We've never said we didn't invoice anything in the beginning of the year. We saw a significant setback and that means a dramatically lower volume of invoicing. But there is, of course, users that had started their trial and test in November, December -- or primarily December and carrying into, so the DKK 50 million very well represent exactly the setback we had in the first 6 to 8 weeks of the new year. And the wholesale business is not impacted very much. And that comes simply by cost of flow into the retail part of the business is basically unchanged. There was a little bit -- it has been quite dynamic, but a little bit of win or lose and cleaning the pipeline and then get a new one installed. But looking at the start to the year, there's no material impact from the reform, except still, as you say, a very solid market. And the main reason for France is there continue to be a lot of shop openings in France because the market is fundamentally less penetrated than the number of other European markets. And that's the development that is continued to be seen. And also why it has been very important and positive to see that a part of the reform is to increase the number of education seats for new audiologists quite significantly. And if we get more audiologists to the field, there will continue to be greenfield openings at a relatively high level compared to a number of other European markets and the French markets in the years to come, I'm sure. And looking at Opn S uptake, no, I cannot comment on penetration into new accounts, existing accounts and so on. I will not comment on those detailed numbers, except say that so far, the focus of the introduction, of course, primarily been with our good, typically very loyal customers and we have seen a very significant uptake and a very positive response. And the period ahead of us is intense and focused on both winning back accounts where we have lost some and also accounts where we, for one reason or the other, did not sell anything.

[Yi-Dan Wang]

And the slowdown in other retail ex France, Australia and the U.S.?

[Søren Nielsen, CEO, President & Member of Executive Board]

No. There's no -- no. It's always a little bit lose and win. But in general, the overall momentum of the business is up. But you know it's now a revolution to where we come from. But the steady improvements we have seen and we basically across most of our markets have seen a good start of the year. I think I'll put it like that. The start of the year, in general, in retail can be slow, so you also have to see it in that line.

[Operator]

Our next question comes from the line of Dan Jelovcan from Mirabaud.

[Daniel Jelovcan, Analyst]

Just on China, if you can shed some more light on what happened there. You mentioned strong sales. I mean was that in independent retail? Or was that more tender business related? Yes, if you can comment on that. And the other one is in the VA region, now open for Opn S since 1st of May, as you mentioned, is -- are you competitive versus Marvel, which has a full connectivity to all smartphones? Or is the U.S. markets -- the VA market, primarily iPhone -- I mean how do you say it, saturated? So would you feel very comfortable with Opn S in the VA? Those are 2 questions.

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much. Let me start with China. I think it's a very broad-based growth. All channels are growing, both hospitals and independent sector. And this is a market which is undergoing a quite rapid development and we see good market opportunities across the business and have a broad-based success, I would say. In VA, I think audiology is a very strong parameter. In the VA system, it is about doing the best you can for the soldiers and the outcome made us a lot and clinical documentation is on. So I think we stand a very good opportunity with Opn S as a highly competitive product in the VA system.

[Yi-Dan Wang]

And just on China, product-wise, it's -- I guess it's primarily low-end driven? Or has -- for instance, Opn S, a chance there as well?

[Søren Nielsen, CEO, President & Member of Executive Board]

China is improving its product mix every day as the market develops. And we have actually seen quite a strong success in '18 with Opn. Opn S is not yet launched and will take a while still before we can. But the Premium part of the market is growing as well as the mid-priced market on the account of low price and OTC and what have you. This is exactly my argument to why I don't think the U.S. market will reverse just because you get an opportunity to buy an OTC device.

[Søren Bergholt Andersson, Vice President of Investor Relations]

Okay. Thank you very much. That concludes today call, and thank you very much for joining. We'll be on the road for the next several weeks and months. And after this call, please reach out to the IR to ask additional questions. Have a great day. Bye-bye.