Demant A/S

CSE:DEMANT

Earnings Call Transcript 2020-Q1

[Mathias Holten Møller, Director of Investor Relations]

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 1 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 Moller.With this brief introduction, I'm very happy to hand it over to Søren Nielsen and later Rene for a quick run through of our presentation.

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

Thank you very much, Mathias. And welcome, everybody, to this session. I think it's obvious to everyone that the past 8 weeks are significantly different from the first 10, 11 of the year, and therefore, we come with a 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 diagnostics side, we're 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 significant part of the hearing health care 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 at working with both end users and our customers in the best possible way, servicing clients, including utilization of new remote services. However, a reason to keep some optimism, the fundamental drivers of the hearing health care 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 tests 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 1:1 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 either in virtual -- virtually no activities, stick 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 virtually a lockdown. I know there are initial steps to opening up and other 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, Holland in early recovery, again, activity level coming, a lot of response from on-service clients that need to see a hearing care professional, where we have not been able to solve it over the phone, et cetera. 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 judge -- take any early conclusion for these very first days. Sweden, China, Japan, Korea, Germany, is seeing some activity levels. Sweden never turned into total lockdown and Germany as well, what I would call a soft lockdown and relatively quick reopening. China being open again since mid-February. Japan, they were really finding out where it exactly is, but still a decent business level, however, below China and Korea. And we just expect it to develop from here, hopefully, due to the many constraints maintained, we can avoid a 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 the first half 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 in -- 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 first quarter, 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, so still good expectations for the future. Strong start to the diagnostic, very broad-based organic growth, and orders placed prior to mid-March as well as service and calibration business and disposable have kept revenue in this slide on a decent level. And 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 our regional plans.If we look at the financial side, 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. And -- 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 costs 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 line, have kept on the unaffected and are in line with original plans. So this is -- the majority of this is happening within distribution cost.Positive cash flow year-to-date, due to the strong start of the new year and the cancellation of our share buyback, but we expect significant negative cash flow in the coming period and months. And to ensure we get through that, we have expanded our credit facilities conservatively 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 a U-shaped recovery with as fast a pickup as closed down, we are sure it's going to 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 guidance.Few more details on the different business areas. If we look a bit more detail 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 you 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, 1:1? 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.And 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 lower ASP, there's no real growth from first quarter '19 to first quarter '20. There was this buildup for Brexit in '19. So that's flattish. So this is coming from a better product mix, better country mix, better channel mix. A 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 with chargeable 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, a 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 had a strong solution out for a while. No secret, we have codeveloped that with the Veterans Administration. And therefore, we have seen 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 health care, 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 untest 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 want to have to remember that. Still, there is 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 failing years are very different. So dome sizes, links for speakers, what have you, is essentially in a good feeling. Some need a real mold, et cetera, 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 pick off of this tool as beneficial for service. We have also seen VA now listed, and we can heavily 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 service 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 jobs in '18, the rest of the U.S. clinic network in line with plans and still coping a good way with growing managed care. So all in all, a satisfactory development. Performance in Pacific have 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 both markets, leading to temporary closure. We try to use remote services and others. Audiologist is online, on phone, et cetera, to help out 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, 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. And we have had to -- or we have chosen to close down our factory in Nice temporarily to meet -- as we have enough stock to meet demand. The application for approval in 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 as the 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, and we are clearly taking market share in this sector. Current run-rate across the 2 product lines is 20%.Diagnostic, strong organic growth until mid-March, and it carried over from last year. It's -- U.S. is a primary driver. We have seen a material slowdown in new orders, I think, natural as this is investment good. But of course, we find it hard to keep the order pipeline going and positively see again recovery in China indicating that once things open up again, we can see there is a certain backlog we can tap into. And we also have good revenue, recurring revenue from service calibration, disposables, and there is year-to-date a modest organic growth. Revenue is currently around 60%.EPOS, our headset business was fully consolidated with financial effect from January 1, the supply chain headwinds we -- that hit us a little bit in the beginning is behind us, and we now see a significant increase of demand because of more collaborative meetings, Zoom and Teams and what have you. And therefore, a strong demand for good, high-quality headsets, and we are very busy in supplying these. And current run-rate is at 120%, compared to initial expectations for the year.And with that, the word to you, René?

[René Schneider, CFO & Member of Executive Board]

Thank you, Soren. So 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 temporarily negative effects of increased shipping costs as well as an effect of the fact that we have a 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 the first quarter 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 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 travel, conferences, et cetera. The main savings we do see on distribution and administrative side, where a significant number of employees have been sent home under -- 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're already back on 15th of March, suspended our share buyback program. We did buy back DKK 191 million (sic) [ DKK 197 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 accounts receivables. 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 billion to DKK 1 billion in that context.On the outlook side, for 2020, it was withdrawn on the 15th of March, 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 also refrain from commenting on that. But given the performance up until mid-March, we did grow significantly above our estimates 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 one-offs related 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 the first half of '20, and the extraordinary spending on branding is also self-maintained, but we determined that it is likely to be back-end loaded.And with this, we will hand over to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Maja Pataki of Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

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 would all do 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 the second half of the year, are you nevertheless going to open up all stores? Is that the plan going forward?And 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 all the people have been really put into isolation, if you want to say so, has an impact on them not 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?

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

Maybe my -- If I could start with that because I think that's the key into the answer on the other -- first question. First of all, we don't know. We haven't been here before, and you can get the optimistic approach from the first shops being opened 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, we don't have a Western European or North American tracking of, let's say, 6 to 8 weeks of recovery. So 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 going to open all stores from one day to the other. There is -- in most of these support schemes, an opportunity to a very gradual onboarding, where also in most shops have 2 employees, both an audiologist and an assistant, and we can start with the audiologists, maybe one or twice a week. We only open up work on scheduled appointments. So we will not just keep all data 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, and that's also what users would like to know that now it's their turn, and they will come. We organized the shops to do 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 societies reopening and normalizing that will determine. And there, we are more cautious than we were in the early days of the coronavirus spreading because we can just see that we have all learned that this is not like a U-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 process is following generally opening of society. But the speed and whether it's to 100% or 110% or 90%, we cannot state a claim today. And then on to you, René.

[René Schneider, CFO & Member of Executive Board]

Yes, sure. So the comments around the 60%. This is really an April/May-ish picture where activity level is at the lowest and the government's support teams are at the highest, and that's the visibility that we have right now. But obviously, many of the government support schemes until now or at least running out June, July-ish. So that will bring back a significant part of the cost base. And then, of course, as 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.

[Operator]

And our next question comes from the line of Kit Lee at Jefferies.

[Nyeok Lee, Equity Analyst]

I have 2, please. 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 my 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 -- a program involved with VA, you saw quite a good uptick. But I'm just wondering what the general, I guess, reception has been among the independent retailer customer base?

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

I'm not sure I fully got your last question. But currently, you cannot really talk about customer uptake. But if you do that, of course, until mid-March. And there, we saw outside VA, very nice uptake in customers and regained momentum with independent and very nice growth rates on the hearing aid side. But if you talk after then the only thing you can see moving is remote care as an activity, but you're coming from very, very low base. So even 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 user not in contact yet. But of course, you had some in trials, you had people out. So it is a mean to keep some level of business going, and I think that's all covered with the 20% we state today.

[Nyeok Lee, Equity Analyst]

Yes. I guess my question is more around how many of your customers have started using remote test as a way to service their customers?

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

Yes. Not remote test, it's very, very limited. I don't think it is the way to do business, and I don't think professionals -- 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 completion of or work on OPN, order portfolio and support to existing clients.

[René Schneider, CFO & Member of Executive Board]

I would abstain from giving scenarios on profitability for first half year. We don't have the visibility at this point to discuss outlook for profits.

[Operator]

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

[Martin Parkhøi, Senior Equity Analyst]

I'm Martin Parkhøi, 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? Some without naming any names, then do you think that it will change something to the market shares development, somebody is stronger than other in the 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 they putting any kind of restriction on your business later on then 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 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?

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

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 want to 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 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. 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 -- we don't have any transparency that can guide on how things will look. But we feel we will stand here well. We have maintained R&D at high level and in line with plans, and we just launched something, which will still be new and we had good momentum in the products we had on the market. So generally speaking, commenting on our own position, I think we'll be in good shape once we get out again.

[René Schneider, CFO & Member of Executive Board]

In terms of the government schemes, you're right, Martin. So we have been seeking actually support in most countries where we operate. There have been various types of schemes. And there are -- some of them provide some restrictions on our ability to act locally, and we are fully observant on those and take those into consideration once we do seek these subsidies. So we are fully aware of that. But we're not going to discuss what are those limitations on a local level at the moment.

[Operator]

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

[Thomas M. Jones, Analyst]

I had 2. The first one is, on the shape of a potential recovery. On Slide 4, 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 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, how much additional capacity is there in the system for you to supply and fit an above normal level of hearing aids? To take, for example, an average audiologist sells 10 hearing aids a week. How many do you think he could sell or she could sell at peak, 12, 15, 20? 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, you're targeting a launch of this product late Q4 or do you think you'll probably be more likely 2021?

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

Yes. Thank you, Tom. I think you will find that the potentially pent-up demand will come gradually and step-by-step and as big national differences as well as even within countries, differences across regions. So I think things will build up at a pace where our capacity is not an issue, and were 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 -- that's definitely manageable within the way the market is going to reopen. It's not going to be -- again, like the hair dressers as where we'll all storm into the shops, the first morning. So on that one, on the PMA in 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 I think it will be natural to be cautious of expecting unaffected processing time in FDA, but we don't know.

[Thomas M. Jones, Analyst]

Okay. Perfect. And maybe just one quick follow-up question to one of Martin's. You mentioned that you've been supporting some of your independent retailers with payment terms, et cetera. But how -- 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 the other side of that equation, the retail bit has probably been the more difficult to manage for you at the moment. How has this current crisis influenced your thinking about using debt to buy retail clinics and general use of debt overall?

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

Yes. I think let's start with the other one. I think it's always like, good businesses survive well, tough times, and bad businesses don't. And 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 try to make sure that they get access to that supportive funding. Will there be opportunities in the M&A space? Yes, whether it's a volunteer or force, it can be both ways, that's just a way to convert that to us. So yes, there could be more short to midterm, 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.

[Operator]

Our next question comes from the line of Oliver Metzger from Danske Bank (sic) [ Commerzbank ]

[Oliver Metzger, Equity Analyst of Life Sciences]

Oliver Metzger from Commerzbank. My first question is on communications. So you basically reported some overachievement with this run-rate of 120% compared to your expectations. Is this better performance related only to the 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 of -- as store currently is fully linked to the 2 clinics where patients cannot get a surgery. So do you think that as soon as a free 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 do you refer -- or which periods do you use for current run-rate?

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

Thank you very much. I think our run-rate is -- 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 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 sales 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 think full year, we will see a much stronger-than-anticipated market growth in this segment. How long that then will last is, of course, also this state difficult to judge.And you're right on the point on the implants that most clinics that is in hospital -- are in 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 have been postponed. We are less exposed towards that, but then immediately after you will see adults. Whether they can eat off the waiting list, many of them had a waiting list already is more unclear at this stage. But I think like most health care 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 a desperate need of a solution.

[Operator]

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

[Veronika Dubajova, Equity Analyst]

Yes. I hope you can hear me okay. I have 3 big ones, please, and then one sort of housekeeping if that's all right. I want to start with sort of fall off on the recovery. I think 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 view, 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 OpEx 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 the second half of the year.And my third question is if you can share some thoughts or observations that you're seeing in the retail business from geography? I think, yes, as you know we've heard some decent or encouraging commentary in Germany. Obviously, you have a fairly large footprint in France. So how are you thinking about that and maybe just remind us if the retail side looks as the market matter for you the most, that would be helpful. And if I can really quickly just -- housekeeping, pre/post revenues first half versus second half breakdown last year just to help us with our models full line, that would be great.

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

Yes. Thank you very much, Veronika. It was actually -- you talked so quickly that please correct us if we got all the questions right. But the red flag that you mentioned from a competitor last week, I think it's a very squared and bold statement. I cannot recognize it fully. It seems like they are 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 second half 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, René?

[René Schneider, CFO & Member of Executive Board]

Yes. Well, on -- 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.So that would give you some indication of what government support would be of our savings.And in terms of EPOS revenue for last year, the guidance we have given would approximate DKK 1 billion, but with a split between first and second half year of roughly 45% to 55%.

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

And maybe just a little more flavor of the OpEx run-rate. I think all these government support programs does exactly what they're supposed to, which is, postpone decisions and consideration whether to resize companies and businesses, generally speaking. And 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. And therefore, I also find it likely that if things seems 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 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 development. And back to your question relating to retail in France. This 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 of people that were already trialed, 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 towards works and what not works and where we have high flexibility for accelerating, but also decelerating if we went too fast.

[Veronika Dubajova, Equity Analyst]

Great. 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 spent for anyhow? Or are there lots of other statements that you have?

[René Schneider, CFO & Member of Executive Board]

No, no. 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 the salary savings is government support. So that would be 50% in total-ish and it's rough numbers.

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

Yes. There is very significant cost associated to sales and marketing in general that are spent on marketing advertisement, travel, entertainment, meetings, sponsorships of 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.

[Operator]

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

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

Great. I have 3 questions. Firstly, on the -- on 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 2 choices. The first choice being, are you willing to accept a much lower level of profitability for a year or 2 until the market recovers, but retaining most of your staff? Or would you expect to undergo a meaningful restructuring program to rightsize?And then question number 3, 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 3 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?

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

We do put health and safety as a very high priority. So all stores are preparing separation in waiting rooms, of course, sanitizers to clean hands, distancing and 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, the take off can be gradual, and that's what we plan for. We don't have, in our planning, a 1- to 2-year scenario where the market doesn't return, and if that one day becomes the reality we have to face, we will, of course, have to assess how to best respond to that. So right now, the planning is to do a gradual opening that follows the opening of society, and we have no indications that you cannot do that. One of the approach is, of course, to 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 to try to get hold of and how much is related to current users and with 2 to 3 months of pause. There is a significant pent-up demand among existing user base that will be first priority, and kind of, of course, be done in a more direct marketing way, which is always cheaper than working from cold and scratch. And then the cost of our bases, 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 experienced talking to customers, we'll 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 U.S. So I don't share the same critical picture as a third would run dry in 3 weeks, as illustrated in the article.

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

I briefly follow-up on these retail initiatives because at the end, offering a customer, so maybe hand sanitizer may not be the most effective way. And I don't know what the answer is, but may not be the most effective way of getting customers back in a store. I think you probably want to feel safe. There's going 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?

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

Yes. But actually, the first indications we have is that people feel, in general, coming to an audiologist is a safe place. 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 the behind. The rest is -- 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 I think we can execute it in a both healthy and safe way, and I think users see the same. We'll, of course, offer remote services for people that are skeptical, for people that are -- feel more comfortable in the beginning doing so, but again, I think most hearing aid 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.

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

Okay. And one last question would be a follow-up. When it comes to the profitability going forward, I've sort of mentioned it, 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 rightsizing? Is that a reasonable amount of time to accept the margin pain?

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

I think this is all speculation. I both can create scenarios where we, in the second half, we'll see return of profitability at the end of second half that we are used to, and we can also see it going into 2021. And we cannot, at this stage, be more specific on that.

[Operator]

Our next question comes from the line of Chris Gretler at Crédit Suisse.

[Christoph Gretler, Managing Director in Equity Research]

Can you hear me?

[Mathias Holten Møller, Director of Investor Relations]

Yes we can.

[Christoph Gretler, Managing Director in Equity Research]

Two questions. The first relates to gross margin. Actually, could you also give an indication in over that is currently normalized or if you adjust for EPOS? Just to give us a sense about kind of the pressure you see there from fixed cost absorption.The second is on China. I didn't really get why is China not a good blueprint for the likely development for Western Europe, U.S. and Europe with respect to recovery?

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

Yes. René, maybe if you comment on the gross margin, then I can take it, China.

[René Schneider, CFO & Member of Executive Board]

Yes. Well, I think we have mentioned before that the consolidation of EPOS is a negative 1, 1.5 percentage point on our gross margin, if that was the question?

[Christoph Gretler, Managing Director in Equity Research]

No, the question was -- I get that kind of. But kind of if I exclude EPOS, and I just want to see kind of where would your kind of like-for-like gross margin on the hearing device business or kind of the rest of the business be given kind of distress in the system right now?

[René Schneider, CFO & Member of Executive Board]

Well, 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 current run-rate, the effect of the coronavirus is bigger than that, given the fact that the freight costs are high and that we are manufacturing at a significantly lower level.

[Christoph Gretler, Managing Director in Equity Research]

But you cannot give us kind of an equivalent to the 60% of the OpEx?

[René Schneider, CFO & Member of Executive Board]

No, we have not provided that detail.

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

And we're 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 data points that can show exactly. It's a quite complicated continuous measurement. So we are cautious to give the flavor on that.And if I may return to China, I think generally speaking, we should believe there is some similarity, but I think it's just very difficult to judge whether the epidemic, it seems, at least from the statistics 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 1:1 as the epidemic in many European countries and to some extent, also U.S. seem to be more widespread and a high level.

[Operator]

And our next question comes from the line of David Adlington at JPMorgan.

[David James Adlington]

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 wondered if you're able to think about how much of that was just pent-up demand following the cyber attack?

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

Yes, 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.

[Operator]

And our next question comes from the line of Daniel Jelovcan of Mirabaud.

[Daniel Jelovcan, Analyst]

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 [indiscernible] plenty that 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?

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

Yes. I cannot see it in the numbers because Germany is kind of this -- you get all the invoicing done the last day because there is a lot of consignment invoicing where if you have a certain stock out of the dispenser and then you will say either invoice or you confirm you still have it on stock or you have to return it. Generally speaking, Germany never -- seems like never have gone as low. The real close down window was relatively short and we generally feel a good appetite and maybe classical German calmness in opening up in a safe and gentle way. So I would foresee that we will see German business improve during May.

[David James Adlington]

So the level in Germany is probably higher than the 20% in general?

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

Yes. Again, we can only use invoicing level as the real measurement. And yes, it's above that because there has been continuous invoicing whether it then last a little longer before it gets up, that's always 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. So generally speaking, I think Germany has been a less affected country. And therefore, the recovery, it was not as steep, and the recovery will be shorter.

[Mathias Holten Møller, Director of Investor Relations]

Okay. And I think we have to conclude the call here. With that, we're a little bit over the hour.So 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.