Amplifon SpA

MIL:AMP

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Amplifon First Quarter 2020 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Francesca Rambaudi, Investor Relations Director of Amplifon. Please go ahead, madam.

[Francesca Rambaudi, executive]

Thank you. Good afternoon, and welcome to Amplifon's conference call on Q1 2020 results. Before we start, few logistic comments.

First, this morning, we issued a press release related to our Q1 2020 results, and this presentation is as well posted on our website in the Investors section. The call can be accessed also via webcast, and dial-in details are on Amplifon's website as well as on our press release. I have now to bring your attention to the disclaimer on Slide 2. As some of the statements made during this call may be considered forward-looking statements. With that, I am now pleased to turn the call over to our CEO, Enrico Vita.

[Enrico Vita, executive]

Thank you, Francesca. Good afternoon, everyone. Welcome to our quarterly conference call. And of course, in these times, I hope to find you all well.

Given the current circumstances, the structure of today's presentation clearly is going to be quite different from the usual one. Our primary goal of today, in fact, is to share with you in detail the strong and decisive actions that we have very promptly taken, and we are currently further taking to face the COVID-19 emergency and the subsequent scenario deriving for it -- from it.

However, before that, I obviously would like to spend a few words about our Q1 performance. As anticipated during our last conference call, our revenue growth in Jan and Feb was very strong, above 10% with an organic growth component of the growth very strong too, above 7%. However, starting from March, trading was impacted by the COVID-19 initially in Italy and then in most of the other markets in the second half of the month, which resulted in a negative organic performance for the quarter. Despite the heavy toll on March revenues, we were able to mitigate the impact on profitability and more importantly, we were able to deliver an excellent result in terms of both operating and free cash flow, thus landing on a pretty unchanged net financial position versus the year-end, also after circa EUR 40 million of cash-out for M&A and despite the seasonality.

Gabriele will share with you our numbers more in detail in his part of the presentation. As said, after China, Italy, and particularly, Lombardy was the very first country hit by the COVID-19 outbreak. For these reasons, we could appreciate very early what was going on and adapted very fast to the new situation in all the other countries. Our first priority was to put in place measures to protect the health and safety of all our people and safely support our customers needing urgent care. Then we put in place, as I said earlier on, very quickly, a strong and decisive contingency plan to aggressively reduce cost and sustained cash flow, while further reinforcing our balance sheet. The results of these actions will be realized mainly starting from April and in the second quarter. We will go also through these actions more in detail during the rest of the presentation.

Now let's move to the next chart, Chart #4. As said, our first priority was support -- to support our employees and our customers. Since the beginning of the outbreak, we have reacted promptly both to safeguard the health of all our people and to continue to serve safely our customers that still need our services. This principle has driven the decision to close many of our offices around the world and organize remote working for all back office employees.

Moreover, we have put a lot of focus in developing safety protocols to operate in the stores, ensuring full protection to our employees and customers. We are still working every day to continue to upgrade this area. This chart is very relevant because as soon as the lockdown will be gradually lift up, we will be very ready to restart safely under the strictest safety measures.

Let me also add that we are extremely proud of what our colleagues in the field are doing to support our customers in these very difficult times.

Let's now move to the next chart, Chart #5. Here I would like to give you some insight about our trading conditions in core markets as of April. First of all, hearing care has been categorized as essential medical service in most of the core markets in which we operate, with the only exception of New Zealand, where all activities were closed.

However, most countries in Europe, such as Italy, Spain, France, as you know, are in a lockdown with a consequent performance significantly down on average from 70% to 80% versus previous year, although improving throughout the month. The U.S., which was impacted to a lesser extent in Q1 due to varied timing of diffusion and adoption of measures was also significantly down, especially at the beginning of the month. Also in the U.S., we see an improving trend throughout the month itself. As said, New Zealand adopted a total lockdown with closure of all the business activities, including hearing care since the end of March.

In Germany, the Netherlands and Australia instead, countries with lesser restrictive measures, our performance is better. For example, in Germany, we are now down less than 30%. And also here, we see some improving trend through the month. Because of all of this, it's clear that April and the quarter 2 are expected to be the toughest months of the quarter and of the year, although still to an uncertainty extent, depending on the duration of the lockdown measures.

We expect to see some improvements already made and in fact, as I said, we have seen in the last day of April, some encouraging trend in several markets. Moreover, as you know, many countries, including, for example, Australia, New Zealand and others are expected to ease, in some extent, their lockdown measures starting from May.

With this, I now hand over to Gabriele to give you more details first about our contingency plan and then our financial performance in Q1.

[Gabriele Galli, executive]

Thanks, Enrico, and good afternoon to everybody. Moving to Slide #6, let's deep dive on the strong set of action we have been working hard since March in order to reduce operating cost, sustained cash flow while further reinforcing our net financial profile.

Starting from the P&L, we are significantly reducing our cost base. With a strong set of action on our main cost categories, including, of course, cost of goods sold, which is 100% variable. On labor costs, our largest cost category, representing around 40% of revenues. We are activating, primarily from April, the various government social schemes and other employment support tools already available or introduced ad hoc for the COVID outbreak in the different countries in which we operate. We are also proportionally reducing the variable component of labor cost and adopting the hiring freeze. Additionally, senior management has agreed to reduce their salaries.

With regards to marketing expenses, which generally represents around 10% of our revenues, we have significantly reduced the spend. On general expenses, we have also suspended all nonessential costs, and we are currently renegotiating several supplier contracts and rent agreements. The results deriving from the implementation of these measures will be realized primarily from April. Obviously, as conditions improve, we are ready to reactivate these expenses in order to be best positioned to meet the pent-up demand.

Moving to Slide #7, we can go through the main actions implemented to protect and preserve our cash flow. Firstly, starting from March, we have reduced CapEx to bare minimum. This means that we can operate with just around 20% to 25% of our usual annual CapEx spending of EUR 90 million.

Secondly, we have temporarily put on hold our bolt-on M&A activity, meaning that today, we are not going to sign or close deals in order to potentially limit our cash-out. At the same time, as condition will improve, we will be ready to reactivate our M&A investments further accelerating the consolidation of our market share following the same path done so far. Thirdly, after our Board of Director resolution on March '20 and subsequent shareholders' approval last week, we decided to allocate all 2019 profit to retained earnings. Therefore, reducing cash out of the around EUR 35 million initially proposed as dividend distribution, demonstrating once again, our agility to act faster and on a prudential basis.

Moving to Slide 8. I since March, we also started working hard to protect our net financial position and further reinforce our liquidity profile. The refinancing activity currently under finalization is securing us additional EUR 300 million credit lines as well as extending maturities. As shown on the left-side table, today, our committed credit lines comprise around EUR 350 million of the 7-year notes successfully placed in February 2020; a U.S. PP for around EUR 100 million due in 3 tranches in 2020, '23 and '25; the GAES acquisition facility A, which, after the payment of the EUR 40 million in April this year, amounts to around EUR 200 million due in 2023; short existing term loans amounting to a total of EUR 193 million; and several revolving credit facilities today, totally undrawn, totaling EUR 195 million.

In March and April, as said, we went through a significant refinancing effort with the signing of financing agreement for a total of around EUR 490 million, of which around EUR 280 million additional. These additional lines include 3 newly signed term loan facilities and one revolving credit facility, all with 2025 maturity for over EUR 180 million, additional EUR 100 million from the increase of the amount of our existing lines, for which we have also extended maturities from the original 2021, 2022, and to 2025 for almost all the lines. All these financing agreements are being secured at very favorable terms with a weighted average spread below 150 basis points.

In addition, as indicated on the graph on the right, we do not have any material short-term maturity, benefiting from a weighted average of debt maturity of around 5 years post completion of refinancing. Therefore, at completion of refinancing, which is almost done, EUR 280 million already achieved out of EUR 300 million, we will leverage on a very strong liquidity profile, supported by cash on balance sheet and undrawn revolving credit facilities of around EUR 550 million. This means that the company via liquidity and revolving credit facilities will be able to meet its debt maturity for the next 4 years, thus, beyond 2024. Once again, our banks have proven to be highly supportive for a company such as Amplifon as demonstrated in their speedy and supportive response in this refinancing activity.

Moving to Slide #9. We have a look at the group financial performance, which posted a strong performance across the board in January and February, with COVID emergence impacting from March. Total revenues in local currency were down 7.2%, with organic performance at minus 9.5% due to COVID-19 emergence impact in March and M&A contribution at plus 2.3%, primarily related to piecemeal acquisition in Germany and France and Attune's acquisition in Australia. As commented before, revenues in January and February were up 10% in local currency versus in '19, boosted by a strong organic growth at plus 7.4%. Starting from March, sales were impacted by COVID-19 initially in Italy than in most of the other markets in the second half of the month. As a result of lower revenues, EBITDA declined by 17.9% at EUR 64.9 million with margin at 17.8%. The mitigation action, we commented in the previous slides, will be mainly realized and benefit financials starting from April.

In the first quarter, the group presented an outstanding free cash flow amounting to EUR 44.2 million, 2.7x Q1 '19, despite the negative impact from COVID-19 outbreak. Net financial debt ended up at EUR 791 million, also after a significant cash out for M&A amounting to around EUR 42 million, with net debt-over-EBITDA ratio at 1.99.

Moving to Slide #10. We have a look at EMEA financial performance, which posted in the quarter a double-digit top line performance until early March, with COVID impacting thereafter. EMEA showed, in the period, a revenue decrease of around 9% in local currency, driven by a minus 11% organic performance due to COVID-19 impact in March and by an M&A contribution positive by 2%. Revenues in January and February were up around 10%, boosted by an organic growth at 7.5%. Starting from March, trading was impacted by COVID-19, initially in Italy, then extending to most of other EMEA markets in the second half of the month.

Despite our services are categorized as essential in most countries, the footfall, primarily in Italy, France and Spain dropped due to lockdown measures adopted by different governments. Despite COVID-19 emergence, Germany, Netherlands, Switzerland and Benelux country, affected by less restrictive measures, reported a strong performance. EBITDA recurring was down by 18.4% at EUR 50.5 million with margin at 19.6%, following the lower fixed cost absorption. The implementation of the mitigation action will provide results starting from April.

Moving to Slide #11. We have a look at Americas performance, which posted a positive top line performance thanks to an excellent first 2 months and a varied timing of COVID impact across the region. Revenues were up by 1.3% in local currency, with organic growth at plus 1% despite COVID-19 emergence in March, thanks to a very good performance of Miracle-Ear and Amplifon Hearing Health Care reporting mid-single-digit organic growth in the quarter. M&A contributed by 0.6% and currency by 0.7%. The region posted an extraordinary revenue growth in January and February, up 16% in local currency versus previous year, almost entirely organic, thanks to an outstanding double-digit performance of Miracle-Ear, Amplifon Hearing Health Care in Canada.

COVID-19 impact materialized more towards the second part of March and with a different timing across the different U.S. states. EBITDA recurring was down 6.6% at EUR 11.9 million, with margin at 18.5% due to lower revenue growth.

Moving to Slide #12. We have a look at APAC performance. Revenues were down 4.1% in local currency, with organic performance at around minus 10%, impacted by bushfires in Australia in January and COVID-19 emergence in March. M&A contributed by around 6%, thanks to Attune acquisition. Currency had a negative contribution by around minus 4%.

Revenues were up low single-digit in local currency in January and February due to bushfires in Australia, affecting market performance during the whole month of January and the total lockdown in China. Australia posted a negative top line performance due to the strong impact of bushfires and the COVID-19 emergence toward the end of the quarter, although with a lower impact versus other markets thanks to less restrictive measures.

New Zealand, India and China posted a negative performance impacted by COVID-19 emergence and total lockdown measures, including closure of our network, although with different timings. EBITDA was down by 27.6% at EUR 10.1 million as a result of lower fixed cost absorption due to lower revenues.

Moving to Slide #13, we can appreciate the profit and loss evolution. Total revenues were at EUR 363 million, with a decrease of 7.3% versus previous year. Operating leverage impacted recurring EBITDA, reducing by 17.8% to EUR 64.9 million, with a ratio to sales of 17.8%. Depreciation increased by around EUR 6 million, led the EBIT at EUR 14.5 million, with a reduction of around EUR 20 million versus previous year. Net financial expenses at EUR 7 million and tax rate at 32.4% were in line with previous year. As a result, net profit reported EUR 5.1 million versus EUR 18.8 million last year.

Moving to Slide #14, we can appreciate the cash flow evolution. Operating cash flow was, in the period, equal to EUR 60.7 million, versus EUR 34.8 million in Q1 '19, with a strong EUR 26 million improvement following the outstanding conversion of EBITDA. Net CapEx decreased by around EUR 2 million to EUR 16.5 million, leading free cash flow at EUR 44.2 million, with an outstanding growth of around EUR 28 million, plus 170% versus previous year.

The M&A activity posted a cash absorption of around EUR 42 million, following the Attune acquisition completed at the beginning of the year. Following around EUR 5 million net negative cash used for the financing activity, almost entirely due to value of bond issuance discount and fees, the net cash flow absorbed in the period was around EUR 2.5 million versus EUR 3 million generation last year, leading net financial position at EUR 791 million versus EUR 787 million at the end of '19.

Moving to Slide 15. We have a look at the debt profile and key financial ratios. As mentioned in the previous chart, the net financial position closed at EUR 791 million, with liquidity accounting for positive EUR 272 million, short-term debt accounting for EUR 224 million and medium/long term debt accounting for around EUR 839 million. Lease liabilities following IFRS 16 application, amounted to EUR 428 million, leading the sum of financial debt and lease liabilities to EUR 1.22 billion. Equity was at EUR 666 million. Looking at financial ratios. Net debt-over-EBITDA ended up at 1.99, and net debt over equity at 1.19.

I would now hand over to Enrico for 2020 outlook.

[Enrico Vita, executive]

Thank you, Gabriele. So as usual, some key messages to conclude our presentation for today. Without doubt great uncertainty remains about the impact of the outbreak on our business. As well as on the speed of recovery when the situation will tend to normalize. Hence, even if we can now begin to see some encouraging trends in several markets, we are not today yet able to give you a specific guidance for the rest of the year. And consequently, we have now to withdraw our guidance for 2020.

That said, what I can tell you is that we continue to expect us to perform definitely better than the rest of the market. And what I would like also to highlight, once again, is that as soon as the crisis emerged, we immediately put in place a very strong set of actions in order to protect the profitability, sustain the cash flow and reinforce our balance sheet. It is also thanks to these actions and initiatives as well as thanks to our clear competitive advantages that we continue to look to the future with great confidence.

Following these crisis, in fact, I expect the consolidation of our industry to further accelerate, and I expect us to continue to play a leading role in this process.

With this, I leave back to Francesca to open for Q&A.

[Francesca Rambaudi, executive]

[Operator Instructions] Now I turn the call over to Judith to open the Q&A session.

[Operator]

[Operator Instructions] The first question is from Niccolò Storer with Kepler.

[Niccolò Guido Storer, analyst]

Two questions. The first one on current trading. You mentioned minus 70%, minus 80% in April, and I didn't understand if this minus 70%, minus 80% is a global figure, or it's just related to Europe? And on these numbers, does it mean that minus 70%, 80% in footfall means minus 70%, 80% in revenues? Or are you seeing that people coming in store is more of existing clients, maybe that need to fix some issues rather than new clients?

The second one is on whether you've studied options to serve clients and potential clients, virologists moving from store to client's house? Is this something viable?

[Enrico Vita, executive]

Thank you, Niccolò, for the question. So with regards to the first question, no, what I mentioned -- well, I mentioned 70% to 80% specifically for some markets like Italy, Spain and France. I also mentioned the fact that U.S. is following a similar path, but I also mentioned the fact that we have other countries like Germany, like Netherlands and Australia, where our performance in April is better. And I also mentioned the fact that, for example, in Germany, now we are trading, let me say, quite well. We are down, of course, but less than 30%. So I was, with the 70% to 80%, I was referring mainly to those 3 market that I mentioned Italy -- I mentioned before, so Italy, Spain and France. And of course, I was referring not to footfall, but I was referring to revenue so not a number of people but to revenues. With regards to the second question, so the 70%, 80% is not a number that you can extrapolate for the, let's say, the entire?

[Niccolò Guido Storer, analyst]

Yes. Yes, sure.

[Enrico Vita, executive]

With regards to -- and of course, these are the -- those ones that I mentioned were the countries, the core markets in which we were mostly affected.

With regards to the second question, so about our ability and opportunity to serve customers through home service, yes, we provide this kind of service, but it's not that meaningful.

What I would like to stress is the fact that we are working very hard in order to create a very, very safe protocol for the stores. We are developing that also in -- with the support with some virologists as well as ENTs. So what we are working on is really to create a situation where our customers as soon as the lockdown measures will ease, and as I mentioned also during the call, there are signs where there are signs that are indicating the fact that several countries are planning to ease their lockdown measures already starting from May, I was saying. So as soon as these lockdown measures will be lift up, our customers feel safe to come to our stores. This is our primary objective of today. I think that we are doing an extremely good job on that. We are touching every single point of the in-store protocol to ensure the safety and the health of our people as well the health and safety of our customers. So that everyone is very comfortable also to come to our stores.

[Operator]

The next question is from Catherine Tennyson with Bank of America.

[Catherine Tennyson, analyst]

I just have one quick one. Can you give us a little bit more color on your cost base measures, particularly on your renegotiation with the suppliers? What was the nature of these renegotiations? And can you give us a little bit of color on, say, pricing discounts and volume agreements that came out of those?

[Enrico Vita, executive]

Well, I guess that you refer to the suppliers of hearing aids. But in reality, what's what Gabriele mentioned was a much broader point. What I mean is that we -- our amount of purchases on a yearly basis is not too far from EUR 1 billion. And here I include, of course, direct purchases, which means hearing aids but also including direct purchases like IT services, like marketing services, like telephony, like every kind of other services. So less -- something less than EUR 1 billion as a total amount, of which direct purchases and therefore, hearing aids represent about, let me say, 1/3.

So the point that Gabriele was making is that we are renegotiating with all the suppliers of our supplier base. So not just the suppliers of hearing aid, but we are renegotiating with the providers of marketing services, IT services, et cetera, et cetera.

[Operator]

The next question is from Lisa Clive with Bernstein.

[Lisa Clive, analyst]

I have 3 questions. First of all, GN Store Nord had their earnings call earlier today, and they spoked about a telehealth solution that they think will be quite important for enabling hearing aid sales during what could be a protracted period of time. Could you just comment on your views on telehealth solution and where you stand on that in terms of your own preparation?

Number two, just in the more locked down countries, where you have seen some foot traffic and revenues, is there any particular pattern? Are these replacement units versus new customers? Are these skewing towards younger patients? That would be helpful color.

And then third, just on M&A appetite on the back of this, obviously, there'll be a lot of independents under more financial pressure than they've ever had before. How should we think about your capacity to increase leverage? And what would be sort of maximum that you could take on, obviously, that depends on where your own EBITDA is?

[Enrico Vita, executive]

Yes. So with regards to the first question, what -- my answer is that, as I mentioned during the one of -- the first answer to the first question, our focus of today, in reality, is a bit different. Our focus of today is really to create an in-store protocol. That's to make sure that we can serve our customers in full capacity. We see that our customers need still to come to our stores. They still need to have a proper medical assessment. They still need to have a proper assessment of the kind of hearing loss they have, et cetera, et cetera. So if you ask me, of course, we are working very well. Actually, I think that we have been discussing this now for a while on how to enrich the customer journey through some remote care activities.

But for me, the key, in particular, in the next months will be to have in-store protocols that ensure the total safety for our customers. And as I said, we are working extremely hard on that.

We are developing protocols also with the support of virologists and very important virologists as well as ENTs. And we are quite confident that we are going in the right direction in order to preserve the health and safety of both our people and our customers.

With regards to the second question, which is the kind of type of customers, certainly, it's more replacement, so returning customers rather than new customers. But we expect the sign of trend in, of course, to rebalance in the next month.

And with regards to the last question and, therefore, M&A, of course, as Gabriele mentioned before, now we have put on hold all our activities. I think that this is what we have to do in this kind of situation. But I also mentioned during the presentation that I expect that this crisis will drive some further consolidation as soon as situation will tend to normalize. And of course, as we did always in the past, we will also -- we want also to play our leading role in this process as soon as the situation will normalize.

[Operator]

The next question is Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

Two questions. The first is on your labor cost. I'm trying to understand to what extent you are able to, say, to transform your labor cost into variable cost, thanks to the different, let's say, temporary layoff schemes? And if you are, say, able to see something like that already in Q2 or if it could takes more time.

Second is a question on 2021. In the sense that -- I'm wondering if you see, say, 2021 as a year with the back-to-normal volumes or if you see some element more structural, you were mentioning the protocols or maybe the online channel becoming more relevant and so creating a different pattern compared to the, say, pre-COVID situation?

[Enrico Vita, executive]

I will ask Gabriele maybe to answer to the first one.

[Gabriele Galli, executive]

Yes. So as you know, Domenico, I mean, labor cost is the most important category on our P&L, accounting for around 40%. Of course, the kind of variable components depends a lot on the fact whether you are on a normal situation or on particular situations such as COVID. So in a normal situation, of course, we can act on the variable component of remuneration, which is in the range of 20% if we include everybody in the organization, so not only, I mean, the management, but also the people in the shops.

In such situations, I mean, the one we are living today, so with the COVID emergence, most of the different government put in place a social program, such as the one we know very well here in Italy, cash integration, but we have chômage in France, ERTE in Spain. So you can imagine that also countries that normally do not have this kind of social measure put in place something.

And so, of course, as long as we are experiencing, for example, a lockdown in terms of keeping the shops closed, we can fully activate these kind of social tools. We are covering, in most of the country, a very significant part of the cost of labor. So in such a situation, labor cost stands to be very valuable. Of course, not 100% because then you have back offices, you need to put in place, I mean, the normal processes. But if you think about shops, which is by far the most important part of our labor cost, of course, I mean, the access to social program makes them strongly viable.

[Domenico Ghilotti, analyst]

Okay. Is this covering the limited period of time, so if it is -- if the crisis is taking more time to be overcome, do you think that this is becoming more difficult and you have to go for more structural lay-off schemes?

[Gabriele Galli, executive]

I think, I mean, the government are being flexible. So at the moment, I mean, they -- we started with some particular country without any social scheme, and they have been introducing. So I think, I mean, there is some flexibility. Maybe, Enrico, you want to complement with some further data?

[Enrico Vita, executive]

No, no. I think that it's very early to say, but certainly, at this moment, we are not envisaging anything that you are referring, Domenico.

[Gabriele Galli, executive]

Okay. With regards to the second question, and therefore, 2021 onwards, I'm confident that even though it's very difficult to say when today, I'm confident -- I'm very confident that the demand will come back. And we'll come back for sure because our purchase is not a discretionary one. It's not just a nice to have. The decision to purchase an hearing aid typically is made over the course of several years, on average, 6, 7 years, driven by a disabling hearing loss with a strong impact on quality of life.

So I think that as soon as people will feel more comfortable to get out, I think that the demand will come back quite soon. And as I said before, we are working extremely hard in order to make our customers to come back to our stores with confidence as soon as the lockdown restrictions in terms of mobility will be lift up.

[Domenico Ghilotti, analyst]

So in terms of productivity, you see your ability to keep up the same productivity that you had before, even if you have to introduce some additional program procedures.

[Enrico Vita, executive]

Yes. Yes, absolutely.

[Operator]

The next question is from Oliver Metzger with Commerzbank.

[Oliver Metzger, analyst]

My first one is also on M&A. So on the suspension of M&A, I completely agree that now it's more important to preserve cash, but it's -- M&A belongs basically to your business model. And you just answered a few questions before that you want to see a normalization before you acquire something. I would say, right now, it might be the best time to acquire some assets at a reasonable price. So how should we think about the level of normalization we need to see before you start again to acquire assets? My second question is your view on catch-up effects. Hearing loss does not improve. And therefore, the underlying demand for hearing aids should continue to increase. If you look on the global market in units, do you see the current crisis as temporary? Or do you think that, let's say, a multiyear growth rate might be affected substantially negatively by this -- the year 2020?

[Enrico Vita, executive]

Thank you for the question. So with regards to the first one, we are just, let's say, 1 month, 2 months since the start of the crisis, I think that for now, it's prudent actually to put on hold our M&A activities, of course, which doesn't mean that we have canceled, for sure.

Our -- you are absolutely right when you say that M&A has always been in the DNA of our company. And for sure, we will continue to pursue opportunities also going forward. But when we will feel comfortable to pursue opportunities that, for sure, will become cheaper in the future, it's too early to say, to be honest with you. But for sure, we will keep you updated on that in the coming quarters. With regards to the second question, as I said earlier on, actually, I expect the demand to catch up as soon as people will feel more comfortable to get out of home and to come back to the streets. So I expect that the demand, which has been suspended in the recent months and will come back as soon as situation will tend to normalize.

[Operator]

Next question is from Kit Lee with Jefferies.

[Nyeok Lee, analyst]

I have 2, please. I guess, firstly, just on your OpEx going to 2Q. You mentioned some of the cost reductions that you are doing or have initiated on. So how should we think about the OpEx level in 2Q? If I can get more color just around as a ratio or as an absolute amount, that would be very helpful. And I'll come back with a second question.

[Enrico Vita, executive]

Yes. The sound was not very good. But I think that you are asking about our plans for cost reductions in Q2. So Gabriele, maybe...

[Nyeok Lee, analyst]

Yes. And if you can quantify the OpEx, that will be...

[Enrico Vita, executive]

Yes. Yes, of course, I just can say that the kind of cost reduction also will depend quite a lot on the trend of revenues. I think that we have always demonstrated to be able to act very fast. We have been very agile. So it's impossible now to quantify, no? Because it will depend from the kind of revenue trend that we will see in the next month. But in terms of, let's say, maybe what kind of work we are doing, Gabriele, you can add something on that.

[Gabriele Galli, executive]

Absolutely. We are, I mean, trying to partialize all the items that I presented before, so having a very strong and aggressive plan on labor, also on marketing and also on general expenses.

As you can recall, what was mentioned, I mean, giving a number is absolutely impossible because in case a market is performing, of course, we are opening shops, and so in terms of overall reduction, the overall reduction is going down. But I mean, if you want to assume, for example, a stress key scenario, with a strong negative impact on the top line for Q2, we can expect that the cost saving versus last year cost base, so excluding, for example, I mean, the COGS, for example, which is 100% variable, the cost saving may be in the range of 60% is a good number.

[Nyeok Lee, analyst]

Okay. That's great. And then my second question is on your scenario planning. So I appreciate the visibility is still pretty low at the moment. I guess when you do your scenario planning, what are your thoughts on the time line of a normalized run rate for the market? Are we talking about, I guess, December this year or closer or further out, into 2021?

[Enrico Vita, executive]

As I said, it's very difficult to say today. It is very difficult to say today. We have seen the initial part of April being quite affected. Then we have seen some encouraging trend in the last few days with people coming back. But today, it's really too early to say if it will be December, it will be September, it will be next year.

So to be honest, I'm not able to answer to this question at this stage.

[Operator]

The next question is from Andrea Scauri with Lemanik.

[Andrea Scauri;Lemanik SA, analyst]

I have a very simple question. I was wondering if the mamas and papas shop in Italy or in other countries might be heavily affected by the current lockdown. I mean, sad to say, but are there any risk that these small shops will disappear? And if this is the case, do you believe that this might be an opportunity to get basically market shares for free? Or do you think that this eventual potential impact is negligible?

[Enrico Vita, executive]

No. No, I expect that at the end of this crisis, we will see an acceleration. I mean, through this crisis, actually, we will see an acceleration in the consolidation of the industry. Still, today, more than 50% of the market sits in the independent channel. So they are very small players, which not always have the financial capabilities actually to survive in a very difficult context like this one. So as I mentioned also during the presentation, I expect the consolidation to accelerate, the industry to accelerate. And of course, I expect also that we will play a leading role in the consolidation of the industry going forward. For sure, we will leverage on all our, let's say, capabilities and global assets to continue to gain market share, maybe even at a faster pace than we did in the past.

[Operator]

The next question is from Veronika Dubajova with Goldman Sachs.

[Veronika Dubajova, analyst]

I have 2, please. One, kind of just curious, I want to clarify, Enrico, some of the points you made. I think GN this morning, were fairly cautious on the size of the market in 2021. They said they expect it to be smaller in global units than it was in 2019. It sounds like your view is it's maybe kind of back to normal trend rate. And there is possibility that you also have some catch-up on the lost revenues. So just curious what's driving your degree of confidence in that. I don't think any of us know, but be helpful to understand your thinking on that. And just maybe confirm that I've understood correctly what you have said.

My second question, please, is on your marketing spend. And I appreciate you're obviously making some pretty meaningful reductions right now. Just wondering sort of as we do go back to normal, when do you think you need to start reaccelerating that spend? And how long does it take from that marketing spend being turned back on until you see people returning back into shops and you start getting some new customers through the door, if you can help us think through that timing.

[Enrico Vita, executive]

Thank you, Veronika, for the questions. Well, with regards to demand, maybe I said something a bit different. What I said is that the current, let's say, suppression of demand is not canceled forever. And I expect this demand because of the kind of nature of our industry, actually, to come back. Then what I also said is, it's now premature to say if it will come back in September, October, in January '21 or later on. To be honest with you, if you ask me, I don't have a very, very clear picture on that. And if anyone has a very clear picture on that, maybe he is much better than I am in forecasting the future.

But to be honest, it is very, very mature from -- according to my knowledge, to say if '21 will be below 29 or will be higher than 29 -- to the '19, sorry, or whatever. So what I just said is that I do not expect the kind of drop in demand that we had in this recent month, and we will have in the next few months to disappear. I expect this demand to come back. This is what I pretty -- and actually, I'm very confident of.

Then when this will happen, I cannot say too much on that because I do not have this kind of visibility.

With regards to the second question, so to the marketing spend, of course, I think we thought that it made a lot of sense to reduce significantly our marketing investments in a situation where there was no footfall, in which there was no circulation allowed actually. So that we have defined a very clear plan on how to adjust our marketing investments according to certain KPIs. And according to also these KPIs, we have also defined what kind of marketing channels to reactivate first, then second and then at the third stage according to those KPIs.

Just to make a very concrete example. So the first marketing channel that has been already reactivated in some way is the call center. And as you know, call center is mainly an activity towards returning customers. Then the second channel, which will be reactivated, and we have started in some -- we have already restarted in some countries, some activities is the digital one, which is the marketing channel with the highest return on investment. And then so on and so forth. So the last one, of course, will be television, which is a mass market media channel. So we have defined our marketing plans according to different stages, which will be reactivated according to certain KPIs that we have already defined.

[Veronika Dubajova, analyst]

Understood. That's very helpful. And if I can just squeeze in one quick follow-up. This is probably better for Gabriele. But in terms of the furlough and unemployment schemes that you've taken advantage of throughout the world, can you maybe help quantify the sort of amount of income that you expect? And I guess what's the duration of the support that you expect that to last for? When do you think you will return to most of your stores being open, and therefore, you've been unable to draw on that government support.

[Enrico Vita, executive]

If you want, Gabriele, I can take the first one.

[Gabriele Galli, executive]

Okay, absolutely.

[Enrico Vita, executive]

As you want.

[Gabriele Galli, executive]

Yes. Yes, go on.

[Enrico Vita, executive]

I mean, in the U.S., there are no specific social schemes. But in this, let's say, in this situation, they have law introduced actually, a specific increased unemployment benefiting us for the time being is for 12 weeks. This is the furlough that you were mentioning before, which is a sort of temporary dismissal. So why -- which means that while our people are in furlough, our people cease to be employees of the company, but they benefit from a state subsidy.

The company -- our company can then take them back at any time as soon as, of course, the situation will improve. So just to answer to your question at this stage, the full law is for 12 weeks, so 3 months.

[Veronika Dubajova, analyst]

And your expectation is to keep them furloughed for the entire 12 months? Because my understanding was once as soon as you brought the employees back, you will not be qualifying for the furlough payout, at least, that's my understanding with the schemes in Europe. So I'm just trying to understand, is your intention to furlough every one for 12 months? Or do you think you'll bring people back fast.

[Enrico Vita, executive]

12 weeks, 12 weeks, 12 weeks. Yes, yes. No, no. Actually -- no, no, actually, at the moment, let's say, we do not have any visibility, as I said before, actually, about when we will take them back. We can do that even before 12 weeks.

[Operator]

The next question is from Giorgio Tavolini with Intermonte.

[Giorgio Tavolini, analyst]

On supply chain, are you experiencing any issue or shipping delays from your manufacturers? And the second one, I mean, on working capital, I saw a positive change in working capital this quarter. Do you expect any adverse dynamics in trade receivable from the payments and if I may say, add another one, what room do you have to reduce the commission to point of sales that last year amounted to EUR 100 million, roughly 6% of your top line. Can we assume a strong reduction in this kind of line?

[Enrico Vita, executive]

Yes, so I will take the first one, and then I will leave the next to Gabriele. So with regards to the supply chain, no. No, we are not experiencing any issue in terms of supply chain. We have a portfolio of 5 suppliers. Basically, we work in different ways with all the different -- all the 5 major manufacturers of hearing aids in the world. And to be honest with you, none of them have, of course, has any problem in terms of supply chain as of today. With regards to working capital and commissions, I will leave to Gabriele.

[Gabriele Galli, executive]

Thank you. So on working capital, we are working on each single item of the operating and nonoperating working capital in order to maximize all the different lines. We had a good performance, of course, in Q1, as you mentioned. But I mean we have space to work also for Q2. We do not expect any particular issue on the accounts receivable? Because I mean if you look in -- at our business, we are retailers. So most of the bill is paid by normal customer at the moment when they acquire the hearing aid, and the portion of accounts receivable is versus government because in countries -- in many countries, government is contributing partially to the price of the hearing aid.

So as long as government are willing to support different businesses with all the measure that we are looking today in the different countries, they are also willing to pay the bill versus Amplifon or other player in the medical industry, I guess, with the same average DSO they are using during normal situation. So on the working capital, we don't see any particular issue.

On commission, I mean commission as related to sales, so you can imagine commission are, I would like to say, 100% variable. So if there is the sale, there is the commission. There isn't the sale, there isn't the commission. So they may be valuable or even more than valuable because there may be some minimum threshold in order to access the commission.

[Francesca Rambaudi, executive]

We have time for one more question. So Judith, I leave it to you.

[Operator]

So the next question is -- and the last question is from Lorenzo Carcano, Metzler Asset Management.

[Lorenzo Carcano, analyst]

My question was on 2021. So it was already actually answered. Domenico asked this, so thank you very much.

[Enrico Vita, executive]

Thank you.

[Francesca Rambaudi, executive]

Okay. If there's another one, or otherwise, we can close. Judith?

[Operator]

Yes, there is a very last question from Markus Gola with MainFirst Bank.

[Markus Gola, analyst]

Great. So the first one is on, once -- the market generally and how -- what you will do? So once it normalizes, will you immediately need to reorder hearing aids? Or do you first need to work down inventories over an extended period of time? And if so, how long could this period last?

My second question is on your franchise network, Miracle-Ear. Could you provide some color how your franchisees are doing, and whether you plan take any measures to support them in any way in this very difficult environment?

And thirdly, on your cost base, have you been able to renegotiate your rents? And if so, what level of reduction have you been able to achieve on average?

[Enrico Vita, executive]

Thank you, Markus, for your questions. So with regards to the first one, inventory levels, we sit on very, very low inventory levels. So our inventories are very linked to the kind of sales that we are doing. So I do not expect any kind of, let's say, significant acceleration or deceleration of our purchases.

With regards to the second question and therefore, to our franchisees in the U.S., of course, we are closely working with all of them. We are also supporting them in how to manage all the different kind of support schemes from the state and so on and so forth. So yes, we are working with them. We are supporting. We are doing a lot of, let me say, consultancy to them, also on how to manage their marketing spend and so on and so forth. So the answer is, certainly, we are working very closely with all of them.

With regards then to the third question and for rents. Yes, as Gabriele said during his presentation, yes, we are renegotiating with landlords. We are in the process. I want to say that Amplifon, of course, has been always a very, very good tenant for our landlords. So we have seen then to be supported in managing this very extraordinary situation in terms of rents.

[Francesca Rambaudi, executive]

Thank you. Many thanks, obviously, to everybody for taking part to our call. This concludes today's call. So thanks again for your interest and attendance, and I kindly ask Judith to disconnect. Thank you.

[Enrico Vita, executive]

Thank you, everyone. Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.