Gustav Hoegh   Investor Relations Officer

Hello, everyone, and welcome to this statement conference call concerning the agreement to acquire KIND Group, which we announced this morning.

For the call today, we will run through a short presentation followed by a Q&A session. The presentation should now be available on our website. We plan for the call to last no more than 45 minutes in total, including the Q&A session. Please note that when we get to the Q&A session, we will only take questions relating to today's announcement.

On the call today, we have Søren Nielsen, our President and CEO; René Schneider, our CFO; and myself, Gustav Høegh, from the IR team. And with that, over to you, Søren.

Søren Nielsen   CEO, President & Member of Executive Board

Yes. Thank you very much, Gustav, and welcome, everybody, to this conference in connection with the acquisition or intended acquisition of the KIND Group, as Gustav said.

Before diving into it, KIND and Demant have had more than 20 years close collaboration, and I'm really proud that we have been able to land this agreement. I think it's 2 companies that are built fundamentally out of the same core DNA, a strong desire to do great for people that are hard of hearing, but also run professional companies with a view to the long run. So very complementary, very aligned in mindset and values and business focus and both well-managed companies that have a solid performance financially. So really a good, strong acquisition in line with our overall strategy. And that's first slide here.

This is one-to-one in line with the all Demant strategy to expand its hearing care footprint globally and signing an agreement to acquire the KIND Group being one of the world's largest retailer and hearing health care players in general with more than 650 clinics is totally in line with that strategy. Around 600 of these clinics are in Germany. And this transaction does further expand our presence in the German market that have been a key focus in the latter years. And we will, with that be one of the larger players -- largest players in the German market and, of course, also a strong and significant expansion of our global hearing care footprint.

The total acquisitions amounts to EUR 700 million. It's done on cash, debt-free basis and paid in cash at closing and financed fully through debt facilities. KIND is, as I said, a unique strategic fit not only sharing Demant's values and ambitions of improving lives through hearing care solutions and expertise, but also offering important synergies with the Demant Group. Both companies will make one another better. So it's a very complementary and I'm sure, a strong growth and strong performance ahead of us in the combination of the 2 businesses.

Closing this transaction is naturally subject to customary closing conditions and regulatory approval. We expect these to take place in the second half of this year. KIND is a recognized brand in a highly competitive market. The business was founded in 1952. Current management is first generation of the KIND family. They have built a very strong brand in the market and a proven track record. And again, their culture, the culture of KIND aligns very well to the culture of Demant, and we have had a long partnership, a successful partnership for both parties that you can say we further solidify with this acquisition. It's one of the leading players, more than 650 shops, of which around 600 is in Germany.

And then as you can see on the map, around 30 in Switzerland and then basically 3 minor assets in Luxembourg, Austria and Singapore. It's a well-established, mature, well-operated organization with around 3,000 skilled and experienced employees that we, of course, look forward to welcome to the Demant Group. A financial strong track record, good profitability. And as always in this kind of business, also solid cash flow generation.

So again, very complementary to Demant. The strategic rationale, I've already alluded to several of the points, but expanding our global footprint, it supports our strategy, the Demant strategy to be both a strong player in the hearing care space, while at the same time being a strong player on product innovation and technology, but this is part of the strategy of expanding our footprint with, again, later years, a focus on Germany, a unique strategic fit.

We offer state-of-the-art technology, global scale and experience and KIND offers a very strong track record, brand and experience in the German market. Very strong fundamentals, well-established organization, strong core values, highly engaged staff, strong profitability and solid operations. So very good and complementary to Demant's existing business.

There are important synergies, including growing share of wallet, conversion to -- further conversion to Demant premium technology and natural scale benefits, increasing profitability over time. We are sure we can also together deliver that. Increasing the footprint in Germany, very obviously, and with that becoming an even more significant player in the German market, one of the biggest markets in the world. So that was the overall rationale and a little more details on the financial impacts by you, René.

René Schneider   CFO, President of Group Services & Member of Executive Board

Yes. Thank you, Søren.

So short term, the group financial outlook for both organic growth and EBIT remains unchanged as we await the closing of the transaction, after which we will come back with more details. We estimate that at closing, our gearing multiple will be around 3.5 thus above our normal target range. And thus, the share buyback program is suspended effective immediately. KIND in itself is a solid cash flow generator with a strong cash conversion. So that in itself will, of course, contribute to Demant. And we expect from this transaction a positive effect on EPS already in the first year after closing.

For '26 and onwards, we estimate that -- KIND will contribute revenue of around EUR 300 million, being DKK 2.2 billion and will contribute with an EBIT margin before special items in the mid-teens. Revenue from the acquisition is expected to grow organically, roughly in line with the global market growth rate of 4% to 6%.

We also assess that the acquisition offers important synergies, which are expected to be realized fully by the end of '27 and thus with full year effects from beginning of '28. When synergies are fully realized, the EBIT margin contribution from this acquisition is expected to be around current group level margin. Expected transaction and integration costs in the first 2 years after closing will be recognized as special items, and we will share more details on this following closing.

On the financing and cash side of things, we would like to emphasize that Demant remains a highly cash-generative company with strong free cash flow as exemplified by the graph on the right-hand side, looking at DKK 3.5 billion of free cash flow, for example, in 2024.

KIND in itself is cash flow positive and will also be accretive to free cash flow from year 1. And as mentioned before, our estimate is that the leverage ratio will be around 3.5 at closing, and it will be a main priority for Demant to deleverage until we are back into our medium- to long-term target range of 2 to 2.5, and we expect that to take place within 18 to 24 months after closing. And still in this period, we will continue to pursue smaller bolt-on acquisitions, albeit expectedly at a reduced rate for now. I think that is what we would like to share on financials, and let's go to the Q&A.

Operator  

[Operator Instructions] Our first question comes from Maja Stephanie Pataki from Kepler Cheuvreux.

Maja Pataki   Kepler Cheuvreux

This is Maja. A couple of questions from my side. Søren, how should we think about the impact of share of wallet? Would that be over 2 years that you were expected to see the positive impact? And is that included in the DKK 2.2 billion that you've indicated on the contribution on sales?

Then I was wondering is there any way that you could quantify the potential positive impact from the scalability you get on the group margin through higher volumes that you're going to be selling on hearing aids? And then the question would be on the financing. Is there any indication you could give us at this point in time what the rate would be for the financing?

And lastly, I'm not sure whether you can answer that at this point in time. But given that you're indicating the growth rate of the KIND Group at 46%, the share of your retail is increasing. Is it going to imply that you're going to change your long-term targets on the organic growth rate? Or how do you think about that?

Søren Nielsen   CEO, President & Member of Executive Board

I take the first and the last, and I will let René to comment on the 2 middle ones. We will, of course, increase the offering of Demant technologies in the business. We always move with further training and explanation and so on. So yes, it is something we aim to achieve within the first 1 to 2 years, and it's built into the guidance you get here.

We will also focus on making sure that people fully understand the benefits of the best technology and maybe with that being able to improve the product mix in the business. That's also a key focus. So growth of the 4% to 6%, it should also be seen in that light that we think there are opportunities to grow organically also within the existing business in various ways.

René Schneider   CFO, President of Group Services & Member of Executive Board

So Maja, thank you for your question. We believe this is a very strong case also financially. And really, how you will see that is that we intend the contribution from this acquisition to go from, you can say, a typical stand-alone retail mid-teens margin to actually contribute with a group level margin on the total sales. And the levers towards that is both, you can say, potentially a better product mix from a higher share of Demant technology, but also the fact that we are, at the same time, are a manufacturer of the same hearing aids. So you will see both the growth contribution, but also a gross margin contribution from lowering production costs. So you can say straight down the middle of what you can say we are used to in these cases, but of course, at a very, very sizable scale here in this case.

On the financing rate, you can -- I can refer you back to our annual report for last year, where you can see our average interest rate being around 3.5% weighted. We are financing this through a bridge loan at a lower percentage than that. That's how much I can detail out on that.

Operator  

Our next question comes from the line of Martin Parkhoi.

Martin Parkhoi   SEB

Yes, Martin Parkhoi, SEB. I think there will be 3 questions. Firstly, now we can say that Germany has been a focus market for Demant in recent years to make bolt-on acquisitions. I guess you will on a global -- on a group level, have less in coming years. But what other focus markets do you have in expanding your retail position like we now have seen in Germany?

And then the other, when do you think that we will have a fully integrated hearing care business in Germany for you where all clinics are under same brand? And then the third question, which I'm probably difficult to answer, but with the valuation that we see on the asset, then it has clearly been a competitive process. Why has this asset been more worth for you than the other potential bidders?

Søren Nielsen   CEO, President & Member of Executive Board

Yes. Thank you, Martin. Yes, true, Germany has been a focus market in recent years basically because it was the single market that were, you would say, left with a significant below share of hearing care activities compared to the rest of the world. So this definitely takes us to a situation where we are among the biggest and therefore, not the same special focus in the years to come. And there are not really any other markets, I would say, in the portfolio of now more than 25 where you have the same strategic gap.

So I think from now on here, unless something special should come up, we will again have a period of more traditionally bolt-on natural part of growth, which will happen in a broad array of markets. So there is no new focus market, especially, of course, we will continue to expand in markets where we feel we have a strong operating model, where we lack scale and where opportunities arise, but no special focus.

Fully integrated, we don't have any current plans for that. We operate an existing business built off a number of individual acquisitions under various brands in Germany already today in Demant. It's a key focus to continue that short term and mid-term, while we, at the same time, make sure we do a good professional onboarding of KIND to the Demant Group. And once that is completed and landed well, then, of course, we will look at how we optimize the entire German business to again make sure we get the benefits out of the asset and the mutual benefit the 2 organizations can give to one another. But that's it for now. And again, we will not comment any further to this until we have been in control at least for a while.

And value, yes, we have, of course, no insight to what offers have been made. We have reached an agreement. Yes, I assume it has been competitive, of course, but we have landed a good deal here, signed a good agreement, which I think both parties also like the match of the 2 companies, which might also have played a role in coming to conclusion.

Operator  

Our next question comes from the line of Carsten Lønborg Madsen from Danske Bank.

Carsten Madsen   Danske Bank A/S

I was just wondering when you now guide us sort of towards a growth of 4% to 6% in line with the global market growth, then how much is this above the last 12 months growth in the German market, which I think to be able to recall that has been sort of suffering a little bit in recent years.

And then secondly, if we look at the KIND in isolation, what will drive the uplift in the EBIT margin for KIND? I understand that you, in combination, as your share of wallet will increase, et cetera, will benefit from this, but which cost items will be lower for KIND in the future?

Søren Nielsen   CEO, President & Member of Executive Board

Thank you, Carsten. It's right that Germany have been more around the 4% than the 6%. But again, this is where we have to look at the global average. We feel there are opportunities in the business to drive organic growth beyond just following the market growth in Germany. And yes, we feel comfortable around that. We don't comment on specific costs, but there are, of course, always things that day 1 applies when you become part of a bigger group, whether it's your licenses to software suppliers or stuff like that. And other than that, we, at this stage, have no further comments to potential cost synergies. We are focused on the sales side.

Operator  

Our next question comes from the line of Graham Doyle from UBS.

Graham Doyle   UBS Investment Bank

Two for me. Firstly, just obviously, as you say, it's your biggest deal, and it's a reasonable step-up in leverage. It's just the bigger context, it doesn't look to be at least initially significantly earnings accretive. And our numbers, it's not massively earnings accretive even on a sort of 2-, 3-year view. So I suppose, how important strategically is this asset because it's quite a lot of capital. And I just maybe raise the question, are there that many more attractive assets left to acquire in the retail segment? So just to get your sense on that.

And then secondly, a bit more related to the ongoing business. Could you give us an update on how the market has trended in the U.S. post Liberation Day, if at all possible? I understand if you care not to, but just if you could, that would be great.

Søren Nielsen   CEO, President & Member of Executive Board

Graham, I will start saying we don't want to use the call today to give any further color or comment. We will come out with that when we have more than a single month and so on. We don't want to run trends analysis on that. So we'll come back on that at a later natural stage. I would say it's a very good business we have acquired, as René said, and René can comment further on the details of it, but it is a solid business. So it's both a strong, solid business where I think it's a fair pricing. But it's, of course, also one which there are not many of, as you say. And therefore, when you get the chance, you need to be sharp and ready.

René Schneider   CFO, President of Group Services & Member of Executive Board

Yes. And just -- so we don't have full line of sight to the exact, you can say, transaction and integration cost in the short term. But beyond that, it is highly accretive to earnings per share. This is a plus EUR 300 million business with a group-like margin and with, I would say, in that context, limited financing cost for Demant and a tremendous, you can say, synergy opportunity also. So all that combined will make it highly accretive to Demant, the net profits and earnings per share.

Operator  

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

Niels Granholm-Leth   Carnegie Investment Bank AB

First question on wholesale prices in Germany. Now that Amplifon, Sonova and you control, I guess, more than 1/3 of the German market, do you think that could lead to better pricing...

Søren Nielsen   CEO, President & Member of Executive Board

We lost the line...

Gustav Hoegh   Investor Relations Officer

I think for now, operator, let's go to the next question in the line.

Operator  

There seems to be some disturbance here. Please go ahead.

Niels Granholm-Leth   Carnegie Investment Bank AB

Okay. I'll proceed with my question.

Søren Nielsen   CEO, President & Member of Executive Board

We can hear you.

Niels Granholm-Leth   Carnegie Investment Bank AB

So do you think this acquisition can lead to better price discipline in Germany now that Amplifon, Sonova and you control such a large part of the German retail market. As far as I remember, the wholesale prices in Germany are quite a bit below the European average. That's my first question. And my second question would be -- so is part of the synergies that you expect for the next few years, would that be to rotate production from KIND's plant in Eastern Germany to your plant in Poland?

Søren Nielsen   CEO, President & Member of Executive Board

Thank you, Niels. I think our main take on Germany is it's still, despite of this partnership being stronger, a very fragmented market and highly competitive market, and I see no chance that this should have any impact on pricing in the market. I think it will remain to be -- that's really a very dynamic market with constant competitive environment going from one manufacturer to the other evidently over time, and I don't see this impacting this at all. About the synergies on the manufacturing side, this also remains to be investigated further once we get in control of the business. We have no opinion at this stage.

Operator  

The next question comes from the line of Susannah Ludwig from Bernstein.

Susannah Ludwig   Sanford C. Bernstein & Co.

I have 2, please. I guess, first, could you give some color as to prior to the acquisition, how margins in your German retail business compared to other countries where you have larger scale. So for example, what did German retail margins look like versus France? And then second, you highlighted one of the positives of the company with its highly engaged staff. Could you discuss strategy around retaining this loyalty with the change in ownership?

Søren Nielsen   CEO, President & Member of Executive Board

Yes. René, you can comment on the first. We always put shareholders, customers and our staff at high priority and having an engaged staff is key out in the many clinics.

René Schneider   CFO, President of Group Services & Member of Executive Board

Yes. And we have said before that our German retail margin has been below our, you can say, average hearing care margin and simply because we -- as we also have communicated, we have been subscale. And this transaction is exactly what propels us from being subscale to having scale and a leading position and thus also enable us to get a leading, you can say, margin in the business. So it connects well and it's in line with our strategy and also financial ambitions.

Søren Nielsen   CEO, President & Member of Executive Board

So it's back to that synergies happens at both sides, both in the KIND business and also in the Demant business.

Operator  

The next question comes from the line of Martin Brenoe from Nordea.

Martin Brenoe   Nordea Markets

Congrats with the acquisitions here. I have 3 questions, if I may. The first one would be that at the Capital Markets Day last year, you showed how it makes sense to buy retail because you can increase your share of wallet from 25% to 95%. Is that also your ambition with this acquisition? And how fast do you expect to go there? That's the first question.

The second question would be what is the typical markup for KIND at least you know, I guess, your own wholesale price and their retail price. So the markup there would be interesting to know. And then just as a final question, what do you think the reaction will be from the independents based on this? Are you at risk of losing any market shares? Are you working with them, talking with them about anything? Are you giving any loyalty programs to them to avoid losing any market shares? That will be the final question.

Søren Nielsen   CEO, President & Member of Executive Board

Thank you very much, Martin. And yes, we will apply the same strategy for KIND as the remaining of our Hearing Care business, which is over time to grow share of wallet. It's always important to again, make sure staff feel comfortable and understand the product. So we will expand the offering over time. We will make sure staff is well even better trained in Demant technology. The good thing in this case is they are very familiar with it and like it and have worked with it for many, many years. So again, this is close partners that move even closer together.

We have no comments on markup, and I don't think it actually -- you could discuss whether it makes any sense. Now it is forward-going revenue and cost of goods sold, and that's how we look at things. And yes, it's, of course, important to reach out to -- from our wholesale organization, which is a separate organization also in Germany to customers and assure that our commitment -- strong commitment to continue to develop strong innovative solutions that are attractive for them to hold in their business will continue and that the strong support will be there.

Again, we have worked with -- partnered with KIND at wholesale level for many years. So in the market, you will not see any major changes from this. And that's I'm sure customers will notice. So -- but there is a job to be done in making sure we are still strongly committed also to the wholesale business and to growing that also in Germany.

Operator  

Our next question comes from the line of Andjela Bozinovic from BNP Paribas.

Andjela Bozinovic   BNP Paribas Exane

Just one on the market share. So what was your market share in Germany before the acquisition? And what is it going to be after the, let's say, you realize all the synergies with the acquisition? And just like a follow-up on this, what is the market structure? Do you have any other independents and how large they are as target in Germany?

Søren Nielsen   CEO, President & Member of Executive Board

Yes. We don't comment on specific market share per country for natural competitive reasons. But we have a decent high share in Germany, you could say, reflecting basically our overall global market share. It will increase from this point as our share increase. It will still, as I said before, be a highly fragmented market, many players. There are a number of bigger players. KIND was one of them. And then, yes, some of their competitors, but then there is also a decent sized, midsized players. We are, of course, at least short term due to authorities reviewing the deal, not able to do any more acquisitions. And of course, with this, we would focus on integration and so on more than additional acquisitions in the German market specifically.

René Schneider   CFO, President of Group Services & Member of Executive Board

On the retail side in terms of footprint, KIND in itself was, you can say, below 10% of the German market. And in combination with our existing stores, the combined business will be just above 10% market share on the retail side in Germany. So despite being leading, still a very fragmented and competitive market.

Gustav Hoegh   Investor Relations Officer

Thank you for the questions, and thank you, operator. Thank you all for joining us on this call today. If you do have any follow-up questions, please do reach out to us directly in the IR team after the call, and we will do our best to help you out.