Demant A/S (DEMANT) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to our conference call, which we hold in connection with the release of our annual report for 2020 earlier today. We plan for the call to last an hour, including the Q&A session, as always. We are also represented by President and CEO, Søren Nielsen; CFO, René Schneider; as well as by the IR team, Christian Lange; and myself, Mathias Holten Møller. Before we go to Q&A, we'll be going through a presentation of our results for 2020, outlook for '21. So I hope you all have it on your screen. If not, you can find it on our website. It should be there now. With this, very happy to leave it to you, Søren.

Thank you very much, Mathias, and welcome, everybody, to this call. We have an agenda for today, where we'll take you through the highlights and talk a little bit about the different businesses, and then, of course, give an update on recent development as well as the outlook for '21. René will in between give you a deeper dive into the group financials. First thing to mention, which I'm sure you have all noticed, is changing to reporting structure. We have, with the inclusion of EPOS and general evaluation, come to the conclusion to change a bit on the way we are reporting our numbers. And the biggest change is to make 2 individual segments for hearing health care, calling Hearing Aids, Hearing Care from a retail, Hearing Implants and Diagnostic and then a separate one for communication, constituting at this time, EPOS. They will have the 2 segments' full P&L and make a comparison year-over-year, of course, across all lines easier, but also because the 2 have far less overlap and shared service elements than within the Hearing Healthcare segment. We have changed names on 2 subsegments. The hearing aid wholesale is from now described as Hearing Aids. It is R&D, manufacturing, production, wholesale business, and it does hearing aids, therefore, Hearing Aids. Hearing Care is the form of retail. It is where do the service element of the business, where we are dealing with end users, where we are handling the counseling process and delivering the actual hearing care, including fitting hearing instruments but also the broader hearing care aspects. Therefore, Hearing Care, in our view, the right name for that business. And then we have chosen to split up the reported revenue on Hearing Aids and Hearing Care and also including, in Hearing Aids, the wholesale value to Hearing Care to make sure we can fully size the actual hearing aids sales in comparison to our key competitors to give also a better indication of growth levels and growth at this level to compare to the underlying market growth. On the other hand, we put together now CI and BAHS when it comes to the growth rates. They are still growing at a different speed and phases. But as we are approaching entering into U.S. and a more global footprint on the CI, it is the 2 businesses together that we think is relevant to report on, and there will always be seasonality and different life cycles and so on. But all in all, it is the growth that we can generate in the implant space, that's the primary interest. So with this as a starting point, the highlights of 2020's annual report, you can see the bar illustrate the revenue side of things. All in all, a decline of 13% organically. But adding on EPOS, indicated in the yellow bar, we end up with 3% decline reported and 2% in local currencies. We have a gross profit decline coming from 2 elements, half of it approximately from EPOS and the other half approximately from coronavirus loss of scale in operation, and also in the second half, a little bit different recovery rates between Hearing Care and Hearing Aids. Adjusted EBIT and in '20, adjusted for one-offs related to EPOS, is of course a low EBIT for the year of DKK 1.3 billion against the DKK 2.1 billion last year that was also low due to the IT incident, so not the best years to judge the company from. But if -- as we're going to get back to look at second half, we made it in with DKK 1.5 billion, and I'll give more to that. And that, of course, indicates a strong recovery on -- in profitability in the second half. Strong free cash flow, very tight control of working capital and improvements in many areas. Of course, also a smaller business, but all in all, very well managed. And so far, both on payments and debitors and inventory, et cetera, coming out very strongly with a significant free float of free cash flow from the business. Key takeaways. Group's local currency growth of 14%, which is at the upper end of the latest guidance from December of 12% to 14%, indicating a good end to the year and a good resilience. Not the least of the Hearing Healthcare business, both retail and wholesale, but in particular, Diagnostic, despite of new restrictions, we saw some stalling of the recovery, but still the business carried through in a good manner. And then we continue to see strong performance of the communication group of EPOS, supported by increased production capacity, so we could deliver to a, again, strong market growth. OpEx, including the addition of EPOS, developed flat in local currency. That reflects a number of temporary savings, less sales and marketing, less travel, et cetera, but also structural savings that we commented on earlier, primarily in the Hearing Care sector in U.S., North America, all in all, leading to strong profitability in the second half of DKK 1.506 billion before one-off and an EBIT margin of 17.9%, and again, a very strong cash flow from operation. And as you can see here, the revenue across geographies. It has been stronger in Europe. The overgrowth come from both EPOS that is strong in Europe, lower comparison figures in -- due to the IT incident. It took quite a while until we got our U.K. operation on the retail side up and running. And a number of other European assets were also longer in their recovery into a contradiction to North America where the IT impact was faster dealt with. But on the other hand, in '20, we have seen a slower recovery, in particular in the VA channel. For Europe, the same goes for the NHS that have had a little bit out of sync with the underlying market development during the second half, actually a quite weak third quarter because of eating into Brexit stock, but then a strong fourth quarter, because it was filled up again. But going out to clients, we saw a decline towards the end of the year, in line with the new lockdowns in U.K. In Asia Pacific, strong recovery, generally speaking, strongest in China, where we have seen a significant growth to our business. And in Pacific, Australia and New Zealand, a strong growth driven by soft comparison figures, the longest recovery process. And the IT incident was in Australia and other countries, especially emerging markets, we continue to see quite severe impact from corona. If you look at business split across geographies, you see quite a bump up to Europe. That's, again, EPOS being stronger in Europe than in North America, but also the faster-than-average recovery in Europe versus North America, so also a little bit out of normal balance still. And you can see below that Hearing Aids and Hearing Care are very equal in size when it comes to revenue. Of course, very different number of instruments and clients being handled as it's 2 different points. In the value chain, 10% in diagnostic; 9% in Communication for the full year and 3% on Hearing Implants. And just a little bit more, the Hearing Healthcare in total, significant revenue improvement since the low point in spring, but still below normal level. Minus 5% underlying organic growth and gross margin in the second half expanded with 0.5 percentage point, which is mainly driven by faster recovery in the Hearing Care, as they are not exposed to channels like NHS, VA and emerging markets. Material savings on OpEx, so organic growth of minus 9%, and therefore, a material lift to the profitability coming in at DKK 1.425 billion or a margin of 18.7%, which I think, given the corona pandemic's consequences on our business, is quite strong performance. And on the hearing aid market, reviewing the full year, and we have updated this table with all the latest statistics. And we earlier estimated Q1 to be around minus 5%. We can see from the markets, we have statistics, it came in minus 6%. We estimated minus 50% on Q2. It came in 48%. Q3 was only down 3%, whereas Q4 is down 4%. But again, if we correct a little bit for the NHS being a little bit out of sync with it, it was probably even a little less in Q3 and a little more in Q4. So a little less positive on Europe than this reflects, but you can also see how North America, also the commercial have stalled a little bit towards the end of the year, whereas VA basically have improved throughout the entire period, but still in Q4, 15% below last year. And we have to remember that on top of this, we should have had an average 5% growth. So it is still quite a significant gap. And our estimation is that the global hearing aids sales is probably down more than 3 million units in 2020, and that leads to the entire discussion of magnitude and timing of pent-up demand. Hearing Aids, not that much more to add than what have been said. We saw a very fast recovery across Europe in the third quarter. All the countries where the pandemic basically disappeared and normalized, we quickly saw uptake, especially on the commercial side. But we have seen stronger resilience here towards the end of the year. And we have simply found a way to operate -- our customers have to operate on the commercial side and only the main hospital systems have seen significant gaps. We continue to drive very strong organic growth in Asia, driven by the launch of Philips Hearing Solutions in China. And again, we launched our new flagship product lines, 30th of November, announced it. We started shipping mid-December, so a little material impact in 2020. But we are off to a good start and well positioned for growth in 2021. You can see units being down 18% in the year and ASP a bit up. That's primarily a channel mix and the way the revenue are played out. As you can see, we are very far in the introduction. We basically only missed a few countries here in February. And then Brazil and China come later due to homologation processes being longer. Hearing Care, former retail, underlying minus 4% when we correct for the IT. And that, again, shows the, you would say, better recovery. But in reality, it's more the exposure to geography. And we have seen very strong development in Europe, despite of new lockdowns in Q4. Of course, U.K. have seen some impact. And of course, also a country like Portugal are now seeing being away from normal. But again, once -- unless people are really prevented from going out, we normally see the business come back up and being executed in line with opticians and dental and so on as special care. We have seen positive growth in Australia, but that is, of course, to a large extent driven by low comparison figures from IT, as that was the most impacted region we had in '19 and a little bit slower recovery in North America, fully in line with the underlying market. So nothing special there. Implants is the business area we have -- had the biggest impact on COVID as of today. Towards the end of the year, we again saw how high numbers of hospitalization led to postponement of elective surgeries and especially the CI area. CI business is significantly impacted across Europe. Whereas the bone anchored do a bit better, because you can do upgrades, you can do -- try it with a head band and so on, a number of opportunities that are not present for the cochlear implant business to the same extent. And all in all, a minus 16% revenue growth in the full year, strongest in first half, but also significant in second half. And Diagnostic doing very well in the second half and ending the full year with just 1 percentage down from '19, very strong performance in second half in Europe and Asia Pacific, a little bit slower in U.S. It is driven by good new strong product portfolio from Interacoustics as well as significant growth in the balance system, adding significant market share gains. We still see our business taking share in basically all markets across the world. And then EPOS communication, significant growth acceleration as the pandemic started and strong, again, in second half. We have seen some normalization of freight rates, which have improved the gross margin moving into second half. We continue to expand quite significantly in the R&D area and distribution activities, and of course, also in terms of sales and marketing. And even despite of that, we have seen a very nice EBIT here in the second half of DKK 81 million against DKK 38 million. We are, of course, as you can see, below some of the peers in the industry, but this is due to investing in growing a much bigger business. We have not been able to spend all the one-offs estimated on building the brand as much of it has been postponed or done virtual. But we still think we are off to a very good start with EPOS and have managed well to steer through these limitations. And then over to you, René, group financials.

Thank you, Søren. So a little bit of repetition and a little bit of extra detail here. But I will comment primarily on H2 as that is the most interesting to observe here. But as shown, it is still the revenue growth of 11%, constituting 2% organic growth, 12% from acquisitions, of which 10% relates to EPOS, and then a headwind of 3% from currency. Higher growth in production costs, leading to an 8% growth in gross profit, and thus, a reduction in our gross profit margin from 74% to 72.5%. And I will revert with a little more detail on that. Looking at the cost line. They clearly demonstrate our extremely cost-conscious approach here. All in all, adding together a 3% drop in reported cost of goods sold. 9% down due to acquisitions -- or 9% up due to acquisitions and 9% savings from, say, organic savings. I would also highlight the EBIT repetition, DKK 1.5 billion, just above that, a very strong number with 17.9% EBIT margin, but of course, with one-off tailwind on some of the cost lines that I will also revert to. On the EPOS one-off, added up to DKK 90 million in second half year, constituting a little bit different than what we had originally anticipated. DKK 52 million in one-off marketing costs related to EPOS and then DKK 38 million in inventory reevaluation, as we have finalized the purchase price allocation of EPOS, but this is an accounting noncash item. So a little bit more detail on the group gross margin. The main driver of the group's decrease in gross margin from -- in the second half year from 74% to 72.5% is a 2% dilution effect from the consolidation of EPOS that just structurally has a lower gross margin. But then partly offsetting that, we see 0.5 percentage point from improved gross margin in Hearing Healthcare, driven by predominantly the change in business mix, where our Hearing Care business is growing 9% in local currency, and thus, slightly higher than the other businesses. For the full year, we see a similar impact from EPOS. But of course, when including the first half year, we do have a severe negative impact of the missing revenue on the Hearing Healthcare side in first half year, and thus, having a negative effect on gross margin from that. On OpEx, as you can see on the graph, what I mentioned before. So basically keeping OpEx flat in local currencies, but having minus 9% organic growth. It is primarily driven by significant temporary savings in sales and marketing, traveling events, salaries, which is really the primary driver of savings. And then in addition, we have realized DKK 125 million from structural savings predominantly related to our Hearing Care business in North America, but also apart from that, broadly based, DKK 100 million from government support schemes globally and then DKK 50 million from reversal of provision of bad debt, where we took DKK 150 million in the first half year and then reverted DKK 50 million in the second half year due to an improved outlook on that parameter. So this leads to the strong profitability that we have seen in second half year at DKK 1.5 billion, in the upper end of our latest guidance of DKK 1.4 billion to DKK 1.55 billion. So all in all, a good half year on that account, but with a few one-offs included, as mentioned previously. When looking at cash flow, this is really a highlight of the year and where we managed it quite strongly. So looking at second half year, we see a very strong cash flow from operations and a very strong free cash flow, driven by high EBIT, tight working capital management, the fact that we have suspended, at least temporarily, a nonessential investment, and all in all, leading to a free cash flow increase of 141%. In addition to that, we have also seen a lower M&A activity than normal. So this leads us to the balance sheet, which has been very stable throughout the year. But looking at it full year -- over full year, it increases by 1%. We do include 6% from the consolidation of EPOS, so 6% acquisitive growth, but it is offset more or less by minus 1% organic growth and minus 5% from currency. And the fact that we have, as mentioned before, had tight working capital management, which leads to a reduction of 24% in net working capital. And year-end -- over year-end, net interest-bearing debt declined 13%, leading to a gearing multiple on historical earning numbers of 2.8 and basically not fully in line with our target of 2 to 2.5, but that is due to the suppressed EBITDA, which on a more normalized basis would have been clearly in our guidance range. And then lastly, just for backup housekeeping. This is the specification of one-offs. And I would just highlight the effect on distribution cost of -- for the full year, DKK 89 million, which does relate to the extraordinary spending on establishing the EPOS brand. This is the only line that has real cash flow effect, and it is significantly lower than the DKK 100 million to DKK 200 million that we expected in the beginning of the period. It is a combination of delayed activities, but also an effect of savings due to conducting M&A activities in a virtual way instead. So with this, to the outlook, Søren?

Yes. Thank you very much, René. And just before going into the outlook, a little bit about recent development and outlook assumptions. We continue to see the hearing health care market being impacted by coronavirus, but far less than we saw in spring. We and the world have learned to live with COVID. And as classified a special care, we have all stores open. Of course, see some effect in U.K. and also in Portugal right now, but nothing that can disturb the big picture. And then, of course, still some slower recovery in NHS, in VA, emerging markets. But other than that, relatively stable development despite the recent restrictions put in place. And also no doubt that with effect of these in a positive way, case numbers go down, hospitalization go down, death cases go down in -- generally speaking, across most countries. In the countries where we operate, this has a positive effect on people's ability to go out and seek all type of health. The area most impacted, as I said, is the implant where we are needing surgery expertise and hospitals to be open for those kind of patients, and that's, of course, impacted. Communication continues to see strong demand for professional headsets. We expect in the year to come that it will be a little less working from home and a little more in the office, but still with the highest restriction on traveling and so on, which will further expand the market. So when we look at outlook, what is the assumption for making an outlook for '21 is we expect a gradual normalization of the hearing health care market during first half. Based on the fact that it again turns summer. Spring, we saw the effect last year. On top of that, vaccination programs that in most of the markets we act in or at least where the primary market for our business is developing quite nicely and fast. And looking at the 65-year population, it will not be many months until most are vaccinated. So that should indicate a good recovery, at least coming into second half. We'll have some slower recovery in government channels as they have to normalize the hospital services, and it will take longer than the commercial markets and some emerging markets, for sure, across Implants, Diagnostic and Hearing Aids will last possibly into beyond '21 and into '22. We expect some release of pent-up demand in second half. Some will not be released until '22, I would actually think the primary part. We estimate that if we allow ourselves to exclude the government channels and export markets, then '21 could look like '21 would have looked. Everything else unaffected by COVID means a strong second half with a tailwind in line what we saw in 2020. But we have no assumption about any significant negative impact from COVID in second half. If that occurs, we would have to come back. That is not part of our baseline. We believe vaccination programs will be effectful. And in the headset space, we believe the market growth will go down, but still be in the line with the normal level of 8% to 10% on top what we have seen this year. So still a significant expansion of the market compared to just a year ago. And in that market, we also expect to be able to take share. That leads to an outlook where we organically believe we can grow 23% to 27%, slightly more on the Hearing Healthcare side than on Communication. We will have an acquisitive effect, as we note as of today, of 1%; and as of today, with today's exchange rate, lose 2%. That will give us EBIT with a low point at 2.85 billion and a high point at 3.15 billion and skewed toward the second half. But of course, with the biggest growth in the first half, that's very obvious, that's where the business really suffered in 2020. Effective tax rate around 23%. Gearing multiples coming back in between at 2.0 and 2.5. And please note, we do no longer have this effect of leasing contracts, et cetera. Just speak about the 2.0 to 2.5, we are almost there today. And with a full normalization of EBIT, we will definitely be there. And therefore, we feel or are quite sure that we can buy back shares for more than DKK 2 billion, as that is -- we also expect a significant surplus of cash even after some acquisitions, and we will return to a share buyback program to do that. And then as we have included, and I will not comment more on it here, we have also listed, you could say, the things we always mentioned. As a mid- to long-term outlook, we expect to take market share in all the businesses we are in. We expect to be able to business area-by-business area to improve profitability, show scale, less in the retail than in the product businesses, the wholesale businesses. And of course, then what really varies is the mix between the businesses, how they develop. Some grow 2%, 3%, 4%, 5%. Some grow 15% to 20%. And therefore, these mixed effects, of course, end up impacting the EBIT margin, why we don't guide on it, so does FX development as well as acquisitions that are typically having, at least at the beginning, some dilutive element. No changes to gearing levels. And again, capital allocation, things that are not well spent on acquisitions, we will return to shareholders in form of a share buyback program. And with that, we open up the floor for questions and answers.

[Operator Instructions] Our first question comes from the line of Patrick Wood from Bank of America.

Perfect. I have 2 please. The first on EPOS, I'm a little surprised on the guidance that you guys gave. I would have thought it would have been a bit stronger, just given the backlog and the strength of kind of what we're seeing in the markets. Maybe just a little bit of color around that, why you felt that was the right range, given how strongly performance has been of late? So that's the first question. The second one, I'm just curious, there's obviously a lot of pent-up demand on the Hearing Aids side. If you have, let's say, a slightly slower spot for 2021 than you're expecting, so more of the demand is going to get pulled through into the second half of the year than would be otherwise. Is it possible for the retail establishments to really work through that backlog fast enough? I guess, how much flex is that within retail to work through and show into that backlog? Or does some of it even more they get pushed into '22? Or do you think they can work through in the second half?

I'll do that relatively quickly. It's, of course, very difficult to have an opinion on a full year growth rate in a business like the EPOS business with the uncertainty. It has a dramatic effect. We have seen in 2020. Huge expansion of demand is there, a little bit downturn on the backside. Yes, there are backlogs, but how do they blend out? I still think it's quite ambitious to see a market growth of 10% on top of a market growth of 30% in 2020. It could be more, but we'll have to see how it develops throughout the year. And our share, as I said, is to expect to grow in that market. So you can expect more than the 10% from us. We have grown 15% to 20% in the past many years. So if that's the normal market level, I think you should also think of us growing to that extent in such a market. Does the market expand? We will take share of that, I'm sure. And pent-up demand, yes, I think it was proven during 2020 that if there is a significant return of pent-up demand, you will find a way to work around it. Of course, again, in the public channels, it takes extra capacity, and it's a little more rigid than it is in the commercial sector. But we saw markets like Denmark, Norway and so on working over time in a period to cut down the waiting list. So yes, I think it's very realistic that the various channels, including commercial, retail can expand capacity short term to deal with more appointments.

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

I have 3 questions, firstly on the guidance. I suspect that you saw the consensus when it was collected. We gave you the opportunity to come in a bit above and still achieve, I guess, a positive share price reaction. But you really came out sort of with quite a storm, quite unlike what demand does normally. Why do you choose to do this, especially when you also highlight that the world remains uncertain? Question #2 on EPOS. Do you expect the market for office headsets and gaming headsets to grow in the second half when you give market growth guidance of 8% to 10%? And then thirdly, I would like to know your view on a competitor's product, this Instant-fit Signia Active Pro, the sort of earbud style, which is quite unique and quite differentiated. Is this sort of a style that you think can do well? And if so, is this something that you will plan to do shortly?

Thank you, Michael. I think we always try to guide realistically, yet a bit ambitious. And I also think this is what we have done this time. It is, of course, based on the outlook. I tried to present about a potential strong second half where COVID is no longer putting significant pressure on the market. And there is a very significant pent-up demand, and I am a fair believer that we will see that come in. And I think also seeing how the business has developed during the latest pandemic lockdowns and restrictions, it has shown to be very resilient. So in that line, I find it, yes, ambitious, but also realistic guidance that we put out for '21. EPOS, we have no strong opinion on particular split between first and second half. Of course, the first 2 months in first half will have quite a significant market expansion still. So yes, those 2 months will be higher than average, and the average for the last 10 months will be a little less. But we are in the final details. The bigger picture is a normalization of the growth rate to 8% to 10%. But again, there is less solid ground to stand on. It is very unpredictable exactly how this develop will market -- market will develop going into '21. And I have no detailed opinion on competitive products. But one comment is still, though, that this idea that you will only use it part time, I'm a little skeptical towards the same for OTC, very visible devices that are kind of "take on and put on when they're needed," at least I don't think fit most of the hearing aid users that come in. They are going for something they can wear all day and forget. And where they are the ones that decide whether their surrounding should see it or not. So we'll follow it closely, of course, as always. And I think that's it for now.

I might add on the EBIT guidance that we've also seen in second half year of '20. And even if sales are slightly suppressed compared to normal due to strong cost management, we are still able to put a floor to what is the profitability of the business. So even if we are resilient on top line, we are certainly also resilient on the bottom line. So I think that's also important. So therefore, of course, we are confident in the guidance.

Maybe I can just follow up or maybe rephrase the question on net cost. Do you expect net cost to grow in the second half?

Yes.

So you think you'll do positive growth in the second half of this year?

Yes.

Yes.

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

I'd like to start off with the implant business. You've talked to the higher sensitivity of the implant business based on the fact that the hospitals are closed and access to elective surgeries are postponed on that side. What is your view on the potential to work through pent-up demand come the second half of the year? Is it -- so we -- are you expecting to see a similar impact like you're talking to on the retail side? Or do you think, on the surgery side, it will take longer because there are just a certain number of implant centers that can perform these surgeries? That will be my first question.

Should we take your second as well?

[Technical Difficulty] growing above the market. And 2020 was an exceptional year where, I guess, a lot of marketing plans that you had weren't put through. How should we think about EPOS profitability over the next, let's say, 3 to 5 years? Do you believe -- are you planning to spend a lot in R&D and marketing and sales, and therefore, margin should not go to 15% in the next 3 years? Or do you think it's going to be a more balanced growth investment outlook?

Your line was not too good, but I think I got the 2 questions. The first one was whether the recovery, you could say, of the implant market will be as fast and also whether pent-up demand can be coped with, meaning will you be able to cut back on waiting list. And the last, in particular, we cannot predict. We are a little bit skeptical. Hearing implants is not as critical as a number of other things that have been postponed. So we are a little cautious on being too optimistic about '21 being a big release of pent-up demand. But that, for sure, has created significant waiting list. When it comes to working through these waiting lists, there's also a hypothesis we have that it would be children first, of course. So you could actually see an expansion of the -- further expansion of the waiting list for adults during '21. And we are stronger with adults than pediatrics. So there is a potential risk element there for especially our business. EPOS and profitability, it is clearly our aim to grow the profitability of the EPOS business up to best in industry. But of course, as you can see in 2020, we are not there. But -- and we invest in the business. We have for long believed that there is a very significant potential in the enterprise solution as well as gaming. That's our reason for being in those 2 businesses. But -- so we will invest in R&D and sales and marketing and not the least attempt to expand our business in U.S. And that will, of course, cost something in the beginning, but the underlying basis is to grow profitability basically year-over-year as we grow the business. There is significant scale effect, as you have also seen, from a number of other players in the industry, and we also expect to be able to prove that.

Perfect. And then just quickly a follow-up. Sorry. So I do read you right that in your guidance, you do not expect to see the full pent-up demand from the implant business to come through in 2021, it could be 2022 is a more realistic scenario, that's part of your assumption?

Assumptions, yes, Maja.

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

I have a couple of questions as well. My first just to the gross margin. So as I recall, last year, you said that you estimated that you would have -- that the second half would have seen a gross margin of 65 -- sorry, 76.5 percentage points adjusted for the cyber attack. This year, your gross margin is around 4 percentage points lower. I understand the 2 percentage point of that dilution comes from EPOS. But I was hoping you could give us some insight into what is driving the other 2 percentage points of dilution? And then my second question is to the OpEx space and how we should expect that to develop going into the first half of 2021. So if we take out these one-offs, including the provision reversal and the government support, I believe your OpEx base is around DKK 4.8 billion here in the second half of the year. But as I understand that, there's still a fairly significant element of temporary savings within that number. How do you expect that to evolve over the first half? Should we still expect some temporary savings here in the first half of 2021? That's my question.

Thank you, Christian. So basically, on the gross margin, when you do compare to an adjusted second half year, it is true, you see a significant dilution also on the hearing health care side. But that relates to -- if you adjust, then, of course, it is an inherent inefficiency from lower capacity utilization, basically lower volumes as the primary driver of that decrease in gross margin. That also means, of course, that when you look into '21 -- I think that's implicit in your question. If you look into '21, of course, we do expect, at least to some extent, to close the gap between where we are second half year '20 to where we, let's say, have been historically, still with some effect of retractability. But definitely, as we have a high-end launch in 4 brands and we expect to increase volumes and better capacity utilization, we will see gross margin come back up. That is our clear expectation for next year. But of course, if you look at second half year to second half year reported, then you do see an increase, and that's also on comparable volumes. On the OpEx, so what to expect for first half year next year? Well, a good starting point, of course, is to look at what was the run rate in second year '20. Of course, then add back the government support and the bad debt. And then we referred to temporary savings that are significant. In ballpark numbers, they are in the range of DKK 300 million to DKK 400 million that are savings related to the lower activity level. And of course, they might persist if sales are still depressed, but they will also come back if sales are up. So you're looking at a normalized OpEx spend of DKK 5.1 billion to DKK 5.2 billion. But of course, as we enter the year, you will continue to see, let's say, temporary savings, to some extent. And then you need to add something for, let's say, increased activity level, inflation, et cetera. So I hope that gives a little flavor to it.

And the next question comes from the line of Neils Leth from Carnegie.

So getting back to the DKK 300 million to DKK 400 million of cost savings per half year. And at this point, would you expect the cost level then to normalize already from the second half of this year so that we put those DKK 300 million to DKK 400 million back in the second half? Or again, is that included in your guidance? My second question would be about product launches within your other hearing aid brands. So is it correctly understood that you have actually launched new products recently in the other brands outside of the Oticon brand?

So on the first question, yes, largely speaking, you would expect to be normalized on the cost side in second half year since that's also our, let's say, similar expectations on the top line. But of course, if that doesn't materialize, then of course, things will change. But that is our base case assumption.

Baked into your guidance?

Yes.

Yes. And on product launches, it's true, we announced that across all 4 brands. We kicked it off with Oticon as that has the biggest exposure to the commercial channels. And rightly after here in the new year, we have launched the other brands. And it's basically now up to markets and channels on how they ramp up. But there's no constraints on availability or what products can be sold around the world other than approval as the example with Brazil and China.

The next question comes from the line of Kit Lee from Jefferies.

My first one is just on the Oticon More launch. I think if you look at some of the markets where you've launched the product back in November, December, what's been the uptake rate in January of this year? And how do you see that developing between the first half and the second half of 2021 for the launch, please? And the second question is just on EPOS production capacity. Do you see any risk of capacity constraints if this market or your business continue to grow at a much higher rate? Should we expect some bottleneck issues there? Or is there more flexibility built in today to sort of capacity?

Yes. Thank you very much. In the beginning, you see very rapid conversion from one product line to another. So of course, here in the beginning, despite a very high numbers going out also out to customers and more we, of course, also see a big cannibalization effect of existing products. So the real growth is coming through the first half and into the second half. And of course, we should see an even stronger growth rate everything else equal, but it's going to be difficult to see as first half was so low. So we expect the whole platform that we have launched to grow throughout the year in absolute numbers. We expand it further with brands here in the beginning. But there will also, of course, come more new products based on that platform during the year. So all in all, the -- it is a key growth driver this year and next year the products that are going to be based on this new platform. And on EPOS, we have multiple times during the year continued expand capacity. And again, that's the beauty of the setup where you are working with quite large sub-suppliers in China that can quickly expand. The biggest risk for, you could say, the entire electronics sector is some shortage of components now and then. Because the whole phones and computers and stereos and what have you is quite booming under the whole pandemic. So from time to time, we and other players are searching different components for -- to support the supply chain. But we have no known constraints if the market develops beyond our expectations.

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

I'll keep it to 2, please. I was kind of trying to disaggregate your guidance versus your expectations for the hearing aid market and sorry that my math on this might not be particularly precise. But if I kind of look at what's implied in your guidance and compare it versus 2019, adjusting for the IT incident, et cetera, I get to sort of your hearing aid revenues being up 3% to 7%, 4% to 8% versus your 2019 sales. I'm just kind of curious, if you were to guide for the market, what would that number look like versus 2019? Just would be good to understand kind of how you're thinking about your own performance versus the market? Or is your expectation that the market will develop pretty similarly? That's my first question. My second question is just on the decision to do a buyback as opposed to keeping the cash for M&A. And I kind of appreciate, in the retail space, there isn't a time, but we see, for instance, Sonova go down the route of thinking about maybe some pharmaceutical solutions to hearing loss. Just kind of curious if that's on your radar at all, if that's something that you've given any thought. If you could comment on that, that would be great.

Yes. Thank you, Veronika. And let's start with the assumption. We assume that the market in 2021, if we disregard NHS, VA and the emerging markets, would see double annual growth rate. And based on that market, we will take share. And I think that's how you should look at the 2021 guidance. And that is driven by our success with the Philips brand. It's driven by launch of new products that we, of course, have great expectation for during 2021. And share buyback versus acquisitions, if unpredicted things happen and we have to do significant acquisitions, we would have to change the guidance on our share buyback. That's how these things work. We have no visibility to such matters. And therefore, this is the guidance and the promise to buy back.

But I would say implicit in this guidance is, of course, a normal expectation of continued acquisitions, but maybe not just major acquisitions.

Okay. And any interest in pharmaceutical solutions to hearing loss? Or is that something that is a little too far outside of your wheelhouse?

We, of course, look carefully at everything that happens in our space, including pharmaceuticals. But our best estimate is still that these are pretty long term.

Understood. I just had a quick clarification. The continuation of the one-off branding costs in EPOS, is that excluded from the guidance you guys have given today?

So we're not going to specify any one-off cost going forward. So we will only do reported numbers, no adjustments, no one-offs. We are just commenting on the fact that EPOS marketing costs were slightly lower in '20 than what we had anticipated, and there might be from an activity level and partly from a cost level a spillover into '21, but that is fully included in the guidance and no one-off.

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

First one is on Diagnostics. So in H2, you were organically again in a positive territory. Does the development of value outperforming volume growth continue? That's the first question. 2 quick ones on EPOS, first a clarification. So except for the first 2 months, but also maybe a year, do we see a strong outperformance of the business versus gaming to continue? And also a question of the expected phasing of EPOS in 2020. You said early in the year, there's a more pronounced phasing towards the second half. It was even stronger, which was again a positive. So would you stick, in general, also towards a stronger second half than the first half? Also with , I know that you made your comments on the first 2 months, but more from a general underlying perspective?

Thank you, Oliver. I just have to make sure I understood it on the diagnostics side. Generally speaking, it's very difficult to talk about ASP on the Diagnostics side. There is a huge difference in different channels and what type of instruments we are talking about from small screening audiometers to bigger installations for balance treatment. So we never really talk about volume versus ASP. It doesn't really make any sense. So the business is growing across multiple segments across multiple channels. As we highlighted, in particular, the Interacoustics business with the new Affinity Compact have been driving share gains as well as further expansion in balance. But also, our continuous effort to move forward in the value chain, doing more service calibration, selling disposables and so on is also part of it, also our newborn screening program in U.S., where we screen babies on behalf of hospitals, is growing. So many different avenues of growth, and therefore, basically impossible to answer your question directly, if I understood it right, otherwise, please come back. On gaming and enterprises, again, with the kind of blurriness of the outlook as the reality is this is an assumption made rather than -- because we know this is how it's going to be, we can also not predict the difference in the growth rate for gaming and enterprises. Both businesses are doing well. Both segments are growing. Popularity of gaming is growing. Online gaming is growing as well as use of enterprise. What I think we'll see in the enterprise is, well, I think in 2021, we might see more of office-to-office collaboration coming in place, because I still anticipate that global traveling will be highly restricted. So much more meetings between meetings rooms kind of equipment type, speaker phones on the table, different kind of video equipment. And H2 versus H1, it's a relatively fast growing business. And therefore, in absolute terms, for sure, we will see a continued expansion into second half. There is a chance that the growth rates will be slightly less in second half than the first half. But that's all speculation around how the market develops. So we cannot give much more clarity on that at this stage.

Okay. Just one follow-up on the Diagnostics question. So in the past, you commented that basically, you moved more from simple products to solutions, and that was also positive from a pricing perspective. Do you expect this trend to continue?

Yes. What is growing is the share of service calibration disposable is growing, but we are not seeing that this is becoming a software business, if that's what you're speaking into. There are different modules that are sold that are working off iPads and so on. And that is, of course, growing as it was not there some years back. But there's no big drift in the way the market structure is.

And the next question comes from the line of Annette Lykke from Handelsbanken.

Congrats on the very nice results. And my first question would go in respect to the communication and the decent growth you're expecting over the next couple of years as the demand for office headsets are still increasing. How should we -- how will you spend that growth? Will this go into new investments in terms of marketing and R&D? Or will part of this operational leverage go down and manifest in terms of margin expansion? And then could you say a little bit more about More? How actual sales -- I know you had positive feedback. But how is the rollout going in the states? Are you seeing more sticky market shares right now? Should we expect that to ease up during maybe the second quarter of this year? Or how should we see the impact of the new hearing aid in general?

Thank you very much, Annette. As I think it was the same line as Maja was asking into, we will invest more as we are subscale in R&D, sales and marketing, expanding global distribution, building the brand, but at the same time with an eye for growing profitability. So yes, we should see expanding margins in the EPOS business also in the near coming years. That's definitely the ambition. And on More launch, we are off to a good start. Sales numbers are good. Some markets, you don't see sales right away. You typically work with some kind of consignment or demo instruments being out. So invoicing comes a little later. But generally speaking, we feel a strong uptake. It's always difficult really to judge until you are 2 or 3 months into it, whether you get a real pull in the market where you really drive in market share gains. In the beginning, you both expand the market and your own sales. And therefore, you cannot really judge share gains. That will be seen over a half year or a quarter. But yes, it is both our ambition, and I'm also sure we will deliver market share gains based on the More concept, no doubt about that.

But also, do you see a difference in the current market right now as it's hard to visit the retailers or the clinics due to COVID-19? So it's maybe -- I mean market share more stable right now? And will that sort of develop or change, for example, through mid of next quarter?

I think there's no doubt that when things are fully normalized and we can get even more on the road, it's not that everything is online, then you will get closer to your customers. So yes, I definitely think things will be better. On the other side, the reach, the number of people you can actually reach is significantly more efficient. So we can just see a simple stat, like how many calls have we been able to conduct here in January in the U.S. market to customers about [indiscernible]. It's significantly higher than it used to be, because you can simply do more a day. So there's both pro and cons, but it's the first time we make such a big launch in a virtual context, and it's difficult still to judge the effectiveness of driving share gain. So you will have to be patient a little longer, and then we will comment on that. But as of now and where we have reached today, we're very happy and positive around the market feedback and the pickup also in sales and numbers shipped to customers -- units shipped to customers.

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

I had 2 quick questions. One, you gave us some unit and ASP details for the wholesale business. I wondered if you could give us some color as far as the retail business goes? And maybe as part of that, just some qualitative commentary about what kind of pricing we're seeing on More versus Open S at the retail level? And then the second question was just a big picture one, really. Over the last 10 years, the return on capital for both you and the hearing aid industry has come under reasonable pressure as there's been a kind of [ arms ] race to outspend each other on R&D, distribution costs, and to some extent, competing for retail assets. I guess the question is what's the outlook from here? I mean, obviously, in the pandemic, you realized that there are probably more efficient ways to do distribution. Did you see kind of structurally lower distribution costs and therefore, improving returns? Or do you just think that, that money will get reinvested into more R&D and other areas of the business? I'm curios to know whether you think we've sort of reached the bottom of the return pressure that the industry has seen and maybe the next 5 years will be a period of improving rather than contracting returns on capital?

Yes. Tom, thank you very much. Retail is relatively stable, retail pricing, whether it's the one product or the other and new generation. Of course, everybody try from time to time to up it a bit. And so we encourage people to do on More and try ourself in own retail, but it's not that dramatic. It is a more natural development. What really helps is the mix. The mix change improve the ASP for us. And that's where we really want to use the new products we have launched to drive share gain in the upper end of the market. Why we get it out at 3 price points, why we get it out at all 4 brands? And that's a much more important factor. On the wholesale side, you cannot typically change a lot in the line-by-line ASP, but you can also see at least temporary mix changes when new exciting products are out. Typically stronger in the smaller independent channel where they very quickly run out and find candidates and sell in a little bit stronger on the premium, and that will help the ASP. But again, it's not price increases as such, it's much often mix changes. And return on capital is a longer education. Maybe you will comment on that, René. But just R&D distribution, whatever happened temporary during COVID will normalize, because yes, we have done some savings, but we have also lost on revenue. And some of it, for sure, is less efficient. So it's not that there has been kind of new business models, if that's where your question is going. To -- in the future, we can do it all with less cost. There is a certain underlying demand that come in with less marketing spend, but if you want the market to normalize, you also have to spend the money.

I think on the return on invested capital, of course, you have seen a declining trend in the last decade, driven by the consolidation predominantly on the distribution side of things. And of course, it is driven by the fact that you have, let's say, consolidated a lot of the, let's say, major chains that have been, let's say, free in the market. And there are only very little of that, you can say, left. So even though consolidation will continue, it's likely to take place at a lower pace than what you've seen in the recent decade, thus limiting the decline from that effect. And on the other hand, then you have seen consolidation on the wholesale side. And basically, the potential for scale and, let's say, optimizing and growing margins on that side from the industry as such, you can say, may be outbalancing the other effect, leading to a flat or maybe even slightly improving returns on invested capital going forward. But these are some of the swing factors at least.

That was the last question. I will hand it back to the speakers for closing remarks.

Thank you very much for all your questions and for your attendance today. We are going on the road for the next couple of days and weeks. We look forward to meeting you there. So have a good day on. Thank you.

Thank you very much.