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

Good afternoon, everyone. Welcome to our conference call held in connection with the annual report for 2021, which we released this morning. As always, we will run through some slides that we've prepared here. They are available on our website. And then we'll hand it over to Q&A after that. We are planning for the call to last a maximum of 1 hour, including the Q&A session. We have 4 Demant representatives today: President, CEO, Søren; CFO, René Schneider; the IR team, Peter Pudselykke and myself, Mathias Holten Møller. So Søren, over to you.

Thank you very much, Mathias, and welcome, everybody. Happy to have all of you here today. I think before we kind of head into the meat of the presentation, I would like to highlight that I think that 2021 was absolutely fantastic year for Demant in total. Strong growth across particularly our 3 biggest business areas, improvement of margins and, generally speaking, record-high EBIT, putting distance to 2020, of course. But also looking ahead, I think the outlook for the sector and the industry it quite positive. We are, post corona, still seeing a big potential for pent-up demand. We still don't know when and how it will come in. But it is to the better. The outlook also, corona seems to, at least for now, have lost its grab on the world. And the underlying demographics are still speaking to strong underlying growth. And Demant did lie well positioned, a number of strong business areas, all entering into growth markets, strong R&D organization, strong global distribution in hearing, both in Hearing Aids and Diagnostic, and also a strong global distribution network that, every day, service thousands of clients. So strong position to participate in that group, and I think we need to keep that in mind as we walk through things today. Then agenda highlights. Hearing Healthcare, Communication, then René will take over and talk more details on the group finance. I will speak to the outlook, and then we'll go into Q&A. And financial highlights, the main highlight is the 27% organic growth in the latest upgraded range, a little bit below the midpoint, I'll get back to that. A significant improvement on gross margin also second half compared to first half, strong EBIT and EBIT margin expansion driven by Hearing Healthcare, in particular, the 3 bigger business areas. And looking at second half in particular, very strong growth and profitability in Hearing Healthcare. In Hearing Aids, driven by successful product launches, further expanded, not the least, market share gains in U.S. across all channels, so very strong momentum in the U.S. market. Strong performance in Hearing Care, our clinics generally speaking but boosted by the French health care reform that have led to a significant boost in the market that, of course, also benefits Hearing Aids as well as Diagnostic. Diagnostic continue very strong performance and market share gains. We are now a clear leader in the market and expect to be able to continue that growth journey. We have, of course, seen negative impact on our implant business from the voluntary field corrective action, but we now know how to get back to the CI market, have found a root cause and are optimistic that, that will start in third quarter. Communication, after our revised planning shared with you in September, we followed that plan. We have seen growing momentum during the second half. All in all, negative growth in second half, we knew that, and also a negative EBIT driven by further investments in R&D as well as global distribution. But all in all, strong EBIT of DKK 1.75 billion, round numbers, and an EBIT margin of 18.6% in the second half. And strong growth rates, organic growth rates across the businesses: Hearing Aids, 34%; Hearing Care, 34%; Diagnostic, 25%; very impressive for the 3 biggest business areas. All in all, second half organic growth of 10% and again, further expansion of gross margin, impacted by strong performance in Hearing Healthcare and some from business mix, meaning stronger growth in Hearing Healthcare than Communication. Organic growth in OpEx, 14%, which reflects normalization. And the cost base in the comparison period still had temporary cost savings and, therefore, the record-high EBIT and also very strong cash flow, even though the growth in cash flow was slightly less due to high comps. Outlook for '22. Organic growth of 5% to 9%; EBIT of DKK 3.45 billion to DKK 3.75 billion. We are going to get back to those numbers. And then a share buyback program of at least DKK 2.5 billion. In 2021, we have also done significant advancements in our work with sustainability. Key highlights are a released position paper on diversity, equity and inclusion, making sure that we benefit all the talent we have in our group and people feel equal opportunities for progress. We have seen an increase of women in management by 1% from 42% to 43%. I have also seen the general gender grow towards even more female employees. So that, of course, is a natural consequence, and we still have work to be done there when we look across the different hierarchies in the business. We have committed ourselves to a Science Based Targets initiative. We are, in general, you could say, low-impact business. However, we, of course, want to take our share in making sure the green transition can happen. However, only 5% is within Scope 1 and 2, but we will work on that, of course. Hearing Healthcare, in a little more detail, 14% organic growth driven by the performance in Hearing Aids, Hearing Care and Diagnostic. Gross margin expansion despite some headwind from supply chain costs, as we have spoken about earlier and, of course, an increase in OpEx mainly driven by distribution cost, reflecting a normalization of the cost base. And again, also here, record-high EBIT, DKK 1.826 billion, and a margin of 20.6%, all-inclusive. French reform estimated to have a positive impact in -- extraordinary positive impact in second half of DKK 100 million on the top line and DKK 50 million on EBIT in the second half. If we look at the world market for hearing aids, we, in the beginning of the year, estimated that 2021 would be very close to expected level. If you took '19 and added 2 years of growth, excluding VA, NHS and what we describe as export market, we are smack on to that. The main lag is with NHS, VA and rest of the world call here. But you could see that fourth quarter came in a notch lower, not the least in U.S. And again, we saw a slight flattening of things towards the very end of the year driven by Omicron, much more on the wider spread, meaning more people are actually sick, including own employees that couldn't come to work. And therefore, things would have to be moved around and postponed and something we, to some extent, still deal with, but where we have seen improvements since then and things we expect to normalize pretty soon. Therefore, pent-up demand can now be concluded for '21. And as you can see here, we have pulled in some in Europe, excluding NHS, in '21. But 400,000 units, which I think is very equivalent to the extraordinary sales in France, so if excluding that, we still see potential for pent-up demand in Europe outside France, not the least Germany. And NHS has further added to it, so now more than 1 million units, so a big potential. North America, excluding VA, basically not adding much but a little bit of pent-up demand being released in the first half and, therefore, still basically from what was lost in first half '20, still a potential. We still believe that should come in somehow, maybe not all of it but some of it. And again, VA, also a quite significant pent-up demand lasting back to '20. And the same for rest of the world, so all in all, 3.8 million units or 2 million people that have not -- probably not started treatment with hearing aids, which is likely they will do eventually. Again, we cannot tell how fast or when. Looking at Hearing Aids, very positive development in the wholesale of our Hearing Aid business driven by new flagship products across all parts. The momentum continued with the release of a nonrechargeable miniRITE. There are still markets that use a lot of instruments for ordinary batteries. And we have seen, again, significant market share gains with independent as well as some of the bigger chains and Philips growing a lot. And then moving on to product portfolio expansion with these days and weeks release a number of new things to the portfolio based on the Polaris platform. New miniBTE both in rechargeable and nonrechargeable across 4 brands, this is still a used form factor in a number of markets and segments. We expand with 2 more price points in the more mid- to lower-priced categories available in all the form factors, which drives typically a lot of volume in a number of markets, then a pediatric version. And then for all the new products as well as the products in the market on the Polaris platform, the ability to do 2-way audio, meaning you can use your microphones in the hearing aid as the pickup microphone when speaking on the phone on iOS Apple devices. This has been approved and will soon go into the market and also the upgrade option. Hearing Care, strong growth driven by France but also strong performance in a number of other markets such as U.K., Ireland, Spain, Poland. And in North America, we have seen a strong growth driven by acquisitions as well. Some headwinds in U.S. still from managed care, where we have also chosen to drop out on some of these programs as we didn't find it appropriate to spend our time just for marginal fitting fees and are now trying to gain back more organic business. Canada improved significantly during second half as Canada opened up. In Europe and rest of the world, we continue our efforts to expand our network through acquisitions. This now also includes Germany as we have decided to also engage in the consolidation taking place there. Hearing Implants, several markets are still affected by COVID and significant backlog. As I said initially, we feel -- or not feel, we have found the root cause for the corrective actions needed. Now it's verification, validation, approval by notified bodies and authorities so we can get back in the market assumably in Q3. On the bone-anchored, quite good progress since the introduction of the Ponto 5 Mini. And we are also ready to launch our Super Power Version in the second. And around medical, as announced, I will, in an interim position, take over from Jes Olsen that is retiring. And again, just to stress, this retirement was actually planned before the volunteer field corrective action but Jes offered to extend his services and for which I'm very thankful. But now we know the move back, we will continue with finding his successor. Diagnostics, very strong growth, very strong performance, keep on taking share. We estimate that the market grew in '21 10% to 15%, which is above normal but reflects a muted '20. We are only back at a normalized level, so there is still a potential for some pent-up also on the Diagnostics side. And the growth is also strong in U.S. with our strong e3 network. Communication, I've spoken to most of it. We did had a negative organic growth of 27%, weakest performance in Enterprise due to the very high comps from '20 and then a decline in gross margin due to lower activity level. OpEx grew as we continue to invest in R&D and distribution and, therefore, a negative EBIT of minus DKK 78 million in the second half. But again, no changes to the expectations that this year will make a smaller loss; and then in '23, the business will turn profitable. Over to you, René.

Thank you, Søren. So just briefly reviewing the numbers that we put out today. Highlight from the income statement, as already mentioned, a 12% growth in the second half year, comprised of 10% organic growth, 1% from acquisitions and 1% from currency. In subsequent slides, I will review our gross profit and gross profit margin development that has been extremely successful. Also OpEx, I will review. So what I want to highlight here is the line called share of profit after tax from associates and joint venture income of DKK 63 million, which is actually DKK 120 million for the full year. That is the -- an expression of the successful journey we often have in acquiring minorities in smaller businesses and then, over time, stepping up our ownership share or eventually fully take them over. This has been part of our growth journey historically, and it is also part of what we will continue to do going forward. That also translates into positive fair value adjustments in some occasions, which is also an example of creating value in these transactions. It amounted to DKK 64 million for the full year in '21 and DKK 17 million in the comparison period. And it fluctuates, of course, a little year-over-year. So slightly to the high side this year, but it is a thing that you would expect also in the future. Reviewing, gross profit increased 17% to DKK 7.1 billion. The gross margin expanded by 3.3 percentage points mainly driven by the positive development in Hearing Healthcare driving the 2.8% increase. And then also business mix supported the group gross margin positively by just shy of 1 percentage point as the Hearing Healthcare has a structurally higher gross margin than Communications. Supply chain headwind impacted gross margin by an estimated 50 basis points in second half year, and that is likely to continue into '22, and we will come back to that. But again, very successful gross margin development. OpEx growth, driven mostly by distribution cost, it is a reflection of a higher activity level and the normalization of the cost base compared to a very low comparative base in H2 of '20. That included government support schemes of DKK 100 million and also reversal of bad debt provision of DKK 50 million. As previously communicated, this is what we see as a largely normalized level. EBIT was a record high both in -- actually in H1 and in H2. And it is particularly driven by the very successful development in Hearing Healthcare. Group EBIT margin was 18.6%, again, an increase of 70 basis points versus second half year of last year. Just for housekeeping items, we have also, outside of the operating profit, realized a net income of DKK 59 million from what we constitute as one-off items. And just to go through them one by one, we had a negative EBIT impact of DKK 100 million from the voluntary field corrective action in cochlear implants, and it is a net loss from returned products, inventory write-down and other miscellaneous items. Then we had an income of DKK 99 million from the divestment of FrontRow, which also gave a positive contribution on group cash of DKK 161 million. And then lastly, we had an income of DKK 60 million from the remaining -- a reversal of the remaining provision for bad debt that has not been realized, DKK 60 million. So all in all, DKK 59 million positive, which we consider outside of operating profit. Cash flow. Very strong cash flow in second half year driven by the strong earnings. But half year over half year, growth was impacted by a significant buildup in net working capital due to both the inventory and trade receivables buildup show a decline in cash flow from operations of 9%. Net investment was approximately 4% of sales -- or CapEx was 4% of sales, which is in line with our normal expectations. Net cash to acquisitions and divestments was only DKK 141 million in second half year, but this is net and then included in that, positively impacted by the divestment of FrontRow. And we had a share buyback of DKK 1.4 billion and DKK 3.2 billion for the full year. But all in all, a 25% growth in free cash flow for the year, very strong. The balance sheet, we have seen a 5% increase versus the midyear balance. The increase is primarily related to goodwill in connection with acquisitions and increase in inventory. Net working capital relative to sales remained very stable at 32%. And our gearing end of year is 2.0 when we measure net interest-bearing debt to EBITDA. With that, let's go to outlook.

Yes. Thank you very much, René. And just a little bit on recent development, I started out in the beginning speaking to this, that we saw this slight softening in the -- at the end of '21 due to the rapid increase of infection rates and, at that time, a lot of uncertainty. What was it? What was it not? How much would society have to lock down? We have seen some of this continue into '22 but in a very different way. I think we all experienced that this is much more about being able to come to work and the complications coming with that. So there has been issues with keeping all clinics open and so on, but this is rapidly improving. And therefore, I consider this short-term postponement more than building to pent-up demand. And Communication, despite the mix development in '21, we still see the demand for video and audio solutions in enterprise to have largely normalized here in '22. And in the first part of the year, there might still be issues centered around supply chain. We have not been highly exposed to that, but it is a factor of this generic electronics shipping, et cetera, has some uncertainty related. So outlook expectations. Looking at the market, hearing health care market is to normalize in 2022 with a normal growth rate, I would say, general population of 4% to 6%. And in addition to that, some pent-up demand, we don't know how much. I would say our expectation is modest. A lot of it is in health care system that needs to recover. But again, we will, of course, follow it closely during the year. We expect a slightly more negative development to ASP than normal. This has nothing to do with lowering prices. This is just channel and geography mix. We do expect bigger growth rates in channels and markets with a lower ASP because they have been more muted for longer of corona, and therefore, the biggest upside. And therefore, they will pull down ASP, on the other hand, more units. We -- our plan or expectation for the year is that we'll see negative growth in the French market from the extraordinary demand and translating into group revenue. It is this DKK 300 million revenue and EBIT of DKK 150 million that we see as extraordinary. We expect the demand for enterprise and gaming headsets to grow at the normal structural level of 12%. And for Demant, both segments, Hearing Healthcare and Communication, we expect to grow market share in '22. We will resume the sales of implants, cochlear implants in Q3 '22. We will remain to have a supply -- dynamic supply chain, which costs something on the gross margin but no material impact on our ability to sell. OpEx, we will see no further benefit from temporary savings in '22, which we estimated in first half to be DKK 150 million to DKK 200 million in first half of '21. And Communication will, in general, show strong growth, but Q1 different due to the very high comps, where we will see a double-digit negative organic growth. But then we are also out of the, you could say, tough comp period. And again, we will have slight negative EBIT for '22 in total but a significant improvement compared to '21. So summarized, in organic growth, 5% to 9%. We already know 1% from acquisition. And of course, more will happen during the year. We will have 2% from exchange rates, as we know them today, positive tailwind. EBIT, based on all of the above, DKK 3.45 billion to DKK 3.75 billion; effective tax rate, 22% to 23%; and no changes to the gearing; and share buyback of at least DKK 2.5 billion. And then before rounding off and opening up for questions, just final to the EBIT development. Again, we have tried to illustrate here in the graph how you build the bridge from '21 to our guidance. And if you take out the temporary savings and the French reform, this is actually quite a strong growth of EBIT of 13% to 23% with the guidance we give. So I think strong ambitions in a 5% to 9% organic growth scenario. And then a little bit to the reporting. We have decided to bring out growth rates by business area in -- after Q1 and Q3 in order to better support you in following the business on a continuous basis. So with that, that was the presentation, and we'll open up for -- the floor for Q&A.

[Operator Instructions] We have a first question. It's from Patrick Wood, Bank of America.

I'll keep it at 2, and thanks for the extra disclosure both in the slides but also on the quarter. That's going to be really helpful. The 2 questions, so I guess the first one is obviously a reasonable amount of pent-up demand on the unit side coming through. I appreciate that those are in some channels maybe with low ASPs. But if that's the case, why wouldn't we have maybe growth would be a little bit more than the 5% to 9% for demand? Is the extra gap there, should we say, the bit of France that's rolling off? Is that why that extra pent-up demand coming back through doesn't result in slightly stronger growth? Is it just France? That's the first question. And then second question, just curious how you've seen the -- because obviously, price/mix is always a pain because there's a lot of mix, geographic channel, but like-for-like pricing, have you guys been putting through whether in communications or diagnostics or in the base hearing business, a little bit of price increases to help with the supply chain and to manage some of the extra costs that you're seeing on the chipset side or has that been relatively stable?

It is mainly France. But I still think an upper scenario of 9% organic growth in a market that might grow 2% to 4% is ambitious. So that's what we aim for. And yes, there could be a even bigger release of pent-up demand than we expect. If so, we will, of course, all benefit, including Demant. And yes, we, of course, closely monitor pricing and where appropriate in various market, depending on general price development in those markets and channels, yes, we also revisit our pricing and lift them where possible.

The next question is from Martin Parkhøi, Danske Bank.

Martin Parkhøi. Just maybe you could elaborate a little bit more on the calculations on France because what kind of you state that you don't expect -- you expect negative growth in France, but to what magnitude are we talking with this DKK 300 million decline in your own sales? Can you maybe put a little bit more granularity into that? And then secondly, on the EBIT result, can you talk a little bit about the profitability between the high and the low end? I can see that the margin on -- the implied margin on the growth in the low end is around 26%. And on the high end, it's around 31%. Is -- shouldn't it be even higher given that the last sold unit comes with a very high margin?

Yes. Thank you, Martin. France, there is, of course, a lot of speculation. We can see the run rate we see now and look into the comps at least 3 or 4 months out and then draw a line. And that's what we have done. We expect a double-digit negative growth in the market, and that's the best job for now. We will, of course, fill you in as we see the numbers come through. René, will you comment on the other one?

Yes. Thank you, Martin. So the difference from the high end and the low end, there are many components, but there are also many components across all the different business areas. So you are right, the marginal wholesale hearing aid, of course, entails a very high margin. But in other business areas, the incremental growth has a lower margin. So therefore, the actual operating margin also in the high end will not only be a wholesale gross margin. But just to repeat what you probably know is, and the main swing factors are, as you mentioned, what is the actual outcome in France in terms of the market, it is the release of pent-up demand. And there, the sensitivity is quite large, meaning that when we say we expect a modest release of pent-up demand, you may assume something like release 10% of the pent-up demand. And that in itself would provide 2% growth on the hearing aid market. So it is very sensitive to that and then, of course, what is our market share gain and how will we develop the rest of the businesses. So a little elaborate answer to your question, Martin.

Okay. Can I just follow up? Just on the report, you stated we should expect a double-digit decline in the first quarter on the Communications side. What about the Hearing Aid side, given that you are comparing with the market was probably still relatively weak at least in the beginning of the year, but you also launched the Oticon More and so the French reform kick in from 1st of January. So how are the comparison numbers in the first quarter on the Hearing Aid side?

I think they are, all in all, more modest. Yes, we launched early in the year, but it was quite sequential during the month, so we don't -- there is, of course, a few markets with a peak here in the beginning of the year kind of shipping into the market. But when you look at the accumulated numbers, it's quite a stable growth throughout the year. So we'll grow on that.

Of course, on the Hearing Care side, you would see, all in all, lower growth rates in first half year than second half year compared to, let's say, the normal picture simply because the reform effect in France was predominantly in first half year in retail or in Hearing Care.

The next question is by Maja Pataki, Kepler Cheuvreux.

One question on general cost inflation. Are you seeing any trends in any of your markets where labor costs are increasing or anything else we should be -- that we should bear in mind that could, throughout the year, represent some upward trend? And then the second question is around VA. What do you think you need to do to go back again to the mid-teens level on the market share side? And how do you think you can go closer to 20%? So just what are the market dynamics right now at VA? And how can you improve your share?

Yes. Thank you, Maja. I think, of course, we also see increases to salaries around the world basically in line with what we all read in the paper. On the production cost, we are less exposed. The direct labor content in hearing aids is relatively modest, so it's more on the general cap cost development. And we are just part of the normal world, so you should expect the same. On the VA, it's a hard work and continued effort. I think the product portfolio that we have now offers more opportunities. Working with more clinics when they open up and further introductions, there are obviously still segments where we are significantly below average, and that's a key focus point. So more clinics to try out. Oticon and a broader portfolio is the key.

The next question is by Aisyah Noor, Morgan Stanley.

My first one is on the Communications business, where you mentioned that the demand for enterprise had normalized in the beginning of '22. Could you describe what you're seeing that's giving you confidence in that? And is it channel inventory? Is it your order backlog? If you could give some color there, that would be helpful. And my second question is just a follow-up around your comments on ASP. Could I just confirm that if we exclude France from your forecast, then you would expect the typical 1% to 2% ASP erosion for '22?

Yes, thank you very much. First, enterprise is, of course, a combination of both your own sales into channel, also a sellout through channel that we can see. It's the number of bigger orders and tenders that you work on at any given time that makes you come to that conclusion that the market have largely normalized. And then on the ASP, yes, for the part of the general market expansion of typically 4% to 6% in units, yes, we expect the normal minus 1% to 2% in price because that growth typically comes a little more in markets with lower prices, a little more in channels with lower prices, et cetera. No change to that. The pent-up demand obviously have a bigger skewness towards low-priced channels as that's where -- and low-price markets, that's where the pent-up demand is the biggest. And therefore, that part, let's say, it all come in at the same pace across all channels, we'll have more units, less ASP. So that can take it lower than the 1% to 2%. But all this, also just the normalization, and it is not yet normalized, so just reaching normalization for NHS without pent-up demand will also pull ASP down a bit. That's why we always, half year over half year, have seen quite significant fluctuations up and down to ASP. It is very dependent on the channel mix, the geography mix, the product mix. We have seen no erosion to channel-by-channel pricing. On the contrary, as I spoke about, we work to increase prices in markets and channels where that's an opportunity. We have seen more rechargeable products that drive higher ASP, et cetera. So it's all these things together, and there are quite a number of moving parts before you come to the end result why it's a little difficult to guide very precisely on.

The next question is by Oliver Metzger, ODDO BHF.

Okay. The first one is on the guidance again. So your range of 5% to 9% is wider compared to your mid- to long-term range. Simultaneously, you still have a hearing aid platform, which obviously performs pretty well. You also mentioned in Patrick's question the pent-up demand. So could you elaborate why you have, in particular, widened the range at the lower end? That's question number one. Question number two is also on France. So some months ago, the comments on France regarding the '22 development or also for the years after appeared more bullish and increased demand was regarded as new normal. Also, the country was named as an example of really released accumulated demand. Now your expectations appear clearly more cautious. So could you elaborate if this is just a more conservative view after 1 or 2 months which were not so strong as expected or whether you have observed really any meaningful deterioration compared to your previous expectations?

Yes. Oliver, thanks a lot. I would actually like to then start with the second, then there is a misunderstanding. There's no changes. If anything, then the effect was longer and stronger into second half than maybe we originally anticipated. We have seen a strong lift. But what we try to communicate is the new level in France is, for sure, higher than it would have been without the reform. So forward-going, the penetration, if it in the past was in the high 30s, now it will be in the low 40s, no doubt about that. More people will get a hearing device. But the pent-up demand from people that have for many years not done anything that now do something because it's for free, that's kind of what we saw come into the market in '21 and which will, of course, be exhausted at some time and not be the same extent in '22, '23. So let me be very clear. The French market had taken up to a new level. It's only the transition from '22 into -- from '21 into '22 where we'll see a decline. But comparing back to, let's say, '19, we'll see a significant market expansion also in '22. Was that okay? Clear? And no change from what we have said previously. We have always said we believe '22 will be smaller than '21.

But you have great visibility into France, in particular, on a monthly base. So would you say that even, let's say, that January was clearly below this '21 level? Or is it just a more cautious view?

No, especially here, as René said before, in the beginning of the year, February, March, April, we really saw a boom, very significant. So we are not at that level assumably for the next 3 months. But then we will get into a phase where you potentially start to see growth because the comparison base is getting closer and closer to the new level. So in first half, that's where you will see the main year-over-year, same half year or same half year decline. It will be less in second half, and then you will see growth. The sequential run rate will soon, I think, plateau to the new level, so we move from there. And then your first one on the guidance, it is a wider exactly for the reason of how will the French market develop, how will pent-up demand develop, these are the single 2 biggest factors. And as René just talked about, it does not take much movement on the pent-up demand to move the market 2 percentage. So when the range is wider, it's not due to, you would say, the uncertainty of our own business, it is much more how big is the hearing aid market going to be in 2022.

The next question is by Lisa Clive, Bernstein.

Just digging a little bit into the commentary around the channel mix and the headwind that, that's creating, if we think about the independent channel and their growth rate relative to your larger customers, has the delta between those 2 have been pretty steady? Or are the independents sort of having a tougher time recovering through the pandemic? I'm just trying to understand if their growth has shifted much.

No. On the contrary, I would say, due to corona, you saw the independent doing better. Being a private business owner with 1 or 2 employees, the decision-making process of procedures and when do we go to work and when do we stay at home and stuff like that is a much shorter decision process. So we saw the recovery coming in faster with independent. Again here with Omicron, we have seen bigger systems reacting. You simply have to take a decision, what is your recommendation, when do you come to work, how many days do you stay at home, be the ones that lag the most. So the resilience towards corona have been better in the independent channel than some of the bigger players. The other trend is just over years, long-term longitudinal, that the expansion of the market is stronger driven by when Costco chooses to enter, chooses to open new warehouses. They add business to the market. When opticians enter, when there is more reimbursement and so on, this is what the growth -- as part of driving the growth, it is not a absolute contraction of the independent sector as such. There is a lot of new people coming out of school that end up opening their own store as well.

Okay. Great. And just second question, in terms of the Medicare Advantage segment of the U.S. market, coverage for hearing aids through MA has gotten a lot better in the last few years, can you just remind us of how you're interacting with that channel, I guess, both on the wholesale side as well as your U.S. retail network?

Yes. That's true that there is a growth in that share. That's what we highlighted as a bit of headwind. We, of course, prefer to sell directly to the consumer and get all the revenue also at, you would say, the pricing of managed care or Medicare Advantage plans instead of leveling a third party, administrator get the part of the -- share of the pie. But we interact with it both on wholesale level, where we supply to such contracts to independents or others that sell under that, and also on retail our own Hearing Care, we do fit for fitting fee. But as I said, we are more cautious in what plans and programs we support and try to grow our direct business more.

The next question is by Veronika Dubajova, Goldman Sachs.

Two questions for me, please. One, just I'd love to understand, Søren, kind of what you're seeing in the market at the moment. Obviously, the U.S. market, in particular, slowed down pretty significantly into the end of the fourth quarter. Just kind of curious what the current environment is and how you're thinking a little bit about the broader backdrop in terms of higher inflation and whether you think that matters at all in the U.S. given the bigger out-of-pocket nature of the market. So any kind of thoughts and observations on the current trends there would be helpful. And then second, on the cochlear implant business, what has been the feedback from your key customer base as you pulled the product back? And how much engagement have you had? And I guess maybe just your degree of confidence that, let's assume, once we get to 2023 or 2024, you think you can return to the type of revenues that you were earning here prior to the recall.

Yes, thank you very much for your questions. I think U.S., it's really a short-term decline of momentum. Remember, U.S. was growing the most by any market, had the fastest pickup. And that's just, I think, U.S. by nature, it reacts very quickly to these dynamics. We have already seen an improvement again in the U.S. market, and I think we will very quickly return to normal and, again, also the potential for picking up on pent-up demand. The whole theme of inflation and so on is, of course, a major theme in U.S. There is also increases to wages, et cetera. But it's not something we, so far, have seen impact the business in any way. On the cochlear implant side, we have, of course, spent a lot of time interacting with customers, making sure we shared whatever progress we had and updates with them. We have had a lot of positive feedback to the reaction we took. It was at a very low level. It would have been tempting to try to wait a little longer, et cetera. But it turned out that it was right that something was wrong, and therefore, people really respect us for taking appropriate action and are -- I think it has further almost built to our trust, and therefore, I feel very comfortable we'll come back in a good way once we are ready to sell again.

And Søren, would you say, I mean, it's fair for us to assume your target here would be to get back to the pre-recall revenues already in 2023?

Yes, it's a little difficult to what is past revenue because we have had corona and so -- and growth in between. So we will quickly get back to the run rate we saw just prior to the recall. That's definitely the ambition.

The next question is by David Adlington, JPMorgan.

So just most questions have been asked. But maybe just on gross margins, maybe the moving parts here, maybe you could just give us some help around gross margins. And then secondly, just wondering how you're seeing the M&A.

Your line is really bad, David. You're dropping in and out. Could you please repeat the question?

The moving parts on gross margin, generally speaking, right?

Yes.

Yes, gross margin moving parts and M&A, I heard.

Yes.

Good. René?

Yes. So on gross margin, on a group level, it is, of course, what is the relative growth, first of all, between Hearing Healthcare and Communications, so that's an easy one to get a handle around. And then within Hearing Healthcare, of course, there is a big difference for us in having, let's say, 3%, 6% or 8% organic growth when it comes to unit cost utilization of capacity and driving down unit cost and, thus, also gross margin up. I think we have seen quite a significant increase in '21 over '20, which is also a sustainable improvement, which is why I would also mention that we set out to -- our general guidance is that a group gross margin of 74% to 75% is our ambition. I think with the performance that we have seen recently, we can up that by 50 basis points as a general, let's say, guidance or expectations and the thing that we will carry into '22 as a benefit, for sure. And then, of course, short term here, a key moving part is the supply chain additional cost that we have. Currently, we are running at this 0.5 percentage point negative impact, and that's the level that we would expect for the first half year and then tailor off, meaning that year-over-year, it would be similar to '21. But of course, that's also, generally speaking, an uncertainty.

M&A?

Yes, and on M&A, so if the question was where do we intend to do M&A, it's historically, at least, has predominantly been in distribution and Hearing Care and also, once in a while, in our Diagnostics business and do intend that, that is what you should also expect going forward and, I would say, predominantly in geographies that we are already present and have a strong position. But of course, also key markets where we are not strongly present today like Germany would also be a key area for us to acquire in.

On the M&A side, I was more talking about whether you are seeing opportunities come up and what the pricing environment was like.

No major difference. I think things have largely normalized after being definitely muted in 2020. It's the same type of opportunities that are out. It's the same audience that pay attention.

The next question is by Daniel Jelovcan, Mirabaud.

Two questions on -- all related to Slide 4. The difference between Europe and North America, the 5% and the 20% organic growth, why was North America so strong? From a product point of view, was it more Oticon More or Philips HearLink or both? And was it more in own retail or more in the independent channels? That's the first question. The second question, you -- on this slide, you have 8% sales to your own Hearing Care. And on the press release, you have 11%. Is that a typo or do I miss something?

Let me take the first one, then René and Mathias review the other one to make sure there's no mistakes. Actually, our growth in North America is quite broad-based. We have done very well on the Hearing Aid side, again, with both Oticon More and Philips HearLink. The Diagnostic group have also grown very nicely. And we have also seen strong growth in our own retail, but that's, of course, also comps, whereas in Diagnostic and Hearing Aids, we, for sure, have taken significant market share.

Yes. And I think, Dan, we will just have to look it up. I can follow up with you separately on that line. We have a lot of numbers in front of us and papers here.

Yes, we'll get back to you and get back to the questions.

The next question is by Martin Parkhøi, Danske Bank.

Martin Parkhøi, it sounded like. Søren, I just wanted to ask again back on the implant business because Jes is retiring. I guess that you as a CEO, it can hardly be a surprise. And there's no successor available right now. As you are going down and monitoring such a relative small part of Demant, are you in any way looking at if this -- are you still long-term committed to this business? Because now I, of course, know that the product recall is, of course, not very nice. But also, I remember when you entered this business and, I guess, you had much higher hopes for where you would land today even without the product recall. So is this a way that you should look at that you're actually considering your long-term commitment to this business?

No, no, there is no change to our long-term commitment to the implant business. It fits well in our Hearing Healthcare business. A lot of growth opportunities, leverage on the R&D, we do already, leverage on the distribution and so on. The recall did disrupt a nice smooth transition from Jes Olsen to a potential successor. We have a very good, strong team and now we are in a much better place when it comes to the uncertainty. And I'm sure the team will manage to steer the business forward with my support and guidance until we have a proper replacement there. No change to our commitment.

Okay. Thank you, everyone. I think from my page here, the queue is now empty. So I think we'll round off the call here and say thank you all for joining us. We will be on the road over the next month or so with a couple of virtual meetings and in-person meetings. We'll be in London tomorrow. Looking forward to that, finally in person. So thanks for joining. Have a great day. Bye.

Bye-bye.