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

Good afternoon, everyone. Welcome to our conference call held in connection with our interim report for 2022, which we released this morning. It's clearly been a very busy morning in Hearing Aids. Now it's our turn to walk you through a brief presentation, and then we'll turn it over to Q&A afterwards. The slides can also be found on our website. And as usual, we plan for this call to last no more than 1 hour, including the Q&A. We have President and CEO, and Søren Nielsen; CFO, René Schneider; and the IR team, Peter Pudselykke; and myself, Mathias Holten Møller, on the call today. And Søren, it's all yours.

Yes. Thank you, Mathias. And welcome, everybody. The agenda for today's session is key events and financial takeaways, update on hearing health care, update on communication, and we will take you through a financial review. I'll comment on the outlook, and then we'll quickly go to Q&A. If we look at the key events here in first half of '22, which has, for sure, been eventful, then we can clearly see that our Hearing Aid business, our Diagnostic business takes a significant market share. And that, of course, in a weaker than expected -- or not, of course, but as announced in a weaker-than-expected health care market, particularly U.S. have developed less positive than we expected, which have impacted our Hearing Care business in U.S., and we have also driven to continue corona vaccine challenges in Pacific. Communication saw a continued weakening of the gaming market, and some supply chain challenges resulting in negative growth for the period. There is global uncertainties and volatile markets, and there is also still some coronavirus-related restrictions. We have seen that mainly in Asia Pacific, and that causes a dynamic business environment. And therefore, a little more unpredictability than normal, and that covers both our growth for both Hearing Healthcare and Communication. And I'll speak to that, of course, in more details during the call. We have finalized the full acquisition, an important acquisition of ShengWang, the leading network in -- of clinics and hearing aid clinics in China, more than 500, and it is a very important platform for continued growth for Demant in China. And as announced earlier, on in the year, we have decided to discontinue our efforts in hearing implant business area. You could say, discontinuation of the business is progressing according to plan, and the only outstanding issue remains to be approval by relevant regulatory bodies, and that is still expected to take place within the second half of this year. So key financial takeaway. We have seen a group organic growth of 4% in H1 in a weaker-than-expected hearing aid market, particularly in the U.S., and this is less than expected. However, a bit more tailwind on the FX. Hearing Healthcare, organic growth of 6% for the half year, but only 3% in the second quarter, driven by strong performance in Hearing Aids and Diagnostic but offset by the lower-than-expected growth in Hearing Care coming from the difference to the market development we have seen, which I'm going to speak to in a moment. Communication, negative organic growth of 14%. However, 5% growth in second quarter. But again, as very strong comparison figures in the beginning of the year and lighter in the second quarter and the 5% is below expectations, and that is to continue weakness of the gaming headset market, which is consumer electronics, which I think we can all say is broadly negatively affected by many things, but clearly after COVID. OpEx is slightly below our regional plans, natural consequences in Communication and Hearing Care, but also expressed that we continue to develop -- invest significantly in further R&D. This is still a key growth driver for the future. So therefore, continue to invest. The EBIT for the group was of DKK 1.588 billion, a decline of 5%. But if we adjust for the temporary savings we had in the first half last year and also the extraordinary profit coming from the French business, driven by the French reform, in H1, we would have seen an EBIT around 13%, everything else equal, which is slightly below our expectations. However, based on outlook into the second half and current state of business, we adjust our outlook. So the outlook for the organic revenue growth is lower to 4% to 6% from previously 5% to 9% and the EBIT from previously DKK 3.6 billion to DKK 3.9 billion to now DKK 3.5 billion to DKK 3.8 billion. And if we dive a bit more into Hearing Healthcare, again, 6% organic growth, strong performance in Hearing Aids and Diagnostic, clear market share gains in both business area. It is the deviation to our regional plans does fully originate from another market development than expected, more in emerging markets, less in U.S. And that hits our Hearing Care business and also, to some extent, has some impact on the Hearing Aid business because, of course, we do much more units at a lower ASP. And therefore, the whole ASP go down and put some pressure on gross margin, but the nice growth rates, of course, works the other way and the same with the currencies. OpEx saw organic growth of 8%, of which half can be attributed to the temporary cost savings last year. All in all, a profit close to DKK 1.7 billion. a margin just short of 19%, which is significantly down from last year. However, had we made the adjustments I just spoke about, it would have been approximately 1 percentage point higher. Hearing Aid market development in '22, and I think so far, I think that's a key topic today. We estimate the whole unit growth, and we only have statistics for around 2/3 to be 8%. Growth in Q1 was 12% and then down to 5%. In Q2, it is not just the growth rate going down. It's also comparisons that are slightly different, but it is a less than our expectations. We had expected a clear tailwind from pent-up demand, but especially in U.S., we can see that, that seems to have been outbalanced by a trend of people postponing the decision to upgrade typically, which has, yes, outweighed this effect. And all in all, we see the U.S. market in Q2 have grown at 1% and minus 1 in the commercial part, but also less than anticipated in VA. Growth in Europe have mainly been driven by U.K. that naturally comes from NHS now recovering. We knew that was a delayed process compared to a lot of other channels post-COVID, but also a number of other markets do well, including Germany, that also have been a lagger. France have developed at least in line with expectations, which does mean negative in Q2, but that was all anticipated. So nothing special there. It is U.S. that's the negative deviation on the other hand, VA, NHS naturally grew a lot, but emerging markets have exceeded expectations. And again, we see our own unit growth being up to 16%, a very high but an ASP decline of 8%, and that all comes from change mix, be it between geographies. If we look in the individual markets, pricing is very stable. So that purely explained by geography and channel mix. And it has been more negative in the period than anticipated, again, impacting gross margin in that part of the business. We continue to expand the product portfolio most recently with custom products, in-ear products. And we do expect to see growth coming from that in the coming period. It's actually been a while since we last released such products, and we see very small, nice looking devices benefiting from the latest technology. And no doubt that with COVID and increased use of facemasks we have seen the trend of an otherwise declining custom market actually gain some momentum. In Hearing Care, below expectation, mainly driven by lower-than-expected market growth in U.S. and Pacific region. Many smaller markets have actually done very well but couldn't outbalance. In U.S., we also have still the trend that we exit a number of managed care plans as the fitting fee does not cover our cost and we rather try to fill the schedule with private pay clients, of course, they've been more difficult in a contracting market. And of course, these 2 trends work a little bit against one another. Positive contribution from acquisitions is basically U.S., Canada and Germany. Diagnostic continue to grow way above market growth. We do see the market growth to be a little bit above the normal growth rate of 3% to 5%. There is of course been negative effects from the slowdown in -- from the lockdowns in China. But all in all, very strong growth, 17% organic growth. And it is in many regions and many of our product segments and also the service and calibration business. And then in Q2, we welcomed the company Inventis to the group, which was focused on software for audiometers and balanced solutions and Inventis will continue to be a separate brand in the group. On the Communications side, things did not develop as expected. We saw a continuation of the slowdown in the gaming market, longer than anticipated and it's still there. And we have also been faced with some supply chain challenges in the -- preventing the enterprise business to fully deliver to incoming orders. I think this is in line with other players in the field. This is simple, the shortage of typically chipsets, generic chipsets, where we then have to redesign to other available models before we can get enough supplies to the market. Decline in gross margin is mix effect and supply chain cost and also negative exchange rates as the communication business basically buy everything in dollar and settle most in Europe, exchange rate works against them. OpEx grew by 5%, strong growth still in R&D, but modest in admin -- or negative development in admin and distribution. And all in all, 5% OpEx growth. The result was due to the above negative DKK 107 million, which was below our expectations and therefore, also a part of the changed -- important part of the -- significant part of the changed guidance or adjusted guidance. And again, in second half, we expect things to develop more positively. We still expect the gaming to be negatively impacted but in enterprise, we both have new products and improved supply chain and therefore, expect growth on top of the natural seasonality in the business. And over to you, René, for the financials in more detail.

Thank you, Søren. And a slight repetition here on the income statement for our first half year. I just want to highlight the fact that we have restated comparison year numbers to reflect the fact that we have decided to discontinue our efforts in medical instruments. So that's what's now built into the '21 numbers. Apart from that, this is also a representation of the 9% growth that we have reported, of which 4% is organic, 1% is from acquisition, and we see a tailwind of 4% from the appreciated currencies, predominantly the U.S. dollar. This provides us with a -- gross margin for the group of 74.6%, very much in line with reported last year. If we decompose the operating profit for the group, we see operating profit of just shy of DKK 1.7 billion for Hearing Healthcare and an operating margin of 18.9% whereas we have seen a loss of just above DKK 100 million on our Communications business, all leading up to the DKK 1.588 billion for the first half year and the 16.7% operating profit. If we look a little bit more into the details of debt, we have seen gross profit increase by 9% to 9% to DKK 7.1 billion, an expansion of the gross margin of 0.1 percentage point, predominantly driven by business mix, the relatively strong performance in Hearing Healthcare compared to Communications, drive that and also supported by positive exchange rate effects. Within Hearing Aids, we saw adverse mix effect from product mix as Søren just reported on, that impacted the gross margin negatively. Supply chain headwinds continue to contribute negatively around 0.5 percentage point, primarily due to higher freight cost. Looking forward for second half year and what is implied by our outlook given for the full year, we do expect to see an improvement in the gross margin driven predominantly by an expectation of a different mix in second half year than what we have seen in the first half year. Looking at the OpEx, we saw 8% organic growth, of which around half is attributable to reflect temporary cost savings that we saw last year of DKK 150 million to DKK 200 million. This is slightly below what we anticipated from the beginning of the year. And we have seen lower OpEx in Hearing Care as well as in Communications business to compensate partly for the shortfall in sales. At this stage, we see no inflationary pressures beyond our initial expectations. EBIT ended on the previously mentioned DKK 1.6 billion for the first half year and an EBIT margin of 16.7%, which is a decrease compared to what we reported last year of around 5%. But in that analysis, it is important to remember what we flagged already last year, and that is the effects of the French reform as well as temporary savings. And if we adjust for these 2 elements, the growth in EBIT was 13%. Of course, here also partly supported by exchange rates. Looking at cash flow. Cash flow from operations declined 43% in the first half year. And this is driven by a significant increase in the net working capital and you can say, a normalization of trade receivables. What we saw in 2020 and '21 was an above -- very much above normal cash generation and cash conversion, significantly above the 100%. We had anticipated already last year that we would see a normalization of working capital that we did not see and that's basically what we have seen here in the first half year, meaning that at this stage, our working capital level very much resembles the level it was pre-pandemic. So all in all, large increase, but back to what was normal pre-pandemic level -- yes. So leading to CapEx, 4% of sales, which is in line with our medium- to long-term expectations. Cash to acquisitions and divestments was just above DKK 500 million, reflecting the acquisition of the diagnostic company, Inventis as well as the initial 20% of ShengWang. As we previously announced, we acquired the final 80% just in the beginning here of second half year. Buyback was DKK 1.3 billion. On the balance sheet, it grows 10% in total assets, of which 3% is exchange rates. Part of this is the normalization of the net working capital. I also want to highlight the fact that now we have assets held for sale. These are the assets and also liabilities that, of course, relates to our medical implant business. Multiple -- giving multiple end of the period is 2.4. This leads us to the outlook for this year. Søren?

Yes. Thank you very much, René. And I think the main changes are highlighted in the kind of some key assumptions, and it is expected that we will see some improvements in the market conditions in second half, in particular in U.S. We do believe we will see a better development towards the end of the year. It is, of course, our assessment, and we will have to see when we get there, how it ends. But I do believe that we will see an improvement in U.S. over the coming months. And then ASP, due to that, we'll still see strong sales in NHS and in export markets, but the balance will tilt back towards higher price margin and therefore, a less negative development to the ASP. We always expect 1% to 2% negative, but -- and it was obviously more in the first half, but less exactly where it lands, it's so sensitive to mix effects, but less is the key message. And also supply situation, that's mainly an issue for the Communication business, will improve. However, the weakening of the gaming market we also expect to carry into H2, we don't know for how long. If we look at the French market, this is totally in line, if not a little bit better than expectations, so nothing there. So it is really down to the U.S. development all in all. We also, of course, expect the Pacific region to recover from COVID, including China. We have no expectations for significant widespread lockdowns or anything like that. In H2, for the group, we'll continue to see market share gains in Hearing Healthcare. In Communication, we think it's a little bit difficult to talk about market share gains as things are so dynamic, and what is it we measure against, et cetera. So we focus on our own development and talk about the ambition to generate double-digit organic growth. That is, of course, very different comparison figures in the second half, but we'll be -- and seasonality, but we will have to see and expect to deliver increased growth rates. However, we cannot fully close the gap we have created in the first half, so we now expect an EBIT around minus DKK 150 million, for the Communication part of our business due to the negative market trends in gaming and the supply chain challenges. Medium to long term, we have no changes to our thinking around the communication market and the positive development. To sum it up, revenue growth organically now 4% to 6% instead of previously 5% to 9%. And why more on the top? Obviously, more come from the exchange rates now. So it is in line with what we have seen in the second quarter and our expectations -- updated expectations for the second half. The acquisition is around 2%, 5% from FX and, all in all, leading to an EBIT guidance previously DKK 3,600 million to DKK 3,900 million, now DKK 3,500 million to DKK 3,800 million, gearing multiples, et cetera, the tax rate, et cetera, share buyback, no changes. And with that, over to Q&A.

[Operator Instructions] And we'll take our first question from Maja Pataki.

Søren, I have a question. Can you give us some flavor and color around why you expect the U.S. market to improve in the second half? The inflation is probably now coming dramatically -- plus we have winter with potentially higher or stronger sales costs hitting your patients or your consumers. So I'm trying to understand why you remain optimistic? And the second question is, if we look at the Q2 growth in retail, the minus 7% organic, could you give us a bit of a flavor of how much it is due to the U.S. where you're still steering away from managed care patients and how much is due to France? That would be very helpful.

Thank you very much, Maja. Yes, we, of course, all have our opinion about the development in U.S., but normally, you cannot kind of postpone forever. And I think we learned from COVID that the reaction is quite immediate. And then when you kind of get used to a new environment and unless we get a real strong recession, which we don't expect, then things will normalize at a new level and then we would still see people solving their hearing impairment. So it is an assumption that things will -- there would be a new norm. There might be positive development to energy pricing. There might be a little less under inflation. You can see some early indicators from that. But this is our best assessment of the dynamics of the Hearing Healthcare market that, that will improve during the second half. And -- yes, that's our estimate. Q2 growth...

Just as a follow up.

Sorry. Yes.

Sorry...

Maja, please.

No. I was just wondering if -- when you talk about people getting used to the situation and -- yes, we're all -- at some point of time we're all used to certain price environments and everything, see but ultimately, the dollar in the wallets remains the same. So do you anticipate that volumes are going to recover, but we might see some trading down because U.S. still limited with regards to reimbursement?

No. Because again, there's just so little evidence in the past that it actually is -- the discretionary money that determines is -- and again, if you look at U.S. savings, there's also been some recovery of share prices, et cetera. So again, all in all, we think people will find the money if they needed. And there is enough Americans that have kept their job and also got a decent salary increase, et cetera. So we think there will be a normalization. And also the comparison, of course, go down. Part of the change from first quarter into second quarter is because the second quarter last year was very strong. But the net-net effect was stronger than anticipated. You can basically -- again, as I've tried to say that the anticipated release of pent-up demand, which is there, have been outbalanced by some users holding back. And we can actually see this trend that new users seems to be less affected, whereas, people that have an existing Hearing Aids where our normal marketing effort, you could say, basically is to argue for an upgrade before the existing product is out of -- is broken down. And that's, of course, also part of the mechanism that I have something that I then choose to use a bit longer when things are uncertain. So I don't think you can totally correlate it to money in the pocket. There's no evidence for that in the past, at least. And back to Q2 growth I cannot split out exactly out of this, but the lower than expected is purely a U.S. phenomenon. The rest works in line with plans, meaning the French development is in line with plans and the extraordinary income we saw there is in line with what we guided for from the beginning of the year. So the deviation, the lower than expected does originate from primarily U.S. and the Pacific region.

Okay. Great. Søren, just a quick follow-up. And with the first quarter results, you mentioned that you were in retail underperforming in the French market because competition has stepped up meaningfully with the reimbursement. Is that a trend that you've also seen in Q2? Or have you been growing in line with markets?

No. I think we have grown reasonably in line with the market. No major -- it's so difficult to see, but I think the argument we made in the first quarter was that maybe we're a little surprised to see the market's size being bigger than anticipated. It was not so much our own performance. And that is, of course, because more people have entered the market. And that's why we saw that wholesale could deliver let's say, stronger performance than we saw relative in the retail side of the business but that was not that we lost the share. You can say technically, we did that, but it's a run rate thing and there, we have delivered in line with our expectations. So take France out of the equation, there's no correlation between the French performance and the adjustment of our guidance.

And we'll take our next question from Christian Ryom with Danske Bank.

Yes. This is Christian Ryom from Danske Bank. I have 2 as well. So first is regarding your full year outlook for market growth where you say that you're now expecting 4% to 6% in line with the structural growth level, which sort of, given the 8% market growth that you estimate for first half, would imply a market growth rate of, say, 1% to 5% roughly in the second half. Can you give us some insight into how you think about, how we should see the phasing of growth for the market in Q3, Q4? Specifically, whether we should see one of the quarters being significantly stronger than the other? And then my second question is to the Diagnostics business and how you see that -- how you expect that will develop given the current macro backdrop. My understanding is that a fairly large part of the Diagnostics business is instruments and therefore, CapEx investments among customers. Do you see any risk of a slowdown here? Any comments on that would be very helpful.

Yes. Thank you, Christian. You're right that the global, you could say market outlook is less than in the first half, but this is the comparison and the strong growth from VA, NHS and the emerging markets. It does represent an improvement basically of the commercial business and primarily in U.S. So that's the -- about this very strong and high growth rates in the first half in the 3 biggest laggers we have left for Corona. And therefore, it still represents a relatively good development in the second half and also a good or better ASP development than we have seen as a natural consequence in the first half. So the value growth is still good and strong and it comes from another, you could say, geography and channel mix than we have seen in first half. The growth rate in NHS, VA, even though they're actually also not at the expected level -- they are still not up to a full capacity level, you could say -- or not capacity -- probably at capacity level but up to what it should have grown to and no sign of pent-up demand being released. They have grown 30%, 40%, very high, and that will, of course, not repeat itself in the second half. And the phasing is stronger towards the end. We will come into the winter where we saw new corona restrictions and, again, customers holding back that was starting in November, December-ish. So a natural improvement during the year -- second half of the year. And Diagnostic, risen over, it is very different. It's not consumer sentiment driven. So we have seen very little, if any, impact from demand going down and we see the market growing above the normal 3% to 5%. So nothing there.

Our next question comes from Veronika Dubajova with Citi.

I will keep it to 2, please. One, I just want to sort of follow up and challenge you, Søren, if it's okay, on some of the expectations for the second half. I'm kind of struck here. ASP was worse than you had expected. Volume growth was softer than expected. You assume pretty significant acceleration as you're moving into the second half. Are you seeing that on the ground today? If you look at your run rate in July and August, have you seen an improvement either in volume or mix? And related to that, I've noticed that you've also very explicitly stated your expectation is you will keep gaining market share in the second half. We know there is a new platform coming from Sonova very shortly. Your local competitor announced the platform launch today. I think you're getting to the sort of tail end of what you have on the platform perspective. So just curious kind of what underpins that and how much confidence do you have in those 2 things? And then I will -- I have a follow-up after that, but maybe, we can tackle this first.

Thank you, Veronika. I think it's important to stress that in the first half of the year, we have seen a strong unit growth development of 8%. So the -- so the units have been strong and good in the global market. And we have seen 16 for ourselves. So that's strong. So the ASP is really just a mix effect. So -- yes, maybe units will be a little less dramatic in the second half, but the ASP will come as a natural consequence. And -- yes, as I said to the previous questions, we do expect an improvement of the growth rate in the U.S. market, which will further fuel that development, that ASP will go up and net-net the volume is likely. But you can quickly get another good ground on these export orders. That's very difficult to predict. That's not a run rate business. That's an occasional business kind of. So I'm comfortable on that. It's not a dramatically different picture than we have seen and are seeing. It's also, again, a natural consequence of less growth in NHS because they start to hit where they got up, VA, et cetera. So that I'm all good for. And then of course, we are always sensitive, of course, to a competitive environment. But there is also a core strength in what we have released. We have also a very complete portfolio, now completing it with in ear products. All price points, all form factors and typically, when these platforms come out, they can be a little thin on the scope and the width. So that is the ammunition we have is proven. Very strong performance. So maybe somebody closed some of that gap, but then also a very wide portfolio, and there is a number of markets where some of the later releases still hold a significant potential for growth. So that's our assessment. Of course, we don't fully know what we're up against, but we think we can make it for the year with the things we have now released.

Okay. Very clear. And then if I can, just a quick one on Communications. And I would love to get your thoughts on whether you still believe you can hit a breakeven or positive EBIT next year. Basically pretty significant ramp versus what you -- just what you've guided for 2022. So I wonder what your degree of confidence is today.

Yes. And of course, the situation is different than we assumed it was. So there is, of course, a likelihood that we will have to revisit that. But we will refrain from that until we have better clarity and market development. We obviously need to see the gaming market accelerate in growth instead of what we see right now, and not just in growth rates, but in actual positive run rate growth. It's extremely much down post-COVID. So that's one thing. And then, of course, we also need to see the enterprise market pick up, not the least in video and some of the newer areas, for collaborative equipment. We are not that far off, but again, supply chain challenges and so on has definitely also muted that part of the market a bit. So normalization of supply chain and further growth in the Gaming market, then this can quickly go the other way as well, and then profitability will be there. We follow our original plans or less on the cost side. And therefore, if we get back up to the original expectation on the top line, which can again happen relatively quickly, then yes, we will also improve from a profitability quite fast and dramatically.

Our next question comes from David Adlington with JPMorgan.

Most of the questions -- most of them have been asked, but maybe just circling back on the guidance. I think from what I -- my take on it is you sort of missed in the first half by about DKK 100 million of EBIT, which is how much you've taken down the full year guidance. So I don't know whether your expectations for the second half have really materially changed. Is that a fair assessment? I'll just leave it there.

If I get you right, you say that we basically are DKK 100 million below expectation in the first half, and that's basically the adjusted guidance? I wouldn't fully say. We have some in first half below expectation, but we also have something significantly above expectations, not the least the Diagnostic business, but also a good strong performance in Hearing Aids. So no, it is just as much an assessment of the second half that have led to this adjustment.

And our next question comes from Niels Leth with Carnegie.

A question about your FX exposure. In order to understand the FX effects on your profitability going into next year, could you briefly talk about how much is your FX hedges will bend to your profitability this year? I guess this will be eliminated for next year, provided that the U.S. dollar stays at this level? And my second question would be about the market growth in July and August, could you briefly touch upon that?

I'll cover the first one, Niels. So hedging headwind was around DKK 100 million in the first half year and then increasing to around DKK 130 million in the second half year given the current exchange rates and -- and rightly so, it will, you can say predominantly be reversed in or, you can say, it will be a tailwind next year for the most part of it.

And on market growth, I think we don't have -- we only have basically U.S. to look into for July. And that was not a change to the situation. That was also not a strong month. But for the rest of the world, we don't have statistics yet. So it's not possible to comment on that so far.

And we'll take our next question from Oliver Metzger with ODDO BHF.

Yes. I have 2 questions. The first was on the reduction in EBIT guidance. So the range goes down by DKK 100 million. So if I just look into the segments, at the end, it means that it's purely impacted by the more negative DKK 150 million you factor in now for Communication versus slightly negative before. Does it mean on the flip side exactly underlying profitability for the Hearing Healthcare business even higher than previously assumed? Or could you elaborate about potential cost savings over dynamics, why implicitly, the Hearing Aid business is even more profitable than before? And my second question is on Communications. So it's again good to see that the business was growing in Q2. Could you give -- tell us a bit more about this, how the supply situation for the enterprise business has improved in Q2 versus Q1? Is -- are there some rays of hope? And -- yes, that's all my questions.

I'm sorry, your line is really bad. It's very difficult to understand, especially your second question. If I understood your first one correctly, you were speaking to the downward adjustment of DKK 100 million seems to be highly related to Communication. And as Hearing Aid is performing less, are the other 2 really delivering much better? And the question is just, yes, that's the case, that there is strong scalability in the Diagnostic business and have seen solid improvement of margins and EBIT. On the Hearing Aid side, the unit growth is, of course, driving up some cost of goods sold. But on the other hand, the scalability and such a big volume is also there. So all in all, good. It is on the Hearing Care that things are pulled the other way. But together, the deviation on the Hearing Healthcare business is not big. It is a lot coming from our changed situation in the Communication business. Your second question, I simply couldn't hear the details.

Yes. I will repeat. So it's good to see that Communication has turned around in Q2. So can you elaborate about the supply situation, how that has changed between Q2 and Q1, particularly for enterprise business, please?

Then I misunderstood your first part. I did not confirm that the situation was different in Q2 than Q1 in Communication. That's basically a continuation. The big change there is the comparison where there was very high -- comparison in the first quarter, therefore, negative organic growth. We basically carried in a lot of supplies in '21 -- orders in '21. So the sales last year declined significantly into second quarter. That's what drives the growth to the 5% organic. The run rate in the business is still not where we want it to be. And it is predominantly Gaming and then secondly, a lack of ability to supply to orders. The supplying to orders will improve during second half and from the beginning year of third quarter we start to be able to release some products that we have been short on for a while, but ramping up the volume just takes time. They are redesigned to now work with chipsets that are generally available. So we have not seen -- dynamics -- to your question, we have not seen a significant improvement of the performance in Communication from Q1 into Q2. That's more or less purely a comparison.

And we'll take our next question from Martin Parkhøi with SEB.

Great. That was pretty close. Martin Parkhøi, SEB. A couple of questions. Firstly, as now you have, for some time, complained about -- at least talked about the negative impact from the managed care in U.S. Now that you -- are you -- should we perceive you as being a structural underperformer, not just this year, but going forward in your U.S. Hearing Care business solely due to the managed care superior growth compared to the underlying market? And then secondly, I think that is true for [ in-ear ] -- Firstly, [ in-ear ] -- with 43% decline in cash flow from operations in the first half. And you have mentioned, of course, the lower EBIT as well as trade receivables. But can you maybe if you -- if you take the midpoint of EBIT guidance for the full year. Where are we ballpark landing for the full year on this point? And then secondly, René, can you maybe just walk me through the half year over half year development in the cost items on each of the 2 divisions?

On each of what, sorry?

2 divisions.

On the 2 divisions?

Yes, Martin, I think short term, you could say you're right. We have chosen to step out of not all plans but a number of plans where we basically, as a group, only get a fitting fee because we fit competitive products. And the fitting fees are, in some plants, ended up being very low and basically loss-making. So we have decided to step out of these plants, you could say also a little bit politically and tactically. And expected to be able to fill the schedule with private pay. That has not fully happened to the extent we planned. Obviously, not an easy market to do it. So you could say a little bit timing challenges there. And then, of course, on the long run, we do work intensively to make sure we can get, one way or the other our share of that pie. And exactly how to do that is, of course, still something we are working on. But we have good ideas about how we can do that in the long run because it is a growing segment. And of course, we have to join as we have done all around the world in all channels and segments. We just have to find a profitable way of doing so.

Yes. So on the cash flow, so it is seemingly, you can say, a relative dramatic change in net working capital that you have seen in the half year. But I just I think it's important to remind if you go back to pre-pandemic level and look at what is days of sales outstanding, what is days of payable outstanding, what is days on inventory, and look at those KPIs, what we have seen is a normalization of the cash flow of the net working capital in -- during the first half year. We anticipated last year that we would see some of these effects. But for various reasons, we did not see it come through, but we have then seen it this year. Meaning that now when we enter second half year, many of those KPIs are on what we would consider the same level as what they were in '17, '18, '19, if you go back and look at it. Meaning that, from here on into the second half year, we would see, let's say, the tie-up of working capital be more normal. And what normal means for full year typically is DKK 500 million, DKK 600 million net working capital charge. So half of that for the second half year would be a rough estimate of what would be considered normal. And then if you reverse from there, you will see a significant improvement in cash flow from operations in the second half year. So that's what we are assuming and working towards as a reasonable, I think, expectation for how the business will go. And just to finalize the analysis on that, which, of course, means that the free cash flow for the full year, given the first half year, will be, you can say, lower than last year. And our -- given the fact that we have now fully completed the acquisition of ShengWang, the leverage ratio end of the year will be slightly higher than the range of 2 to 2.5. And this still includes the facts or the assumption that we will close the medical acquisition end of this year. So I think that's the full divestment -- sorry, end of this year. So I think that's the full sort of analysis on that. On the operating expenses, if we look at the Communications first, it is a growth of 5%, and it is solely driven by our continued investments in R&D, amongst others, in video solutions, but basically all over the product portfolio, whereas we see a reduction in both the distribution and admin as a consequence of the sales shortfall in our efforts to recover that on cost savings. If you look at Hearing Healthcare, the reported growth is, of course, high. The organic part of that, however, is only 8%. So on top of that, you have a small contribution from acquisitions. And then on top line, you have a significant currency element. But if you decompose the 8% organic growth, half of that, DKK 175 million or DKK 150 million to DKK 200 million is from the abnormally low cost levels that we already highlighted last year. So organically, what we consider underlying organic growth is this 4% you can say, more or less equally driven or equally distributed across R&D, distribution and admin costs. If you're looking for something else, Martin, but -- please.

Yes, I was looking for the H2 '22 versus H1 '22?

Yes, so to give some flavor on that then, you can say if we kind of assume that the underlying organic growth in first half year was 4%, you can say our implied organic growth for the group in second half year, just mathematically is 4% to 8%. So you could assume an organic growth rate that would resemble that a lot. And then, of course, you need to -- can also deduct that from our outlook. You can add 3% from acquisitions and 6% from currency from pure math.

And it appears we have no further questions at this time. I will now turn the call back over to our presenters for any additional or closing comments.

Yes. Thanks very much. That's it for today from us. Thanks very much for joining us, and let us know in the case of any questions. We look forward to meeting many of you on the road in the coming weeks and months. Have a great day. Thanks