Demant A/S

CSE:DEMANT

Earnings Call Transcript 2021-Q1

[Mathias Holten Møller, Director of Investor Relations]

Good afternoon, everyone, and welcome to our conference call held in connection with the release of our interim management statement earlier today. As always, the statement that we've put out covers the period year-to-date, so including April also. We plan for the call to last an hour, including the Q&A session, also very much as usual. We are also the usual folk here in the room. So our President and CEO, Søren Nielsen; CFO, René Schneider; and the IR team, Christian Lange and myself, Mathias Holten Møller. And Søren will now quickly run through some prepared remarks before we then open up for Q&A. And the presentation has already been uploaded to our website. So Søren?

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much, Mathias, and welcome, everyone, to this update after first 4 months of 2021, still a period where at least in the beginning, uncertainty was high. We were in the middle of the shadows of the pandemic and new restrictions put upon our -- the world and our industry. But also, as we talked about back in February, relatively resilient, classified as essential care. Therefore, stores have been open. The business have been running. And what we can see now at really high level is that things have developed slightly better than anticipated. I will, of course, explain why and how. And it basically all starts with the recovery of the global hearing healthcare market that have progressed at least in line with our assumptions. Meaning that we would see a strong -- relatively strong correlation between senior citizens receiving a vaccination and the recovery of -- in particularly, the hearing aid market, but also the diagnostic market to a lesser extent, at least immediately, the implant market. And that is exactly what we have seen. We have seen North America private sector in U.K. recover relatively fast and instant. We have seen most of Europe a similar way, but with a few more nuances and then, of course, also in Asia slightly. I'll get back to all that, but not knowing all markets in all details because statistics are not there, at least in line with assumptions. We have a better-than-expected revenue growth and EBIT driven foremost by our Hearing Care business, retail owner-operated stores. And that has broad aspects, but in particular, a positive effect from the Hearing Healthcare reform in France that have lead to quite a significant uptake in demand in the first 4 months of the year as clients now have access to a no-own-payment type of product category, and it seems like a number of people have waited for that. And this demand has been released. We knew it would be coming. We had anticipations about it. We didn't know how COVID would stretch it out or whether it would come relatively fast out and how big it would be. But we can say now that it has been faster and also a bit more profound than anticipated. How long it will last is then, of course, still uncertain. We do expect a normalization back to maybe a new level, but still not at all at the growth rate we have seen in the first 4 months. The business in general is doing well and performing well and therefore, have delivered organic growth rates in high double digits above expectations, low double digit versus '19, which is probably a better comparison. We now start to get the really severely corona-impacted months and René being last year in Spain, we had months where we were down at minus 80% in the Hearing Health space, Hearing Aid space. And that, of course, gives an enormous boost to growth rate compared to '20. But if we look over '19 in the period that are past low double digits and in this connection, of course, the beginning of the period, January, February, is more impacted than towards the end. And we basically see this continued progress towards the normalization as we have expected and guided for towards the end of the first half year. Acquisitions have only had a minor positive contribution since 2020. And on currencies, that has been negative low to mid-single-digit FX. The Hearing Healthcare business doubled the high double-digit organic growth, low double digit versus '19 and driven by Hearing Aids, Hearing Care and Diagnostic, all 3 business units performing really well. Implants also performing well, circumstance given. But there is still a severe impact on the number of surgeries being executed, in particular, in the markets we are exposed in, being Central Europe and a number of emerging markets, including Brazil. Communication, a very strong start to the year, very high double-digit organic growth, benefiting from very low comparison figures last year. Some orders carried in from 2020 into '21, but also during the period, some softening of new orders. We have definitely seen an element of really placing a lot of orders in fall that maybe have stocked up a little bit in the channel. We still see a good outflow, but a little bit eating into the stock that was built over the winter.Very strong profitability year-to-date, of course, driven by better than expected top line but also improved sequential gross margin and still low double-digit organic growth in OpEx. Some of it relates to the bigger business we are operating, but we are still underneath that seeing quite solid temporary savings, still not traveling, still not executing major customer events, et cetera, which still realize material temporary savings. Of course, ramping up in a number of areas, R&D, et cetera, of course, starts to lift OpEx, but again at lower level than top line, and therefore, very profitable. Strong cash flow, thanks to the profit generated, of course, also still from tight control of working capital. M&A running a normal level with bolt-on acquisitions in Hearing Care mostly. And then share buybacks year-to-date of almost DKK 0.5 billion. And based on all this, we have adjusted and increased our expectations for 2021. So organic growth is now expected to be 24% to 28%. Previously, 23% to 27%, higher in Hearing Health than in Communication, EBIT up to DKK 3 billion to DKK 3.3 billion from previously DKK 2.85 billion to DKK 3.15 billion and share buyback now more than 1.5 billion, previously 2 billion. And a few more details on the business areas here in healthcare first, strong performance, as I said, across Hearing Aids, Hearing Care and Diagnostic, less in Implants due to the market conditions. And if we move to the market conditions and here, we don't talk about the full period when we talk about Hearing Aids, we only talk about first quarter because that's the statistics we have. Then based on the statistics we have available, and that's not all markets, in Europe have seen 10% growth over Q1 last year, which was down 10%. So you would say, even steven, back to where we kind of should have been last year or flattish last year. So still a significant gap actually up to what you could expect for '21. North America, in line with that, but less impacted Q1 last year, the effect in U.S. came later. The lockdown started in Europe and it took a while until it got to U.S. So Q1 was basically unaffected or not much, at least. And we have seen stronger recovery on the commercial side than on VA. However, during the period, we have also seen VA now really getting up to speed. Rest of the world, flattish, but this is also where we have far less data points available in particular China, we don't have statistics and therefore, it's a bit of best estimate that we base our commenting on. CI, again, low activity level in our core European markets and emerging markets impacting the business quite a lot, whereas the bone-anchored are doing better. There's both simpler surgery and better access, but also the use of headbands prevents or at least allow some users to get started before they can get a surgery. Diagnostic market expected to have grown in line with our normal expectations of 3% to 5% and the market have never been hit as hard as the hearing healthcare market, but probably still also there some pent-up demand. So overall, year-to-date, recovered at least in line with expectations, but the big differences across geographies. Hearing Aids performed very strong back to the lifting of the guidance. We had high ambitions already, but we definitely have also seen Hearing Aids perform well. And maybe not above our expectations driven by new products, very successful release despite of COVID's limitation in getting directly out to customers. Oticon More is performing really well, especially with the independent end markets where there's a lot of them like U.S., North America. And Philips HearLink also enjoyed strong success in U.S. and Philips in general in Asia and China still drives significant growth. So sales -- so has sales to Hearing Care grown, of course, strongly driven by France, but of course, also the strong performance across a number of geographies for the Hearing Care business. And Oticon More, speaking about that, it is a stellar product. It performs really well, very strong feedback. We have now also released a very solid piece of academic work where we test the product against 2 of our key competitors' latest introductions. And what we try to document and prove or have documented and proven is the much better ability to hear what's happening all around you, which is the main claim of Oticon More having to avoid to focus in on speakers from a front. So a documented positive effect of access to speech coming from around the user's typical restaurant situation, social gathering, where people pay attention to things in a very dynamic listening environment, access to more relevant sounds without being tired and overwhelmed, rapid adjustments to changes in the sound scene and in all in all, more contrast and details that make it easier and more intuitive for the end user themselves to decide what to listen to and get a meaningful sound picture out of things instead of being overwhelmed and confused. And this comes out very strongly. You can all find it on the Oticon web page, if you want to read more. Hearing Care have performed very strong most notably due to the reform in France, but also due to market recovery in our key markets, in particular, highlighting U.S. But again, I would also say across the board, across our retail entities, really performing well the past 2, 3 years effort in consolidating brand, building more professional marketing, lead generation, operating the business, call centers, operating model, best practices, shares is really paying off, a lot of digitalization effort going into it. And I'm really happy and pleased to see how the performance of the retail group is improving, but of course, a significant tailwind from the reform in France and general market recovery. Two examples of the correlation to vaccination is U.K. and U.S. We, on a monthly basis, have, in a number of basically all our key markets, made a survey with at least 500 people above 60 in each market. And one of the question relates to whether your fear level have changed up or down in the past 2 weeks. Orange, yellow here means you are more scared than you were 2 weeks ago. Green don't -- no change, or blue less scared. And you can see the significant change that have happened in February and March in those 2 countries, and they are ahead of the curve on vaccinations. We haven't seen the same in the other markets, but start to see it now. But even if you haven't received vaccinations, then as the pandemic gets under control, less people coming to hospitals, et cetera, you see the fear level go down, which calls for further improvement of the business there. We also still see, I would say, still some skepticism among first-time users. They might even not have seen their GP or the ENT doctors, so they're not even in the funnel yet. Our marketing activities have been focused and centered around existing users, and we have been better and improving our processes for that. So now we're also ready to tap into a significant potential of people that have not even had a diagnosis in the past 12 months. Hearing Implants, a severe impact from coronavirus, postponement of elective surgeries, however, positive on track with the FDA premarket approval, and we therefore still believe we can get market access towards the end of the year. So despite of FDA being busy with a lot of other things, we have managed to interact with them and work with them, and they have also found solutions and how to execute audits and other matters that could have prevented the approval. So we still expect that. And then again, bone-anchored, of course, more resilient, as mentioned earlier. Diagnostic, strong performance, a combination of resilient market, market share gains, recovery in markets, investments to be done because demand, generally speaking, is high. More and more people that needs to have their hearing checked. Instrument sales have recovered well. Service and disposable is at a healthy level, you can say in corona, then you are even more cautious if some people have used disposables more than one, now they don't. So we have seen good demands for those disposable elements. And basically, all regions have contributed, but strong growth includes, again, U.S., where we clearly see a business environment improving. And moving on to Communication, to EPOS, our own end-to-end communication company, operating both in Gaming and Enterprise Solutions. We saw, as I said, a very strong start to the year up until mid-March. comparison numbers have been low, and therefore, the growth have decelerated to a more natural level. Year-to-date, we have seen very high double-digit growth, benefiting from, again, low comps but also strong growth across euros -- Europe, a little less strong in U.S. And then a number of open orders from 2020 have been closed. And we see some softening of the order intake, particularly around relatively low-priced USB-connected headsets, which -- where we saw the boom in both first round 2020 and in particular, second round 2020 where people again were sent home to work from home and people knew what it took. And there has definitely been some double orders in the system, I'm sure. And therefore, orders at our wholesale level has softened. We still see relatively good traction out of customers. All in all, just to clarify and calibrate the expectations, there was an element of all proportional demand in the second half 2020. The business in general also have some seasonality up to Christmas and so on in Gaming. And therefore, we expect revenue in H1 to be lower than it was in H2 2020, important to stress, 2020. Some have misread it a little bit this morning as it was the other way around, but it's not, it is comparing first half '21 to second half '20. Outlook assumptions have continued gradual normalization of the hearing health market during H1. In the developed markets, we still expect it to be slower in NHS and emerging markets, whereas VA have clearly, are approaching fast and also faster than expected. We still expect a release of pent-up demand in second half. We cannot tell whether we will have it all in '21 or into '22, for sure. Emerging markets is going to be into '22. And -- all in all, you would say -- it is with some caution that we look to these parts of the world where, of course, the infrastructure and healthcare systems are less well prepared for handling pandemic than we see in Europe, North America and most of Asia Pacific. And then also growth of at least 8% to 10% in the professional headset market despite of strong comparison figures, that's still our assumptions. And based on that upgraded guidance for organic revenue growth to 24% to 28% from previously 23% to 27%, 1% from acquisitions completed by today, minus 2% on currency exchange rates as of today -- or yesterday, no -- yes, yesterday. EBIT DKK 3 billion to DKK 3.3 billion from previously DKK 2.85 billion to DKK 3.15 billion, and only skewing modestly towards H2. There is an element of the French reform that lands primarily in H1. So you could say underlying, we still expect H2 to be as we originally expected. There is still quite a significant element built into that around release of pent-up demand, et cetera. So that's still a good strong ambitions even in the light of a very strong start to the year. Effective tax rate around 23%, gearing multiples unchanged, but share buyback lifted to DKK 2.5 billion as a result of the better performance. And with that, back to you, Mathias, for question and answers.

[Mathias Holten Møller, Director of Investor Relations]

Yes. Thank you. I think we'll just hand it over to the operator. If you could open up for Q&A, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Jannick Denholt from ABG.

[Jannick Lindegaard Denholt, Research Analyst]

It's Jannick from ABG. Can I ask a little more about you can say, the market dynamics you're seeing? So obviously, you flagged the private market in the U.S. coming back. You also see France obviously benefiting from the reform. Can you provide a little more granularity in some of the other key European markets, whether being Germany or Southern Europe, et cetera? That would be much appreciated. That would be my first question.

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much. I think across Europe, generally speaking, it is in line with expectations. Germany, a little bit behind. They have -- they were never deep in the hole but has also not been as quickly out. Spain, Italy improving, we basically see the countries improving, also U.K. private, very significant improvement where NHS because it's more hospital-driven. Denmark, Norway, Scandinavia doing well. Holland, Belgium, I would say it's mainly Germany that's a drag and NHS, of course, still in Europe. Canada have lagged somewhat behind the trend in U.S. that's in the lagged vaccinations, but are now getting it and are quickly moving up the ladder. So also there, we start to see improvements. In Asia, Japan is a very sensitive market. It takes small changes to numbers and restrictions are in place and society turns very skeptical. You basically, still see the discussion on the Olympics and so on, and it's a very good reflection on also the sensitivity in our market. So quite a lot of dynamics in a market like Japan, where Australia, China, South Korea have done well in the period.

[Jannick Lindegaard Denholt, Research Analyst]

Great. Then my second question, please, a little bit about the pricing dynamics in the U.S. also led by the channels, there's obviously been a lot of focus on. You can see some price pressure in Costco. How do you see that playing out also we could say as the market, also on the government channels and so forth, obviously, where prices are more set. How do you see this playing out over the year because you know the positive ASP effect this time around, would we expect that to reverse as the markets become even going forward?

[Søren Nielsen, CEO, President & Member of Executive Board]

No. Of course, it does from a channel mix. So if you see more growth now in VA then ASP will go -- blended ASP will go down. That's a natural given. But again, that's not what we call pricing pressure. Yes, there has been, as always, some pricing adjustments when a new KS is out, and we have also looked a bit at our tactics in that light. But all in all, if the mixtures change a little bit to branded products in Costco, the ASP actually go up. So from a blended market point of view, I think we are approaching a normalization and approaching the historical ASP in the market. There is, of course, a somewhat downwards trend, the more Costco grow, the more managed care growth. But on the other hand, they are also part of growing the market. So it's definitely not an erosion and something we are not ready to handle.

[Operator]

And the next question comes from the line of Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Yes, Martin Parkhøi, Danske Bank. I have a couple of questions. Søren, just to your comment on the -- on pent-up demand, you say you're not sure all will be in 2021 or some will be postponed into 2022. But what have you assumed for your guidance, you assumed pent-up demand in '21. But how much have you assumed or what you actually believe will be -- hit you in total? And then second question, just recently -- I got this SEC filing that hear.com is getting -- potentially getting listed on Nasdaq. Can you just remind me on your view on this type of business model and the ability to scale it? Why you're not more open into this? And also the conversion rates that we saw in this business with only a 20% conversion rates from an appointment to an actual sale or customer sale, how does that look for your new normal retail business?

[Søren Nielsen, CEO, President & Member of Executive Board]

Yes. Thank you, Martin. Pent-up demand is as far from exact science, as you probably can get. We only know the total potential. So it is our assumption and based on what we saw already last year that private sectors, European markets, U.S. in the private sector will happen relatively fast. What's uncertain is where there is government allocations that needs to follow. So if you have built up a big waiting list, what will it take to bring it down from a capacity point of view. How quickly do you get out and get aware that you have something with you're hearing, you need to have checked? These are some of the uncertainty. Then, of course, when we talk about pent-up demand, broader scale, what about CI, that's also not fully transparent. And then emerging markets, I have no -- I'm not too optimistic for 2021 on emerging markets. Brazil, India, countries around Latin America and so on, they still seems to have quite some way to go. And if there are not vaccinations where we get into fall, one could fear that they would have to go through a third or fourth round once more. And on hear.com, yes, I think I can add my own flavor. I think it's a somewhat risky model because it is really focused on first-time users and you hand the user against the fitting fee to an independent, typically, independent fitter, that, of course, will also do what they can to take over the customer for a second round. And therefore, we also know from own retail that acquiring a new customer is quite costly, whereas if you can do a good piece of service and really satisfy the user, they're likely to come back to you. So a limitation to the hear.com model is that they have all proportional share of first-time users and less second-time users. And they, of course, also compete in the digital space with us and all the other retailers. And in the beginning, I'm sure hearing aid users have no opinion on how to get their hearing aid. They just hit some kind of digital marketing. So that's some of the limitations of why it can be difficult to build scale on just such a model if you're uncontrolled in the outlets that you make the leads for.

[René Schneider, CFO & Member of Executive Board]

Martin, maybe I can add a little bit on the market assumptions for '21 because broadly speaking, if we disregard VA, NHS and emerging markets, we're probably speaking consider that '21 will end up being as '21 would have been without COVID-19. But of course, a first half year, which would be somewhat below and then a second half year somewhat above, which means that essentially, we have still not dealt with the buildup pent-up demand from 2020. So there will still be something left for the subsequent years.

[Martin Parkhøi, Senior Equity Analyst]

Can I just take a follow-up up on -- just -- I remember back when you launched the Oticon Opn S, you had this problem with some previous owners returning their old products within their guaranteed period? Have you seen anything similar with those at all?

[Søren Nielsen, CEO, President & Member of Executive Board]

No, I think we saw most of that in 2020 because it was announced and one of the problems with Opn S was also that the rechargeability solution we have offered did not really live up to expectations. So it was also a way for customers to solve for some a less good experience.

[Operator]

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

[Christian Sørup Ryom, Senior Analyst]

I have 2 questions as well, and I'll take them one at a time, if I may. So maybe starting with your guidance. As I understand it, the DKK 150 million lift to guidance that you announced this morning, is mainly driven by the first by increased expectations for the first half. So will you just confirm that your expectations for the second half or your assumptions for the second half is unchanged? And maybe elaborate on why that is the case given that it appears that you've seen stronger take-up of your new product in the numbers that you're reporting today?

[Søren Nielsen, CEO, President & Member of Executive Board]

That's again -- Christian, thank you, back to what we are trying to convey, there is a significant element coming in a better-than-expected performance from the reform in France and the extra demand that have created. And then a U.S. that recover earlier, so the knee point is earlier. That doesn't mean we lift the longer-term element of it. It's more where it lands in first half versus second half, this potential pent-up. Then the other markets, they lag a little bit behind. But yes, it's the DKK 150 million that we have lifted is expected to be in first half primarily. And there are not really any changes to the way we expect the second half to happen.

[Christian Sørup Ryom, Senior Analyst]

Maybe as a sort of follow-up to that. Is there an underlying assumption of some pull forward in what you've seen here in France?

[Søren Nielsen, CEO, President & Member of Executive Board]

Absolutely. We thought it would take longer and would start slower because of COVID and so on. So yes. We definitely expected more first-time users to come in, but we will simply not had not expected that they would literally stay and ready outside the door in the beginning of the year.

[Christian Sørup Ryom, Senior Analyst]

And then that's my second question. Can you talk a little bit about what your thinking is of how these large U.S. stimulus packages both have and will impact the hearing care market, whether we've seen most of that effect or well, there will be additional effects as we look ahead to the coming months?

[Søren Nielsen, CEO, President & Member of Executive Board]

That I cannot tell whether the stimulus packages will help. But what really helps is the opening of society. And again, that's typically relatively little correlation between general financial situation and the hearing aid market. So it works both ways, even in crisis, it's more resilient. But if you get more money, maybe you'll get a new car first.

[Operator]

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

[Veronika Dubajova, Equity Analyst]

I have 2, please. My first one is just sort of on sort on your comment about most of the customers that you've seen so far have been returning customers. How do you think that will play out as we kind of move into the second half of the year and then into next year? Are you pulling forward, do you think some replacements? Or are these still mostly replacements that were due to happen last year, but are coming through? If you have any flavor or color on that from your own stores, that would be really helpful. And then my second question is a financial question. Just trying to understand the OpEx growth profile for the remainder of the first half. And I don't want to ask you for month-by-month growth rates, but that low double-digit growth that you have reported so far, if you can give us a sense for what it might end up looking like for the first half and maybe the exit rate of OpEx that you expect to be at by the end of the first half, so we can model the second half more appropriately.

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you very much, Veronika. I'll try to explain the first one. I definitely think we have seen some of the pent-up demand already being released on existing users. You're simply more likely to get it done. Your hearing aid break down and you do something. So I don't think we have pulled forward. We've just been more effective. We have been more focused, more diligent in people that have booked an appointment that they actually get it done, better follow-through, et cetera, and maybe use us the same way also more made up their mind. We still also lost a lot of existing users during March, April, May, June last year. So I'm just saying that the pent-up demand left is predominantly first-time users. And that all together is what looks like a normalization, but not a normalization in the fact that we see typically more or less balanced between first-time users and existing users, maybe 40-60, then maybe today in most markets, it's more like 30-70 or something like that. So it's that granularity that we talk about. It's not that we don't see first-time users at all, but they are just a little less likely to react to marketing. They are a little less likely to book an appointment. They're little less likely to show up where existing users has the reverse attributes. And then René, if you could comment on the OpEx front?

[René Schneider, CFO & Member of Executive Board]

Yes. So Veronika, the best way to think about OpEx is really taking a starting point in second half year of last year and the run rate there. So as you recall, we reported DKK 4.6 billion in operating expenses. And from that, you need to back out the government grants that we got of DKK 100 million. And then the best debt reversal that we also did of DKK 15 million, and that brings you to an underlying OpEx for second half year last year of DKK 4.75 billion, and that still includes significant temporary savings in the DKK 300 million to DKK 400 million range. And sort of soft guidance on that now is that we still see material temporary savings. But from a run rate perspective, they might have halved compared to what they were last year in second half year. So you need to add something there. And then, of course, an element on -- from acquisitions and also inflation. And that should give you sort of a ballpark number for first half year.

[Veronika Dubajova, Equity Analyst]

And is your expectation that by the time we get to the end of the first half, all the temporary cost savings disappear? Or do you think that there will be some that will linger into the second half? I appreciate there's a ton of uncertainty, but if you can comment on that, and then I'll jump back into the queue.

[René Schneider, CFO & Member of Executive Board]

Yes, there's definitely a ton of uncertainty. And if we are even to say fully normalized in the sense that business traveling and conferences and so on, and staffing is normalized, then cost will also be normalized. And then, of course, from a sales perspective, it will also correspond in a very strong way. And that's where the uncertainty lies. But right now, as we all know, we are still seeing material temporary savings from not being able to travel or engage with customers in any physical manner. So -- but for sure, we will be closer to normalization end of the first half year.

[Operator]

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

[Nyeok Lee, Equity Analyst]

My first one is just on the French hearing care reform. Can you just quantify the impact in any way as part of your organic growth performance so far on a year-to-date basis? And essentially, if you exclude the healthcare reform in France, what was the underlying organic growth for you on a year-to-date basis. And my second question is just a follow-up question on the guidance. If you adjust for the IT incident in the second half of 2019, I think your guidance for the second half implies probably only mid-single-digit organic growth versus 2019, which obviously, is quite a slowdown compared to what you reported this morning. I'm just wondering if you are expecting any headwinds or maybe some pull-forward effect as some people just asked earlier.

[René Schneider, CFO & Member of Executive Board]

Yes. So maybe I will take a crack on this one at a starting point. So obviously, the French reform impact is, as we also highlight, relative, the single most significant element, but all in all, if you look at it from -- going from '19 into '21 and our low double-digit growth, it is approximately 1/3 of that growth that relates to the French reform meaning that 2/3 is still overall a strong business performance and general recovery. So even if it's a driver and the most important driver is still not more than 1/3 of the growth. And when it comes to your calculations on second half year organic growth, you can say, ballpark, you are right. But it needs to be seen in the light of an adjusted second half year '19 adjusted for IT incident, being a very, very strong comparison base. So that's the background for those assumptions.

[Nyeok Lee, Equity Analyst]

That's very helpful.

[Søren Nielsen, CEO, President & Member of Executive Board]

Also still a headwind from NHS export, CI, et cetera. So there is areas where we are not where we should be.

[Operator]

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

[Maja Pataki, Head of Med Tech Devices Sector]

I have 2 questions as well. And the first one is relating to your U.S. performance. And I was wondering if you could help me consolidate some of the statements in the press release. You talked about your North American retail performance not being back to normalized levels. But you still talk about the U.S. commercial markets growing strongly. Now my question is, have we seen in the first couple of months in the U.S. commercial market a stronger uptake of Costco and more in the private market or the remainder of the commercial market, more of a slower uptake? And my second question relates to your performance at Costco with the Philips HearLink. Can you confirm or can you tell us a bit how market share gains have performed since you have lowered or since Costco has lowered the prices of the branded segment significantly? Now it seems like with the gap between KS and the brand new segment getting smaller, do you think that there might be a change in the dynamics between KS and the branded segment going forward?

[Søren Nielsen, CEO, President & Member of Executive Board]

Thank you, Maja. I will try to see if I got it all right on the first one. First of all, in North America, the Canadian business has definitely recovered less strong and less fast than U.S. So that's part of it. I think our U.S. Hearing Care business have grown in line with the market and also had a good performance year-to-date as a stand-alone. So no major deviations from the general development in the market, but we are performing well. We have been through many changes and so on and we think we're in a good place. So no specials there. Costco, we definitely saw lagging for a while. They were -- operate very bigger warehouses and there were limitations to how many people were allowed into a warehouse at a time. And I'm sure senior citizens were maybe a little less likely to show up, et cetera. But we definitely sense now that, that's normalizing. And then into pricing and so on in Costco, I will not comment in all details. I have not that same insights as Costco have. You have to ask them because I don't notice the statistics. I only know my own numbers. But clearly, I would say we have aligned our pricing a little more to the pricing in the channel. They were already competitors that were sold -- branded competitors that were sold at the price range where Philips HearLink latest products are now positioned. That definitely gave a positive reaction towards Philips HearLink and were part of the driving growth. So the system reacted as we expected. Otherwise, we shouldn't have adjusted our pricing. And that is, of course, part of the Costco model to continue to somehow improve pricing. On the other hand, I'm also sure that with that level of pricing, as you indicate, there was at least with the former KS, an uplift to the branded products, which quickly, you don't need to make much mess, have actually increased ASP in the Costco system, at least for a while. But then a new Costco comes out, there's $100 off and then they, of course, get a lot of attention, and that's how the system works over there.Most importantly, yes, the distance from KS to the branded products are narrowed. That should lead to more branded products being sold, everything else equal, which is good for the ASP in the system. However, as always, they are very strong pushers of the KS products. That's why they have them. So also, no doubt, you can see it when there's a new KS coming in.

[Maja Pataki, Head of Med Tech Devices Sector]

And just a quick follow-up question, if I may. Since we've seen the introduction of KS10 at Costco now with a rechargeable model, does that help you to gain market share in the independent segment because some of the Sonova or Phonak customers are not too happy about the rechargeable solution at Costco?

[Søren Nielsen, CEO, President & Member of Executive Board]

Time will tell, I cannot tell at this stage. It's only been out for 4 weeks. So there is, of course, a benefit that things are private label, and it's less obvious.

[Operator]

And the next question comes from the line of Lisa Clive from Bernstein.

[Elisabeth Decou Bedell Clive, Senior Analyst]

One question on the U.S., actually, 2 questions on the U.S. and one on France. Can you comment on the volumes in your U.S. stores that are coming from patients with an insurance benefit today? Is it 5% of patients, 10%, 30%? And I assume 5 years ago, this would have been, I'd say, less than 5%. Number two, can you remind us how many stores you have in the U.S.? And at this point, what does your branding strategy look like? How consolidated are those under -- how many brands do you have active? And is there some synergies to be had from consolidating those brands more? And then on France, could you give us some granularity on what has been the impact on unit volumes and average pricing? I remember, in Germany, when they changed the reimbursement, they saw something like a 30% increase in volumes, but ASPs, I think, declined some 15%, 20% given that the higher reimbursement could now cover the sort of basic level. And also just on France, can you just remind us -- I recall that the reimbursement in France was phased somehow. Could you just remind us of how that works and whether there's going to be a further uptick to the amount that is covered and the ability for patients to sort of top up beyond that?

[Søren Nielsen, CEO, President & Member of Executive Board]

Yes. Thank you, Lisa. I'll see if I get all of it. Managed care or subsidies is not a new phenomenon. But yes, over the past 10 years, it has definitely increased. It is now more and more typical that your health insurance offer some kind of managed benefit. But it's typically still with a significant end user payment. And there's also other ways to get access to the price level that you can. So yes, it has grown. We have no statistics that show to exactly what level. We can, of course, look in our own books. But I will not disclose that here, but it has grown over the past 10 years. We have different measures to push a little bit back on it, which we work on these days and see good success with. Then back to store network, we are around 500 stores in U.S. And they are all operating under one consolidated brand now. That's one of the things we have spent time on. It's under the HearingLife brand, which is a look and feel like Oticon in general, which is our global brand, but we have a high number of HearingLife stores as that was the backbone that we acquired many years ago. So we are through that consolidation in some stores. It's a new sign. In others, it's part of renovating a store, and we will spend more money in the coming years -- not more money, but continue to spend money on renovating and making the store experience a nicer one.And in France, yes, there is a boom in free to client DSP go down, and the volume go up. What we have seen so far, it has been on top of what of what was there, meaning there's not been an erosion of the existing sales, maybe a little bit on the contrary that when more people come in, even if they believe they come in to get free to client, they actually end up buying something themselves because they want the feature that's not available, could be connectivity, could be rechargeability, a little bit depending on what they look for. So there is [ NSB ]. The French market and the wholesale level have never been as high on the high end as some other markets are not as low -- on the low end and also the way the reform is designed. It is a relatively not flat curve, of course, but more flattish curve than you see in many markets. But on retail level, it's a high increase in profitability when you get so much more clients into the same capacity, whereas at wholesale level, it's a bit more dramatic to the ASP. But of course, the absolute numbers are also there, good and better. And again, it's more or less the same staff, of course a little more busy in the packaging area and maybe a bit more calling in for help and support. But other than that, you have to deal with it with the capacity you have. So a significant increase to the profitability also back to the upgrade and why. It's -- if you do the backwards math, it's a little more modest on the top line than on the profit, but that is because the scalability, of course, come in very dramatically when. And you have no chance to expanding the capacity, but just have to get it through with the hands you have.

[Operator]

The next question comes from the line of Carsten Lønborg Madsen from SEB.

[Carsten Lønborg Madsen, Research Analyst]

First, just bridge, could you maybe give us a little bit of an indication on how important is the Philips HearLink brand for you these days? Are we getting to 5% of sales, 10% of sales, anything -- any color you could give us there? And then in terms of your EBIT guidance this year, how many U.S. launch cost or U.S. establishing cost for your cochlear implant have you built into this -- to your guidance for this year, if any?

[Søren Nielsen, CEO, President & Member of Executive Board]

Yes. Thank you, Carsten. We cannot talk about how big Philips HearLink is, just say it's important. It's significant -- it's a very important part of our multi-brand strategy enabling being in all channels. So it's strategically very important, although we end up selling exactly Philips so another brand is less important, but it's very important for the accessibility to multiple channels that are somewhat competitors. And so it is important. And on the CI, yes, there is a ramp-up, but in the bigger number of things, you cannot see it. So it's not something you will see at group level. But of course, we need some extra resources when we start to do CI. But we have a significant basis already from the bone-anchored, then of course, we'll leverage on that going forward.

[Carsten Lønborg Madsen, Research Analyst]

And then just a quick one here in terms of managed care. Could I have your view on whether you need your own type of true hearing referral network, or whether you lift this without one of those? What's the right strategy going forward in order to grasp the opportunities in managed care?

[Søren Nielsen, CEO, President & Member of Executive Board]

I think that lies in the strategic thinking of the company. But of course, if there is a lot of consolidation, one have to be careful that it's not becoming a monopolist.

[Operator]

The next question comes from the line of Niels Leth from Carnegie.

[Niels Granholm-Leth]

Two questions from my side. Is it correctly understood that the headset market and your headset sales went from high double-digit growth in quarter 1 to negative growth in the month of April? And my second question would be about your capacity utilization in your clinic network. Have you already started to expand your capacity by extending your opening hours?

[Søren Nielsen, CEO, President & Member of Executive Board]

We will not comment on single months on sales. But yes, the comparison figures are very different between March, April and January, February, and therefore, the growth rate is very different. I think that's as far as we can tell you. Yes, we do everything we can to expand capacity when you're basically -- I don't know all the details of what's done in France to deal with it. But yes, I'm sure some have had to work extra hours to deal with the demand. That's also why when sales are accelerating like that, you also get -- it looks like some of the temporary savings are gone, but they're still there. There's just more money spent in the sales that come in. So there are some variables between the high sales numbers and the OpEx. But it's not the same as the savings on the travel and the exhibitions and so on.

[Niels Granholm-Leth]

And since you mentioned France, could you remind us what was the market growth in France in quarter 1?

[Søren Nielsen, CEO, President & Member of Executive Board]

Very dramatic, very high. Almost a doubling of the market in units.

[Operator]

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

[Oliver Metzger, Equity Analyst of Life Sciences]

The first one is also on your EBIT guidance increase. So if I do the math, organic top line guidance moves up by 1%, whereas some operating leverage, but also there should be a slightly higher as it had been compared to your full year results? So I see only mild support. Could you comment whether the increase is purely driven by the more profitable growth in your French retail business? Or do you see some additional benefits from planned savings or the extraordinary savings in the first half? Second question is a comment on your Diagnostic development. So for the market, you've reported this normal 3% to 5% underlying growth in the first quarter. But you talked also about a very strong performance for your business. So as I have -- think correctly in mind, over the first months last year, the decline is basically not so strong, basically only very mild decline. So could you elaborate about the factors that drive growth in the moment? Am I wrong? Or is pent-up demand potentially not the most meaningful driver of your business?

[Søren Nielsen, CEO, President & Member of Executive Board]

Yes. Let's take them one by one and see if we get all of it on the second one. The -- there are 2 factors in the extraordinary EBIT. It is a different reform. But yes, we definitely also see scalability from improved product mix and geography and channel mix. And therefore, improved EBIT, also Diagnostic coming nicely there. So it is a broad spectrum. Again, as René said before, the majority of the growth comes from other factors than the French reform, but a significant part of the reason for the upgrade, of course, come from the situation in France. And on Diagnostics, there is not exactly market statistics. And yes, the whole sector has been more resilient, but that's also because there's more disposables and calibrations and stuff like that. We were significantly down in installations of new equipment in the spring last year. And what is pent-up demand and what is us taking share and what is the market growth is not exact science. So our best take is the market is growing 3% to 5%. We are taking share and significantly outgrowing the market.

[Operator]

And the next question comes from the line of Julien Ouaddour from Exane BNB Paribas.

[Julien Ouaddour, Analyst]

And I have two also, please. I'm sorry, is if I missed this, and I joined a bit later, but on Communications, you seem to have experienced tops on your orders momentum since mid-March. So I just will say that this is linked with the fact workers are maybe coming back to the office and value has set -- is negatively impacted because it was more used for home office. And do you expect this negative momentum to accelerate as we will return to the office probably during or after just the summer? And just like a follow-up question about that, have you seen the same momentum for premium wireless headsets and gaming headsets? And my second question is just what would be the ideal scenario for you in order to reach the upper end of your fiscal year guidance?

[Søren Nielsen, CEO, President & Member of Executive Board]

Yes. Thank you very much. I commented somewhat on it earlier. And I think we talked about this selling into a channel and selling out. And there's no doubt there was a lot of ordering taking place and maybe same order placed multiple places towards the end of the year leaving quite some back orders to be supplied in the beginning of the year and some overstocking in the channel. And I think that's how you should read it that, yes, we see a little less orders to us, but the outflow is still relatively good and strong. The only thing where we have seen maybe an actual decline is there is less demand for these very lower priced simple quick take-home plug and play USB-related headsets. So the market is normalizing to a new high level, but comparison figures also being very strong, and therefore, the growth rate going down. Singly, it's difficult for us to really guess the market size. We can only stitch it together by adding our competitors' numbers, but how much is video and how much is headset and how much is gaming and how much is enterprise, it's not the same players in all the fields. So it's a little bit of an artwork to try to actually figure out exactly the market sizes. So we listen to our customers. We listen to what they tell us. Some of them share some data with us. And yes, there is something definitely with a little bit softening of the demand for some segments, but not the least, they also have to lower their inventory a bit. And then the second one, could you please remind me?

[Julien Ouaddour, Analyst]

Yes. What would be the ideal scenario for you to reach the upper end of the guidance?

[Søren Nielsen, CEO, President & Member of Executive Board]

Of course, significant release of pent-up demand in second half, how long is the French reform impacted the market, and do we see a dip afterwards or a continued strong momentum, stuff like that, I think these are the main variables.

[Mathias Holten Møller, Director of Investor Relations]

Okay. I think we'll end the call here. We've just rounded the 1-hour mark. So thanks very much, everybody, for participating today. Please do let us know in case of any further questions, then we're happy to help. We look forward to going on the road in the next couple of weeks and to speak with you all again. So have a great day, and thanks.