Demant A/S

CSE:DEMANT

Earnings Call Transcript 2021-Q2

[Mathias Holten Møller, Head of Investor Relations]

Good afternoon, everyone. Welcome to our conference call, which we hold in connection with our interim report covering the first half of 2021, which we released earlier today. As usual, we plan for the call to last a maximum of 1 hour, including the Q&A session. We are also the usual 4 team and representatives today, President, CEO, Søren Nielsen; CFO, René Schneider; the IR team, consisting of Christian Lange; and myself, Mathias Holten Møller.Søren and René, they will now go through the prepared remarks, and then we'll switch to Q&A afterwards. And the presentation is available on our website. Søren.

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

Thank you very much, Mathias, and thank you, everybody. Welcome to this walk-through of the highlights of the report on the first half, a very strong first half for the Demant Group after some -- a bumpy period with COVID and what have you. I think we can clearly conclude that our business is back on the feet and in really good shape and deliver very strong growth rate as well as profitability not the least within our Hearing Healthcare space.We have seen growth -- or organic growth over last year of 51% and organic growth of 51% and 15%, looking back to '19 first half, and it is in Hearing Aids, thanks to the launch of a number of new very successful products, not the least Oticon More that drive market share gains in important markets, including U.S. It is very strong performance in Hearing Care, boosted, supported by the growing demand from the reform in France, and it is further significant market share gains in the Diagnostics, whereas our 2 other smaller businesses, the Implant business still feel headwind from coronavirus and also the Communications business have post-corona experienced also larger-than-expected headwind from lack of demand. And with that driving unfortunately a negative EBIT in the period, but something we, over time, of course, believe will change.The negative EBIT primarily derives from in -- at the same time, significant investment in expanding the business in R&D as well as global distribution. Based on the performance in first half and expected continued momentum and market share gains in the second half, we have upgraded the guidance to the outlook for 2021.And the key figures are revenue growth of 53% in local currencies, as I said, and 26% against '19, 51% organically and 15% against '19. We grew OpEx 18% in local currencies, of course, reflecting sales growth, in particular in Hearing Care. There is a correlation between level of sales and cost as some of it are -- significant part of it is variable, but also temporary savings last year, including government support that are not reoccurring this year, at least not to the same extent.We have seen a significant temporary savings in second half '20, some in first half '21 and see them now phase out and on their way into second half. Better-than-expected EBIT of DKK 1.6 billion -- a little more than DKK 1.6 billion, corresponding to an EBIT margin of 18.2%, primarily driven by very strong profitability in the total Hearing Healthcare sector of segment of -- with an EBIT of 20%. The strong EBIT and strong performance have led to very strong cash flows that have more than doubled since comparable period. And the upgraded outlook is now a organic revenue growth for the group in the full year of previously 24% to 28% now being 26% to 30% and DKK 150 million upgrade to the EBIT with the same span range of now DKK 3.15 billion to DKK 3.45 billion and an upgrade to the share buyback of at least DKK 2.5 billion to now at least DKK 3 billion.And a little more zooming into a Hearing Healthcare area, it is really strong and solid performance, again, primarily across Hearing Aids, Hearing Care and Diagnostics. The very strong performance in Hearing Aids is driven by product launches and of course, also the market recovery, but a strong effect from market share gains, definitely not the least in U.S. among independent but, of course, also on the wholesale side from France.And similar strong in hearing care supported by the French reform. And in total, the benefit of the French report -- reform on top of normal expectations, we estimate round numbers to be on the revenue side around DKK 200 million with an EBIT effect of DKK 100 million, as much of this have had to be done with existing resources. Of course, some extra costs related to executing also that.Improved gross margin in first half driven by higher productivity and volumes and business mix versus last year. However, we still see some dilution when we compare back to '19 from growing rechargeable share. Very strong EBIT margin of 20%, supported by the impact from the French reform and temporary cost savings.If we look at the hearing health care market and the 3 main segments we serve, first, if we start with the hearing aids market, if we look at the total first -- grand total for the first half, we estimate a total growth against '19 of 6%, where we should expect if it was normal 8% to 12%. So we are still adding, you could say, in first half totally to the pent-up demand. It still primarily comes from NHS in U.K., the Veterans Administration in U.S. as well as less developed markets, our export markets, whereas the rest of Europe and North America commercial are closer to a normalization.U.S., clearly ahead of it, but a number of other markets are still lagging. Germany is lagging. France, of course, ahead of the curve. In Asia, China, South Korea are ahead of the curve; whereas Australia and Japan is a little more bumpy with continued lockdowns occurring, but still small compared to U.K. and VA and export.In CI, we still see headwinds in terms of the market, especially in Europe, where there's still not a normal activity level. It's not so much because the hospitals are not open, but the whole pipeline is not built up. So we hear stories from hospitals that are actually short of patients to be operated. So the whole machinery needs to get back in speed.On the bone-anchored, still faster pace of recovery. You can use it with a headband, the operation is simpler, the diagnosis and process around it is shorter. And Diagnostics market has seen recovery, in particular, in second quarter, we see growth rate above the structural 3% to 5%. But just a few words to pent-up demand on the hearing aid side. Our assumptions is, in reality, unchanged. We did expect an improvement during '21.We have added to the pent-up demand globally in first half, but still believe that excluding VA, NHS and export markets, we will see '21 coming out more or less in line with what it would have been without COVID, meaning catching up what has been lost in first half. And then all the pent-up demand from '20, we still expect will run into '22, maybe even '23 for some markets and channels. Whether it will be all of it is too uncertain, still uncertain, but I do believe that especially in the more developed commercial part of the market -- world, we will see people that are hearing impaired, getting a hearing aid to the same penetration level as normal, meaning that the pent-up demand will come back in.So if some is not coming in, it's either export markets or government-driven hospital systems that simply don't manage to catch up on waiting list. So good outlook on the market growth side for the coming years. That's still our opinion, but we cannot really predict exactly how it's going to happen.Looking closer at Hearing Aids, strong momentum driven by Oticon More, not the least in U.S. Market share gains across many markets. When you look at unit and ASP as in the table, in a 2-year sequence, 3% unit growth, which is, of course, not that much when we talked about the 6%, but that's our exposure, you could say. But when you look at value and ASP, very significant element.And if we had zoomed into the commercial U.S. market, I'm absolutely sure we're -- both in units and in market and value, we'll see market share gains. So when the other markets come back up, it will also come out in units that we have gained share, I am very sure. So solid growth in first half, driven by France, Spain, Nordic countries, slow recovery in U.K. and Germany. North America, strong in U.S. commercial, less in VA and slow recovery in Canada. Strong growth in first half against first half in China, South Korea and most of the -- and the Pacific, continued restrictions in Japan, has worked against the growth and same with emerging markets, where we see actually a nice development, but we are still far from historical level.And Oticon More and the other products are really good products. However, the product width of the portfolio is not the broadest. We brought out a single model, the most used one, a rechargeable RITE, and we will continue to expand on this technology. And next step is a flagship -- in all the flagship product families, a new nonrechargeable RITE style, also still some demand for -- or actually some significant demand for nonrechargeable, many existing users that are used to batteries prefer to continue with that. That's what they're used to. So I'm sure this will further drive growth.Then we have worked a lot with the perception of how to process sound on this new music -- not sound, music in this new processor, and we get a significant better music performance both when listening to music live, but also through streaming, many hearing impaired also enjoy listening to music. So this will also be part of upgrading the product. A new CROS solution, and we will also, during second half roll out a new portable charger. There is a little bit ramp-up to be taken care of, but it will gradually come out in the markets during the second half.Hearing Care, very strong performance. We have seen significant improvement across the business over the past 2 or 3 years. Our entire work with a more global approach to marketing, branding, processes, et cetera, is paying off as well as, of course, a strong performance in France, but also market share gains in France under the reform have significantly lifted the performance in Hearing Care. And we have seen, of course, support from vaccination rates that have supported market growth, but we have also seen strong launch of Oticon More into own retail that have supported a lift to the ASP.Hearing Implants, that's still, as I said, severely impacted in, especially, Europe, where we have the majority of our business, and therefore, maybe a little harder hit than competition. We see some recovery, and we definitely expect improvements during the second half. On the bone-anchored, things are -- have been for long ahead of the curve, and that's still the same picture.We have a number of important milestones in the Implants business lined up for second half. We will be launching a 3 Tesla approved version of our cochlear implant. So you can also do MRI scanning in 3 Tesla scanners, which has been an important call from the market. We have a very innovative solution where the magnet is well positioned and don't make any shadows, a little bit technical. So it's actually a very innovative solution we have.We have received the premarket approval for Neuro system in U.S. So we have started marketing activities and expect to be able to do the first surgeries end of the year. And then the bone-anchored will be supported in second half by new Ponto 5, very small processor that I'm sure will attract attention. And then we are introducing a new even simpler surgical procedure for the bone-anchored that will increase and enhance the clinical efficiency.Diagnostics business, strong momentum most markets and not the least, U.S. That's the biggest contributor, and it's a very broad-based growth. We have had a little bit headwind in the market for newborn hearing screening services due to reduced reimbursement. But even with that, the performance is very, very strong. And we can see how the business has grown 30%, more than 30% in 2 years. So we clearly, clearly take market share.On the Communications side, we can see that there is a 14% growth against last year but it came unevenly with a lot of growth in the beginning, low comp numbers, a lot of back orders, tougher comps in -- towards the end of the period and some slowdown. And when we, at the same time, have, as you can see, grown OpEx in the business to invest in sales, marketing, building the brand, but most -- not the least and most importantly, in R&D, then, of course, when the growth rate on the top line is not to the same extent -- going on happening to the same extent, we have, unfortunately, turned into losses. Negative EBIT here in the period, and we also expected in the second half then, yes, that comes out like that. And we, of course, expect to turn things up again and start to see growth in the business when we get through the worst of the comp here in the second half.So softening of new orders is the main driver. We primarily operate in -- and drive our business in Europe that maybe have been a little harder hit by slowdown than, for instance, U.S. And we are also a newer and smaller player and, therefore, maybe have taken a little harder hit on the slowdown than maybe some of the bigger players. But very ambitious road map, both in gaming and enterprise, including video that we see as a big and important part of the enterprise business going forward.And so the word to you René for a little more in the -- on the financial numbers.

[René Schneider, CFO & Member of Executive Board]

Thank you, Søren. So trying not to repeat ourselves, but here is the income statement. And as has been mentioned before, when we measure up against last year, it is, of course, a stellar performance, but also, of course, inflated numbers given the impact of COVID in last year. But it is 48% reported growth in sales, which is 51% organic growth, a significant improvement in our gross margin, in particular, driven by the Hearing Healthcare business. It is 18% -- sorry, 16% growth in our capacity cost, driven by the higher sales and also significant temporary savings and government support in the comparison period.One thing in particular I would just like to highlight on this particular slide is the income from share of profit after tax from associates and joint ventures of DKK 57 million, which is also reflecting a very strong performance in our not fully owned companies, not least our not fully owned retail operation in France, doing extremely well. And of course, we also have expectations for that going forward.So a brief view on gross profit, which increased 58% to DKK 6.7 billion, a gross margin increase of 4.5 percentage points mainly due to higher production volumes in Hearing Healthcare, but also supported by mix changes, given that Hearing Healthcare structurally has a higher gross margin than Communications leading to this 74.5% reported in the first half year.If we look against '19, it is the opposite picture as is well known to all of you, the fact that we see an approximate 1 percentage point decline from changes within Hearing Healthcare, meaning introduction of rechargeable hearing aids predominantly. And then just short of 2 percentage point dilution from a business mix driven by the inclusion of EPOS into the group, but now leading us to, again, group level of 74.5%, which is in the middle of our soft guidance of 74% to 75% gross margin range, so exactly in line with that. Just reviewing the OpEx in first half year, DKK 5.1 billion, just above that, 16% growth, which is fully in line with also the soft guidance and the components that we have provided earlier. And that growth does reflect a higher activity level compared to last year, again, driven mostly by distribution costs and administrative expenses. The extraordinary items in the comparison period of first half year last year was government support benefiting cost of DKK 350 million, partly offset by debt -- bad debt provision of DKK 150 million.If we look for more, you can say, a fair comparison of the development. Against '19, you will see in the graph that growth here is only 6% organically over a 2-year period and then 8% from acquisitions, again, predominantly derived from inclusion of EPOS. First half year this year, we also still benefited from temporary savings, but predominantly so in the beginning of the period and less so towards the end. And we estimate that for first half year to be negligible, so more or less none of that left.That leads to the already mentioned EBITDA of just above DKK 1.6 billion, derived from strong performance in Hearing Healthcare and a loss in our Communications business. But all in all, 18.2% EBIT margin, which is 3 percentage points up against, comparing to first half year of '19. So very, very strong and solid performance there.Cash flow from operations and free cash flow more than doubling against last year and also against '19 44% and 76% up, respectively, driven, of course, by significantly higher EBIT, but offset by increase in working capital. Modest increase in net investments and acquisitions, predominantly related to our Hearing Healthcare business and is back to what we consider a normal level. And also just highlighting our level of share buyback of DKK 1.8 billion.The balance sheet growth of 8% is 4% organic and 2% from acquisitions and 2% from currency. It is, again, goodwill from acquisitions and an increase in trade receivables from the strong top line performance of the business. Net working capital increased by 17%, again as a consequence of higher revenue. Our net interest-bearing debt is DKK 8.5 billion, and our gearing is 2.1, which is in the lower end of our general guidance of 2 to 2.5.With that, Søren, over to you to outlook.

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

Yes. Thank you very much, René. Just a few assumptions before we come to the outlook. We have seen the hearing health care market recover at least in line with our expectations in the first half, and we expect a further gradual recovery in the second half.And to be more precise, again, we believe the hearing aid market will largely normalize except for VA, NHS in the developed markets. And with that, expect the market in '21 basically to be what it should have been when excluding again, developed markets, export markets, VA and NHS. And we definitely feel the way things have developed. We are well on track for that. It can be -- of course, there is still some uncertainty to pent-up demand in second half, but we believe it's realistic to catch up on what was lost in the first half period.Normalizing of emerging markets and with that also NHS and VA can stretch into '22, '23, especially the emerging markets and growth of at least 8% to 10% in professional headsets, which is the normal level. We cannot conclude any more precise, they're not the statistics, that's still our assumption. And then in line with development in first half, our outlook assumes no material impact from potential supply chain constraints. There are many businesses that have such, but we don't expect any. That's due to our relatively fragmented distribution and infrastructure where we have stock many places around the world and customers, and we feel we are in good shape.Organic, that leads to an upgrade -- updated outlook where we step up the expectation for the organic growth rate from previously 24% to 28% to now be 26% to 30%. For Communications, we also expect negative organic growth in second half due to the high comps. We anticipate 1% from acquisitions, which is what has been completed by today. And we expect with the currency rates we know right now a headwind of 1% from FX. All in all, EBIT upgrade from previously DKK 3 billion to DKK 3.3 billion to now DKK 3.15 billion to DKK 3.45 billion.For Communications, explicitly, we also expect negative EBIT in the second half. And again, primarily driven by growing OpEx while we'll see a negative organic growth, of course, then that's also the expectation for second half. Effective tax rate around 23%. Gearing multiple unchanged, and we are safely within that range now. And therefore, also share buyback of DKK 3 billion against a previous minimum -- more than DKK 3 billion against a previously more than DKK 2.5 billion.And with that, let's open up for questions.

[Operator]

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

[Jannick Lindegaard Denholt, Research Analyst]

It's Jannick Denholt from ABG. One on each division, if I may. On U.S. commercial, obviously, as you say Søren, it's probably running above usual levels right now. Expectations obviously still going forward into the second half, that it will be a key growth driver. Can you give any flavor without giving any guidance, obviously, for your thinking into maybe the next year for U.S. commercial marketplace? Because obviously, that's also where you have a strong traction and good margins these days.And the other question will go to EPOS. So obviously, it seems to be a negative outlook for that division in second half. When we look a little ahead of that, is that a similar expectation for the coming years? Or should we already see next year a more positive traction in that market? I acknowledge you guys are a small player, but obviously, you need to make some kind of inroad in the marketplace.

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

Your line was not too good. So excuse me, if I didn't get your question totally right, then please come back. It's simply too early for us to start to guide on next year. We need a little more experience here in second half. But if your overall question relates to the development of the U.S. commercial market, then yes, I think we should all see a positive development to the U.S. commercial market next year. There is significant pent-up demand left in U.S. And yes, I am a fair believer that the U.S. society will normalize or my assumption is that's better to say that it will normalize further. And with that, we should see pent-up demand.If people start to go out again and socialize, the people that are hearing impaired and have not reacted and remained, but is primarily first-time users we have not seen, then I would also anticipate a nice growth rate in the business. EPOS, we'll come back at a later stage on the more long midterm guidance what we expect. For now, we relate to what we can look into here in the second half.

[René Schneider, CFO & Member of Executive Board]

Maybe I can add to that, Jannick, just even though we say that we have seen the U.S. commercial market realizing some pent-up demand, we are still at a place where there is up towards maybe 500,000 units still remaining in unsold units drive back from last year. So still a good outlook for that market looking forward.

[Operator]

The next question comes from the line of Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

Perfect. Two please, one on pent-up demand and the other on margins. On the pent-up demand, just playing around with the kind of out of gap as it's always dangerous, but with the market numbers, do you think it's a fair ballpark to say maybe 6%, 7% of sales, not for you guys, but for the market overall, is that in a pent-up bubble? I get you may not have an exact estimate, but as a ballpark, do you think that's even vaguely in the right area code. That's question one.And then question 2 on the margin side. If I'm thinking and not specifically for next year, but the normalization that will come, I guess there's kind of elements on both sides. On the one side, the incremental volumes where there is pent-up demand, i.e., NHS and things like that, are quite margin dilutive. But then on the other side of the coin, presumably, you guys have taken a big look at the cost base during COVID and had a real sense of what's going on there. So I guess if you were asked, how would you think about structurally the margins maybe on a more midterm basis, balancing that mix effect relative to what you could do looking at the cost base and your learnings from COVID.

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

So I will kick off answering your question here, Patrick. So on the pent-up demand side, you can broadly speaking say that given the 6% unit cost that we have -- or unit growth that we have seen in first half year, we have maybe added a little bit to the actual pent-up demand. So -- and even if you disregard NHS, VA, commercial market or export markets and the extraordinary effect in France, you are still at that same 6% to 7% growth over 2 years, where, you can say, underlying should have been around 10%. So we have just added a little bit to the pent-up demand overall.And the pent-up demand, as we have mentioned before, is still this 3.5 million units, where maybe 1 million is from government channels, VA and NHS. And as I mentioned before, you can find maybe up towards another 0.5 million in the U.S. commercial market. So that potential is definitely still there, and that's where we expect to realize part of that in second half year of this year, but another major part in '22, '23, but that's, of course, where the broad uncertainty lies.So it's all, you can say, broadly speaking, intact and in line with our previous assumptions. On margin implications, I think nothing has fundamentally changed to the fact that if we look at it on a business area by business area level, it is our expectation and ambition to continuously improve margin. And of course, if we are into a period where we would see, let's say, higher growth than normal or higher growth than market and we will gain market share, then it is, of course, only adding positively to our margin. But all of that comes with a disclaimer with regards to what is the business mix overall.

[Operator]

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

[Martin Parkhøi, Senior Equity Analyst]

Two questions, at least officially. If we start with your implied guidance for Hearing Healthcare in the second half because you talk about potential pent-up demand in the second half and so forward. And you still have, of course, the first half effect -- second half effect from Oticon More, now with this also the new extensions. But if I look at the midpoint of the guidance, then the organic growth rate in the second half for Hearing Healthcare, and correct me if I'm wrong, is below 10% with -- if we compare with the -- after you've adjust for the cyber attack back in the second half of 2019. So could you just walk us through your assumptions for the implied growth for the second half of Hearing Healthcare in the context of the fact that you see pent-up demand and you have new product offerings?And then just to be certain on the Communications side, again, I appreciate that you're not talking about next year. So let's stick to the second half of this year. You're talking about a decline to year-on-year, but what about sequentially, what should we expect compared to -- what should we expect for -- what have you baked in with respect to both OpEx development sequentially and also sales development to understand what kind of magnitude of EBIT loss we're looking at?

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

Yes. Thank you, Martin. First of all, I think you take the midpoint and there is a range because there are ups and downs. In one of the biggest uncertainty on the Hearing Healthcare side is, of course, also the recovery on the implants. It's the continued development in France. How long is this effect from the reform going to last.We don't believe we will see as much tailwind in second half as we have seen in first half from the market, and that is a big part of the uncertainty. So with that in mind and still general uncertainty to small lockdowns here and there. This is what we feel is right outlook for the year, even if we will see some catch-up of pent-up demand in a number of markets.On the Communications side, on the sequential, it is flat to slightly positive expectations. But we will, of course, also see a relatively high growth rate on the OpEx side in the second half and -- which will also grow sequentially. So everything slight -- flattish to slightly better.

[René Schneider, CFO & Member of Executive Board]

So Martin, just adding to that point, just have in mind, of course, when you compare Hearing Healthcare growth in first half year and second half year, the comparison periods are very, very different from a soft first half year to a very strong second half year when you add back the IT incident.

[Martin Parkhøi, Senior Equity Analyst]

I appreciate that, but you also have, of course, a complete new product portfolio this year. And then just to -- can I just follow-up just on your guidance. We have seen -- I think it was last month that Sonova went out with some -- it was Phonak and Unitron was out with some supply issues on certain of their products, I think it was BTEs, so no major issue. Have you baked any kind of things into a risk of supply issues in the second half? We also hear now the environment in China, not so much only on the components, but also in the fact of getting products out of there. Are you seeing any increased risk in the second half you also have baked into casual guidance?

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

With the visibility we have, we don't believe we will see a material impact on the financial side, not that we are not dealing with challenges. But having the operation in Europe and all our stock here and so on, we feel that there is very little risk we should see any -- or no risk, we should see any impact on the financials. It's not that we don't fight in exactly the same world as everybody else. But we feel we are well set up for dealing with these things. We have a new travel charger coming in, and there is some ramp-up limitations on that. But other than that, no issues.

[Operator]

The next question comes from the line of Christian Ryom from Nordea.

[Christian Sørup Ryom, Senior Analyst]

I have 2 as well. So the first is on the market development here over the last couple of months. So obviously, you report a strong development from -- a strong acceleration in the market from Q1 to Q2. But can you elaborate a bit on what you've seen more recently, so over June, July and into early August?And then the second question is to your market share development because as I read your presentation and your report today, you're actually reporting a loss of unit market share. So I think you're reporting unit growth of around 3% versus first half '19, whereas you're estimating the market to be up by around 6%. Can you help us a little bit with the interpretation of that?

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

Yes, Christian, of course, I understand both questions. We have not seen any material change to the market development in the later months. We continue to see the U.S. market commercial develop well, a little bit flattening of the development in VA. We see sporadic lockdowns in Australia. We see some soft development in Japan, good nice development in China and South Korea.In Europe, of course, some, a little bit -- starting to see a little bit slowdown in France from a very high level, of course, and therefore, still a growth -- significant growth over last year. We see still in Germany that are impacted by corona, where we are still kind of not really normalizing society at the same level as the rest of Europe. We see Scandinavia doing well and leaving things behind. And then NHS that are getting up to speed, but that have not at all catched up to the past. And then, yes, rest of Europe in relatively good shape. Canada is still soft or slower in the normalization, but we see that as caution, more than real problems, and see steady improvement. So no material change to the situation as we saw it just a few months back.On the market share development, I tried to point it out when I went through it. You're absolutely right, fully globally. But it is when we take out NHS of Europe, where we have a very high share that is significantly down. Then if you just looked at basically all our key markets commercially, we are taking also a unit share. And then adding to that, a very significant ASP improvement, then in value, we have no doubt we are gaining market share. And that's how you should interpretate the numbers.

[Operator]

Next question comes from the line of Oliver Metzger from Commerzbank.

[Oliver Metzger, Equity Analyst of Life Sciences]

The first one is on Communications. So you reported a slowdown. And also, you stated that gaming out from the Professional segment. So first question to that is, was the professional segment still in the positive territory in the first half? And do you regard the slower growth primarily derived by a weaker market environment or a base effect? Or do you see any other reasons for that? My second question is that wholesale of Hearing Aids, you recorded significantly higher growth to your own stores than to external customers. Could you disclose to which extent this growth was boosted due to the French Hearing Healthcare reform? And also, what scope do you see in future for further increase of your share of sales within your own stores?

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

Thank you, Oliver. I really had difficulties fully getting your first question. I don't know, René, did you get it?

[René Schneider, CFO & Member of Executive Board]

I think it was related -- and you can correct me, Oliver. But it was related to our comments regarding enterprise communication performance there, whether that was also negatively impacted and what was the driver of that, whether it was the market on our own performance. And have in mind here that we are the smaller player. Overall, so our insight to market is limited. But it is our feeling that, at least where we are exposed, the market has definitely contracted. But also in that market, we maybe have performed slightly below overall market. And the market, of course, on that side also contains video where we are a very, very new player in that.

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

And I think we have seen from one of the major players that they actually also confirmed that the headset market in Europe was contracting, whereas video was kind of booming. So I think there is a lot to this market. But again, as I also try to say, being the smaller player, when demand go down, maybe we are being slightly more squeezed than some of the major players. I don't see there's lack of competitiveness. But we have to, of course, grow the business and expand. And then U.S., we are not very strong and very big. And therefore, if the U.S. market, which it seems is growing nicely, then we, of course, are not getting our fair share of that.And on wholesale versus sales to own retail, it is the French reform that play in. It is, of course, also growing share, but there is also a little bit of running in the measurement of that or from when we didn't report, then we have not revisited the '19 numbers and how it's done. And therefore, there is a little bit of effect of that. But we have, of course, with a strong growth in own retail also seen strong growth in sales into own retail in our wholesale business.

[Operator]

Next question comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have one on Hearing and one on Communications, please. On Hearing, just kind of trying to understand it, obviously, the gross margin is pretty robust here. But clearly, with some very strong ASP tailwind as you look at it from a mix perspective versus 1H, and René would just love your thoughts whether you think this is a sustainable gross margin as you see kind of normalization in some of those lower ASP markets? Or should we be penciling in something else for 2020 or 2023, whenever that might happen on gross margin, specifically?And then my second question is on EPOS. And I appreciate you guys want to invest. But when you did acquire this business, there was a very clear commitment from you for this business to see positive EBIT, one, and for that EBIT margin to expand. And I'd love to hear whether your thinking on that has changed? And exactly what didn't go right this half year that meant we swung basically by DKK 70 million, DKK 80 million from positive to negative EBIT in spite of the revenues increasing pretty meaningful year-on-year?

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

Yes. Thank you very much. Gross margin is fine in line with our own kind of soft guidance, as René told about. So don't expect any significant changes from around that point. The lower price products also have significant lower cost and there is scalability in getting the extra volume through. So no meaningful change to that is expected. And on EPOS, it is quite simple. It is the top line that have not delivered in line with our own expectations and, therefore, quickly changing from slightly positive to slightly negative. But again, we are very trustful in our ability to generate organic growth and grow the business. A significant part of the investment is into the video space, where we see it as a prerogative for being a significant player in the enterprise going forward.So yes, we invest in R&D, but we also, of course, invest in making sure people know we are there and exist and in expanding the distribution around the world so we can get out to customers. So the expansion is in line with expectations. It's the top line that have disappointed here, especially towards the end of the first half.

[Veronika Dubajova, Equity Analyst]

So Søren, I guess for you to return to EBIT positive in 2022, you will need to see substantial revenue growth. Is that the way to think about it?

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

That is the way to think about it.

[Operator]

The next question comes from Carsten Lønborg from SEB.

[Carsten Lønborg Madsen, Research Analyst]

Just a question, again, to the gross margin in Hearing Healthcare. Did the rechargeable solutions put pressure on your gross margin? I can also remember that I think you said historically that you had to source components at a relatively high price because it was sort of a necessity to have these available fast.But is there also sort of a scenario where going forward, you could source components deeper, you could develop maybe the new portable chargers that you are able to produce so that you will not have this drag on your overall gross margin? And if you could also give us a little bit of a hint on -- as to how much of your sales is today with the rechargeable solution?

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

Yes. Thank you, Carsten. Gross margin, I think we have said many times that we have a number of initiatives to lower the cost of rechargeability, and we definitely will do over the coming period. But it will never be for free, and it will never have the same margin as a pure hearing aid. So there will always be a dilution compared to historical levels when they were nonrechargeable. But of course, the further impact on gross margin will fade out.Today, we see a very high share in the markets and channels and segments where rechargeability is out of up to 70%, whereas kind of total group, we are more like 30% of units, but that is because there is a lot of -- in Europe, in government systems, in export devices that have not yet become rechargeable.But of course, the long-term expectation is that ultimately, one day, maybe all hearing aids will be rechargeable. It's just something we will have to cope with. And therefore, of course, also a significant effort goes into developing models with significantly lower prices on, for instance, recharge just as you speak about.

[René Schneider, CFO & Member of Executive Board]

A few comments to the 2 questions also from Veronika earlier on the gross margin on Hearing Healthcare. As you all know, there are so many components going into that share of rechargeable. What is the unit growth, elevated freight costs at the moment, ASP, so on and so forth. But the overall message is that we feel comfortable that we can maintain the gross margin level that we are at currently. And that's our firm expectation.

[Operator]

The next question comes from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

Two questions from my side as well, please. Søren, I was wondering if you could share your thoughts about your VA market shares. We've seen this tremendous improvement in May when you launched Oticon More. And now it's come off a bit. This is a bit of a different pattern than if we look back to 2018, where you had a significant step-up with Open and then it continues to go up. So is it because VA channels are overrun, so it is a bit difficult to get new customers on the product? Or how shall we think about market share development going forward for you in the VA channel over the next couple of months based on what you're seeing?And then my second question relates to your guidance. If we look at the guidance hike of the 200 bps on the top line, what has changed obviously is also that this time around, you expect softer growth for EPOS presumably. So could you help us understand what is driving the upgrade on the hearing aid side. Is it France? Is it the commercial market in the U.S. where you're taking greater share. It'd be just great to understand the various factors.

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

Yes. Thank you very much, Maja. On VA, it's right, we have seen quite of a step-change from short of 10% to above 14%. And I would say that there's 3 elements in growing further. Better access, it is still literally impossible to get in and get a face-to-face meeting with VA staff to explain about the benefits of our product. So no doubt, we have primarily seen people that were already familiar with Oticon picking up. So access needs to improve.Then also some element of product line expansion. We have only Oticon More in a rechargeable rig. It is the most used. But VA has kind of a slightly different product mix than rest of the U.S. market more. Custom products also are still quite some with disposable batteries. So getting more products in, i.e., the disposable battery version we launched now, we'll get on in November, and then hard work to improve all these many details, it takes to be a good supplier to VA. But access, I would say, right now, access to sales calls is the limiting factor for short-term moving things further.And then on the guidance, it is continued market share gains. It is momentum in the business. That's the main driver for further growth in second half. The expectations to the market recovery is in line with our expectations. So you should read this as a strong momentum in Hearing Aids, Hearing Care and also Diagnostics, and the French reform, as one example, have shown to have a longer-lasting effect than first anticipated.

[Maja Pataki, Head of Med Tech Devices Sector]

Okay. Great. Can I just follow up on the VA share, please? Have you seen anything from the VA clinics that they've started to be a bit more hesitant again, given the fact that U.S. hospitalization rates have started to increase? Is there anything that you've heard from yourselves, totally anecdotally?

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

No.

[Operator]

Next question comes from Michael Jungling from Morgan Stanley.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

I have a few questions. Firstly, when it comes to Communications, what do you make of the slowing orders in Communications towards the end of the quarter? And what's the feedback from your distributors and customers sort of telling you, was there a destocking event? And did you even see cancellation of orders?Secondly, on OTC. Can you comment on your thoughts around conversation boost coming out with your next-generation Apple AirPods Pro, I think they're coming out in a few months' time. And specifically sort of the ad highlights that it helps people with mild hearing loss and uses beamforming microphones. Are these sort of products that start to worry you tackling some of the hearing aids that you would normally sell in that category?And then thirdly is on the CMD. Can you comment on whether you intend to give some sort of midterm guidance in that CMD next month. Will you showcase new products? Will it be an OTC strategy that you may highlight as well or some sort of M&A event? Just sort of color what sort of areas you may address in the CMD.

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

Yes. Thank you, Michael. First, on Communications. It is the distributors that have primarily we hear a lot on stock and then some decrease, of course, in demand as people are no longer sent home to work to the same extent and the channel is kind of full for that. So we also hear about converting into discussion, which gives a little bit stalling of decision taking in how do I actually equip my office? What is the equipment I need, video versus headsets and speaker phones and so on?So there is actually a good activity out of the channel, and we see it start to pick up with the customers we have. But they -- for the products we sold the most of during COVID have basically seen a stalling. We have -- not the cancellation of orders. It's not like that. It is just a flattening of the demand from us to them that we have seen and that lasting longer. Of course, because at the other end, maybe the dip was a bit stronger than anticipated and a little more longer lasting than anticipated.On the OTC, specifically, the AirPods, I would put them in the broader categorization. The way I have talked to Apple and know Apple, it is just very important for Apple that people that use their products can have benefit from them. And yes, now including if you use them to actually listen to things. But I still think there is a tremendous step that I at least not yet accept it, that is, that you wear headphones when you are in social situations like restaurants and others and use them for listening.Hearing impaired people, especially mild, moderate, are very hesitant to -- even if they have a suspicion, they have a hearing loss, to admit it's there. And it would take a significant change to stigmatization around hearing loss and so on. So no, I do not see this as other than trying to make your AirPods work better, if you have one and you believe you have some hearing challenges.If anything, then positively, it could add and draw more attention that you actually have a hearing issue because if you try to switch this feature and you actually hear better, so maybe you will feel that it's time to have you hearing checked and go see a specialist and get a real product that you will actually wear where it's most needed. And then on CMD, no surprises planned.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Okay. So for the CMD, is it more of an educational session then rather than trying to produce anything that is sort of different towards how you want to tackle things in terms of strategy?

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

We will try to give a little more in depth to some of the businesses we operate that. Right now it's -- where there's uncertainty related and try to give our best view on how things could develop so you all feel as enlightened as possible.

[Operator]

The next question comes from Michael Hannig from Stifel.

[Michael Hannig, Research Analyst]

I have 2, please. First one on the Philips HearLink. Can you shed a bit of light on it? I know you wrote that it is doing rather well in the announcement, but a bit more detail would be helpful, also on the success within the Costco channel. And further, it would be great if you could give us a rough indication of how big the Costco channel is for you? The second one is on Communications. On the Communications slide, you wrote that growth in H1 was driven by gaming. Can you give an overview on what of the 16% growth can be attributed to gaming? What would the audio side?

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

Sorry. Your line is really weak. I have difficulties hearing your question. It's not very good sound quality. Could you try to repeat the second question?

[Michael Hannig, Research Analyst]

Sure. On the Communications slide, you wrote that growth in H1 was driven by gaming. Can you give an overview on what of the 16% growth can be attributed to gaming? And what would the audio side?

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

Yes. Understood. Let me first comment on Philips HearLink. Philips HearLink is a relatively broad-based growth across channels. As we have said, our primary focus at the beginning have rightfully been the Costco system, and we have definitely increased our position significantly during the first half. And also we have launched the Philips brand in Asia, China in particular, and have seen very good growth coming from that. So we are now also entering a number of other markets with other channel strategies and see good interest in growing the Philips brand. So it's getting more and more broad-based, and it's a good momentum around the product.On the Communications, we cannot comment any further on the split between enterprise and gaming. There was also a significant boost in the gaming market during COVID, and we have also seen some slowdown there. There's a lot of users that got a nice new headset during COVID. But further than that, we cannot comment.

[Operator]

We have one final question from Kate Kalashnikova from Citi.

[Kateryna Kalashnikova, Director & European Medical Technology Analyst]

It's Kate Kalashnikova. I've got a question on OTC. So a self-fitting hearing device was launched by your competitor nationwide this week as we await FDA regulation for OTC devices. Given that there is already a self-fitting hearing device on the market, how much sales that can be held of actually from the OTC devices compared to the additional hearing aid? What would you be most concerned about seeing the FDA framework for OTC devices when it comes out?

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

I'm sorry, again, your line is really tough. I'm not sure I got your question. Was it how people could release things prior to the FDA regulation?

[Kateryna Kalashnikova, Director & European Medical Technology Analyst]

No.

[Mathias Holten Møller, Head of Investor Relations]

That what we would have concerns with the...

[Kateryna Kalashnikova, Director & European Medical Technology Analyst]

No. As we await FDA guidance regulation for OTC devices, as there are already self-fitting devices, how much further can be held of for OTC devices? And what are you most concerned about seeing potentially the FDA framework on OTC devices?

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

I'm sorry, I simply don't get the question.

[Mathias Holten Møller, Head of Investor Relations]

No, no, I think you're asking about the concerns, the major concerns around the OTC category and what would come out. And I think we're pretty we're pretty uncertain as to what exactly the category will look like. We don't have any clarity on that. But through here, the industry organization in the U.S., we have published a position paper on the OTC category and he has recommendation as to what regulations should look like in his opinion.And I think that's a pretty good proxy for looking at the important areas that we view the things that we'll be looking at in the coming OTC framework. Other than that, I don't think we can we can really say much on OTC. It's still kind of in the making and no further clarity on either timing or contents.

[Kateryna Kalashnikova, Director & European Medical Technology Analyst]

There is no reason to expect another delay in publication beyond 18th of August.

[Mathias Holten Møller, Head of Investor Relations]

Yes. So 18th of August was the statutory deadline last year in 2020. That was a 3-year deadline for the FDA to come out with regulations. Obviously, that was not met. And then we've heard from the FDA on several occasions to these unified agendas and a few other means. And basically, I don't think they've given any clarity in terms of when exactly they expect to publish this except we've seen several dates and deadlines that have subsequently not been met. So I don't think we have much clarity there, unfortunately.

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

But in line with here, we definitely would like to see it out. That would only bring clarity. I'm very skeptical that it will bring much news because FDA is about safety and claims. And whether or not there is a dispenser that fit a hearing aid basically don't interest FDA. It's just important that if it does, not include one, then it's safe for the user and the instructions are proper. So that's why I think you have seen Bose coming out with their best shot at OTC device already under the existing regulation, and I don't expect it to be fundamentally different.So let's get the full clarity and transparency and then see who actually plans to release some and we will see if the market responds. As you have seen, probably seen the pricing of OTC devices has had a trend to grow in order to maybe help somebody show profitability one day, and it's not very far from what hearing aid actually can be bought for these days. So I think the whole theme is slightly exaggerated in importance.

[Kateryna Kalashnikova, Director & European Medical Technology Analyst]

Actually, on the price of both the self-fitting hearing devices, $850, it's actually quite high, given that self-fit is not included. What are your expectations for a potential price stage for OTC devices, given likely high rate of success, given that there may be higher sustaining costs because it's a first-hand sale, not a replacement device.

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

I cannot give any further flavor to pricing development on OTC. You can follow the development and see the various players positioning. You have Alango, you have Bose and a number of other less-known players. And I think they are the best. Right now, the good thing is already out there. We see how the market reacts. We see how the whole thing will develop. So we will watch out for that in the coming period. And would actually like, again, clarity from FDA what it is they are going to regulate. So with that, I think we should round off and say thank you for questions, and thank you for today. Mathias, any closing remarks.

[Mathias Holten Møller, Head of Investor Relations]

No, I think -- yes, that was it. So we talked about it before, Capital Markets Day being planned for 27th September. We still hope to see as many of you as possible in person but more to come on that in due course. Otherwise, thanks very much for participating. Let us know in case of any questions. We're going on the road, mostly virtual, but also in person this time. So looking forward to connecting with you in the next couple of months. Have a great day. Thank you.