Earnings Transcript for DEMANT.CO - Q4 Fiscal Year 2020

Mathias Møller: Good afternoon, everyone. Welcome to our conference call, which we hold in connection with the release of our Annual Report for 2020 earlier today. We plan for the call to last an hour, including the Q&A session. As always, we are also represented by President & CEO Søren Nielsen; CFO, René Schneider, as well as by the IR team, Christian Lange and myself, Mathias Møller. Before we go to Q&A, we'll be going through a presentation of our results for 2020, outlook for 2021. So I hope you all have it on your screen. If not, you can find it on our website, it should be there now. With this, very happy to leave it to you, Søren.

Søren Nielsen: Thank you very much Mathias and welcome everybody to this call. We have an agenda for today, where we'll take you through the highlights and talk a little bit about the different businesses and then, of course, give an update on recent development, as well as the outlook for 2021. René will in between give you a deeper dive into the financials. First thing to mention, which I'm sure you have all noticed, is changing to reporting structure. We have with the inclusion of EPOS and general evaluation come to the conclusion to change a bit on the way we are reporting our numbers. And the biggest change is to make two individual segments for hearing healthcare, Korean hearing aids, hearing care, former retail hearing implants and diagnostic and then as a third one for communication, constituting at this time EPOS. They will have -- the two segments full P&L and make a comparison year-over-year, of course, across all lines easier, but also because the two have follies [ph] overlap and she had service elements then within the human health care segment. We have changed names on two sub-segments; the hearing aid wholesale is, from now on, described as hearing aids. It is the manufacturing production wholesale business and it does hearing aids, therefore hearing aids. Hearing care is the form of retail. It is where we do the service element of the business, where we are dealing with inducers, where we are handling the counselling process and delivering the actual hearing care, including fitting hearing aid instruments, but also the broader human care aspects, therefore hearing care. In our view, the right name for that business. And then, we have chosen to split up the reported revenue on hearing aids and hearing care. And also including in hearing aids, the wholesale value to hearing care to make sure we can fully size the actual hearing aid sales in comparison to our key competitors, to give also a better indication of growth levels at this level to compare to the underlying market growth. On the other hand, we put together now CI and pass [ph] when it comes to the growth rates; they are still growing at different speed and paces. But as we are approaching entering into US and a more global footprint and the CI, it is the two businesses together that we think is relevant to report on, and there will always be seasonality and different life cycles and so on. But all in all, it is the growth that we can generate in the implant space. That's the primary interest. So with this as a starting point, the highlights of 2020 annual report, you can see the bar illustrate the revenue side of things, all in all, a decline of 13% organically. But adding on EPOS indicated in the yellow bar, we end up with 3% decline reported and 2% in local currencies. We have a gross profit decline coming from two elements, half of it approximately from EPOS and the other half approximately from Coronavirus, also scaled in operation. And also in the second half, a little bit different recover rates between hearing care and hearing aids. Adjusted EBIT in 2020 -- adjusted for one offs related to EPOS is, of course, a low EBIT for the year of DKK1.3 billion against the DKK2.1 billion last year, that was also low due to the IT incident. So, not the best years to adjust the company from, but as we're going to get back to look at second half, we made it in with DKK1.5 billion, and I'll give more to that, and that, of course, indicates a strong recovery in profitability in the second half. Strong free cash flow, very tight control of working capital and improvements in many areas, of course, also a smaller business, but all in all, very well managed and, so far, both on payments and debentures and inventory, etc. coming out very, very strongly with significant free float of free cash flow from the business. Key takeaways, Group's local currency growth of 14%, which is in the upper end of the latest guidance from December of 12% to 14%, indicating a good in to the year and a good resilience, not the least of the hearing healthcare business, both retail and wholesale. But in particular, diagnostic despite of new restrictions, we saw some stalling off the recovery but still the business carried through in a good manner. And then, we continue to see strong performance of the communications, a group of EPOS, supported by increased production capacity, so we could deliver to, again, a strong market growth. OpEx, including the addition of EPOS, developed flat in local currency, that reflects a number of temporary savings, sales and marketing lists, travel etc. but also structural savings that we commented on earlier, primarily in the hearing care sector in US North America, all in all, leading to strong profitability in the second half of DKK1.506 billion before one-off, and an EBIT margin of 17.9. And again, a very strong cash flow from operation. And as you can see here, the revenue across geographies, it is been stronger in Europe. The overall growth comes from both, EPOS, that is strong in Europe, lower comparison figures due to the IT incident, it took quite a while until we got our UK operation on the retail side up running, and a number of other European assets were also longer in the recovery, into contradiction to North America where the IT impact was faster dealt with. But on the other hand, in 2020, we have seen a slower recovery in particular in the VA channel for Europe. The same goes for the NHS, that have had a little bit out of sync with the underlying market development during second half, actually a quite weak third quarter because of eating into Brexit stock, but then a strong fourth quarter because it was filled up again. But going out to clients, we saw a decline towards the end of the year in line with the new lockdowns in UK. In Asia Pacific, strong recovery, generally speaking, strongest in China where we have seen significant growth to our business. And in Pacific Australia, New Zealand has strong growth driven by self-comparison figures. The longest recovery process of the IT incident was in Australia. In other countries, especially emerging markets, we continue to see quite severe impact from Corona. If you look at business split across geographies, you see quite a bump up to Europe, that again EPOS being stronger in Europe than in North America, but also the faster than average recovery in Europe versus North America. So, also a little bit out of normal balance still. And you can see below that hearing aids and hearing care are very equal in size when it comes to revenue, of course, very different number of instruments and clients being handled as it's two different points. In the value chain, 10% in diagnostic, 9% in communication for the full year, and 3% on hearing implants. And just a little bit more, the hearing healthcare in total significant revenue improvement since the low point in spring, but still below normal level, minus 5% underlying organic growth and gross margin in the second half expanded with 0.5 percentage point, which is mainly driven by faster recovery in the hearing care, as they are not exposed to channels like NHS, VA and emerging markets. Material savings on OpEx saw an organic growth of minus 9% and therefore a material lift to the profitability coming in at DKK1.425 billion or a margin of 18.7, which I think, given the corona epidemics consequences on our business, is quite strong performance. And on the hearing aid market reviewing the full year, and we have updated this table with all the latest statistics, and we earlier estimate the Q1 to be around minus 5%. We can see from the markets, we have statistics, it came in minus six, we estimated minus 50 on Q2, it came in 48. Q3 was only down 3%, whereas, Q4 is down 4%. But again, if we correct a little bit for the NHS being a little bit out of sync with it, it was probably even a little less in Q3, and a little more in Q4. So a little less positive on Europe than this reflects, but you can also see how North America also the commercial have stalled a little bit towards the end of the year, whereas VA basically have improved throughout the entire period, but still end Q4 for 15% below last year. And we have to remember that on top of this, we should have had an average 5% growth. So it is still quite a significant gap. And our estimation is that the global hearing aid sales is probably down more than 3 million units in 2020. And that leads to the entire discussion of magnitude and timing of pent up demand. Hearing aids, not that much more to add than what have been said. We saw very fast recovery across Europe in third quarter. All the countries where the pandemic basically disappeared and normalized, we quickly saw uptake especially on the commercial side. But we have seen stronger resilience here towards the end of the year, and we have simply found a way to operate, all customers have to operate on the commercial side, and only the main hospital systems have seen significant gaps. We continue to drive very strong organic growth in Asia, driven by the launch of Philips Hearing Solutions in China. And again, we launched our new flagship product lines, 30th of November announced it, we started shipping mid-December, so little material impact in 2020. But we are off to a good start and we'll position for growth in 2021. You can see units being down 18% in the year and ASP a bit up that's primarily channel mix and the way the revenue played out. As you can see, we are very far in the introduction. We basically only missed a few countries here in February, and then Brazil and China come later due to homologation processes being longer. Hearing care, former retail, underlying minus five 4% when we correct for the IT, and that again, shows the better recovery but in reality, it's more the exposure to geography. And we have seen very strong development in Europe despite of new lockdowns in Q4. Of course, UK have seen some impact and, of course, also a country like Portugal and being away from normal but again, unless people are really prevented from going out, we normally see the business come back up and being executed in line with opticians and dental and so on and special care. We have seen positive growth in Australia. But that is, of course, to a large extent driven by low comparison figures from IT as that was the most impacted region we had in 2019. And a little bit slower recovery in North America fully in line with the underlying market. So nothing special here. Implants is the business area we have that have the biggest impact on COVID. As of today, towards the end of the year, we again saw how high numbers of hospitalization led to postponement of elective surgeries and especially the CI area, CI business, is significantly impacted across Europe, whereas the [indiscernible] do a bit better because you can do upgrades, you can do -- try it with a headband and so on, and above opportunities that are not present for the cochlear implant business to the same extent. And, all in all, a minus 16% revenue growth in the full year, strongest in first half, but also significant in second half. And diagnostic, doing very well in the second half and ending the full year with just one percentage down from 2019. Very strong performance in second half in Europe and Asia Pacific, a little bit slower in US, it is driven by good new strong product portfolio from Interacoustic, as well as significant growth in the balance system. Adding significant market share gains, we still see our business taking share in basically all markets across the world. And then EPOS, communication, significant growth acceleration as the epidemic started and strong again in second half. We have seen some normalization of freight rates which have improved the gross margin moving into second half. We continue to expand quite significantly in the R&D area and distribution activities and of course, also in terms of sales and marketing. And even despite of that, we have seen a very nice EBIT here in the second half of DKK 81 million against DKK38 million. We are, of course, as you can see below, some of the peers in the industry. But this is due to investing in growing a much bigger business. We have not been able to spend all the one-offs estimated on building the brand, as much of it has been postponed or done virtual, but we still think we are off to a very good start with EPOS and have managed well to steer through these limitations. René, a word from you on financials?

René Schneider: Thank you, Søren. So a little bit of repetition and a little bit of extra detail here, but I will comment primarily on H2 as that is the most interesting to observe here. But as shown, it is still the revenue growth of 11% constitutes in 2% organic growth, 12% from acquisitions of which 10% related to EPOS, and then a headwind of 3% from currency, higher growth in production costs leading to an 8% growth in gross profit, thus a reduction in our gross profit margin from 74 to 72.5. And I would revert with a little more detail on that. Looking at the cost line, they clearly demonstrate our extremely cost-conscious approach here. All in all, adding together a 3% drop in reported cost of goods sold, 9% up due to acquisitions and 9% savings from organic savings. I will also highlight the EBIT repetition, 1.5 billion just above that, very strong number with 17.9% EBIT margin. But of course, with one-off tailwind on some of the coastlines that I will also revert to. On the EPOS one-off added up to DKK90 million in second half year, constituting a little bit different than what we had originally anticipated, DKK52 million in a one-off marketing cost rate to EPOS, and then DKK38 million in inventory re-evaluation as we have finalized the purchase price allocation of EPOS, but this is an accounting and non-cash item. So, a little bit more detail on the group's gross margin. The main driver of the group's decrease in gross margin from in second-half year from 74% to 72.5% is a 2% dilution effect from the consolidation of EPOS, that just structurally has a lower gross margin. But then, partly offsetting that, we see 0.5 percentage point from improved gross margin in hearing healthcare driven by predominantly the change in business mix, where our hearing care business is growing at 9% in local currency and does slightly higher than the other businesses. For the full year, we see a similar impact from EPOS. But of course, when including first-half year, we do have a severe negative impact of the missing revenue on the hearing healthcare side in first half year and thus having a negative effect on gross margin from that. On OpEx, as you can see on the graph what I mentioned before, so basically keeping OpEx flat in local currencies, but having minus 9% organic growth. It is primarily driven by significant temporary savings in sales and marketing, traveling events, salaries, which is really the primary driver of savings. And then in addition, we have realized DKK125 million from structural savings predominantly related to our hearing care business in North America. But also apart from that, broadly based, DKK100 million from government support schemes globally, and then DKK50 million from reverse law provision of bad debt, where we took DKK150 million in first half year and then reverted a DKK50 in the second half year, due to an improved outlook on that parameter. So, this leads to the strong profitability that we have seen in second half year, a DKK1.5 billion in the upper end of our latest guidance of DKK1.4 billion to DKK1.55 billion. So, all in all, a good half year on that account, but with a few one offs included, as mentioned previously. When looking at a cash flow, this is really a highlight of the year and where we managed it quite strongly. So, looking at second half year, we see a very strong cash flow from operations and a very strong free cash flow driven by high EBIT, tight working capital management, the fact that we have suspended, at least temporarily, non-essential investments, and, all in all, leading to a free cash flow increase of 141%. In addition to that, we've also seen a lower M&A activity than normal. So this leads us to the balance sheet which has been very stable throughout the year. But looking at it fully over a full year, it increases by 1%. We do include 6% from the consolidation of EPOS, so it's 6% acquisitive growth, but it is offset more or less by minus 1% organic growth and minus 5% from currency. And the fact that we have, as mentioned before, had tight working capital management, which leads to a reduction of 24% net working capital and over year end, net interest bearing debt declined 13%, leading to a gearing multiple on historical earnings numbers of 2.8 and basically, not fully in line with our target of 2 to 2.5 [ph]. But that is due to the suppressed EBITDA, which on a more normalized basis would have been clearly in our guidance range. And then lastly, just for a backup housekeeping, this is the specification of one-offs and I would just highlight the effect on distribution costs for the full year DKK89 million, which does relate to the extraordinary spending on establishing the EPOS brand. This is the only line that has real cash flow effect and it is significantly lower than the DKK100 million to DKK200 million that we expected in the beginning of the period. It is a combination of delayed activities, but also an effect of savings due to conducting many activities in a virtual way, instead. So, with this to the outlook, Søren.

Søren Nielsen : Thank you very much, René. And just before going into the outlook, a little bit about recent development and outlook assumptions. We continue to see the hearing healthcare market being impacted by Coronavirus but far less than we saw in spring, we and the world have learned to live with the COVID. And as classified the special care we have also opened, of course, we see some effect in UK and also in Portugal right now, but nothing that can disturb the big picture. And then, of course, some slower recovery in NHS, in VA, emerging markets. But other than that, a relatively stable development despite recent restrictions put in place. And also, no doubt that with the effect of these in positive way, case numbers go down, hospitalization go down, death cases go down, and generally speaking, across most countries, in the countries where we operate this has a positive effect on people's ability to go out and seek our type of help. The area most impacted, as I said, is the implant where we are needing surgery expertise and hospitals to be open for those kind of patients, and that, of course, impacted. Communications continue to see strong demand for professional headsets. We expect in the year to come that it will be a little less working from home and a little more in the office, but still with the highest restriction on traveling and so on, which will further expand the market. So when we look at outlook, what is the assumption for making an outlook for 2021? We expect a gradual normalization of the hearing healthcare market during first half, based on the fact that it again to enter summer, spring we saw the effect last year. On top of that, vaccination programs that in most of the markets we act in, or at least were the primary market for our business, is developing quite nicely and fast. And looking at the 65 year population, it will not be many months until most are vaccinated. So that should indicate a good recovery at least coming into second half. We'll have some slower recovery in government channels, as they have to normalize the hospital services and it will take longer than the commercial markets and some emerging markets, for sure, across implants, diagnostic and hearing aids will last possibly into beyond 2021 and into 2022. We expect some release of pent up demand in second half. Some will not be released until 2022, I would actually think the primary part, we estimate that if we allow ourselves to exclude the government channels and export markets, then 2021 could look like 2021 would have looked, everything else unaffected by COVID means a strong second half with tailwind in line what we saw in 2020. But we have no assumption about any significant negative impact from COVID in second half. If that occurs, we would have to come back. That is not part of our baseline. We believe vaccination programs will be effectual. And in the headset space, we believe that market growth will go down but still be in the line with the normal level of 8% to 10% on top of what we have seen this year, so still a significant expansion of the market compared to just a year ago. And in that market, we also expect to be able to take a share. That leads to an outlook where we organically believe we can grow 23% to 27%. Slightly more on the hearing healthcare side and on communication, we will have an acquisitive effect as we know it, as of today of 1%. And as of today, with today's exchange rate lose 2%, that will give us EBIT with a low point at 2.85% and a high point at 3.15% and skew toward the second half, but of course, with the biggest growth in the first half. That's very obvious. That's where the business really suffered in 2020. Effective tax rate around 23%, gearing multiples coming back in between 22.0% and 2.5%, and please note, we do no longer have this effect of leasing contracts etcetera just speak about 2.0% to 2.5%. We are almost there today and with a full normalization of EBIT, we will definitely be there and therefore, we feel quite sure that we can buy back shares for more than DKK2 billion, as that is, we also expect a significant surplus of cash even after some acquisitions and we will return to a share buyback program to do that. And then, as we have included and I will not comment more on it here, we have also listed, you could say, the things we always mentioned as a mid to long-term outlook. We expect to take market share in all the businesses we are in. We expect to be able to -- business area by business area to improve profitability show scale, less in the retail than in the product businesses, the wholesale businesses. And of course, then what really varies is the mix between the businesses, how they develop, some grow 2%, 3%, 4%, 5%, some grow 15% to 20%. And therefore, these mix effects, of course, end up impacting the EBIT margin, that's why we don't guide on it. So it does effect development, as well as acquisitions that are typically having, at least in the beginning, some dilutive element. No changes to gearing levels, and again, capital allocation, things that are not well spent on acquisitions, we will return to shareholders in form of a share buyback program. And with that, we open up the floor for question and answers.

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

Patrick Wood : Perfect. Thank you very much for taking my questions, I have two, please. The first one on EPOS, I'm a little surprised on the guidance that you gave, I would have thought it would have been a bit stronger, just given the backlog and the strength of what we're seeing in the markets, maybe just a little bit of color around that. Why you felt that was the right range, given how strongly performance has been of late? So that's the first question. The second, I'm just curious, there's obviously a lot of pent up demand on the hearing aid side. And if you have, let's say, a slightly slower spot 2021 than you expect, and so more of the demand is going to get pulled through into the second half year than would be otherwise. Is it possible for the retail establishments to really work through that backlog fast enough? I guess, how much flex is that within retail to work through and chanted [ph] our backlog? Or to some of it, even more they get pushed into 2022, or do you think they can work in the second half? Thanks.

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

Patrick Wood : Okay, thank you, and thanks for the incremental disclosure. Thanks.

Operator: And the next question comes from the line of Michael Jungling from Morgan Stanley. Please go ahead.

Michael Jungling: Good afternoon. I have three questions. Firstly, on the guidance. I suspect that you saw the consensus when it was collected and it gave you the opportunity to come in a bit above and still achieve against a positive share price reaction, but you came out with quite a storm, quite unlike to what demand was normally. Why'd you choose to do this, especially when you also highlight that the world remains uncertain? Question number two on EPOS, do you expect the market for office headsets and gaming headsets to grow in the second half when you give market growth guidance of 8 to 10? And then thirdly, I would like to know your view on a competitor's product, this instant Six Sigma active probe instead of earbud style which is quite unique and quite differentiated. Is this a style that that you think can do well? And if so, is that something that you will plan to do shortly? Thank you.

Søren Nielsen: Thank you, Michael. I think we always try to guide realistically, yet a bit ambitious. And I also think this is what we have done this time. It is, of course, based on the outlook I tried to present about a potential strong second half, where COVID is no longer putting significant pressure on the market. And there is a very significant pent up demand. And I am a firm believer that we will see that come in, and I think also seeing how the business has developed during the latest pandemic lockdowns and restrictions, it has shown to be very resilient. So, in that light, I find it - yes, an ambitious, but also realistic guidance that we put out for 2021. EPOS, we have no strong opinion on particular split between first and second half. Of course, the first two months in first half will have quite a significant market expansion still. So yes, those two months will be higher than average and the average for the last 10 months, it will be a little less, but we are in the finer details, the bigger picture is a normalization of the growth rates to 8% to 10%. But again, there is less solid ground to stand on. It is very unpredictable exactly how this market will develop going into 2021. And I have no detailed opinion on competitive products, but one common is still though, that this idea that you will only use it part-time, I'm a little skeptical towards the same for OTC very visible devices that I take on and put on when needed. At least I don't think it would fit most of the hearing aid users that come in, they are going for something they can wear all day and forget, and where they are the one that decide whether their surroundings should see it or not. So we'll follow it closely, of course, as always, and I think that's it for now.

René Schneider: If I might add on the EBIT guidance that we've also seen in second half year of 2020, that even if sales are slightly suppressed compared to normal due to strong cost management, we are still able to put a floor to what is the profitability of the business. So even if we are resillient on top line, we are certainly also resilient on the bottom line. So I think that's also important. So therefore, of course, we are confident in the guidance.

Michael Jungling: If maybe I could just follow up, or maybe rephrase the question on EPOS. Do you expect EPOS to grow in the second half?

Søren Nielsen: Yes.

Michael Jungling: Of course, so do you think you'll do positive growth in the second half of this year?

Søren Nielsen: Yes.

Operator: And the next question comes from the line of Maja Pataki from Kepler Cheuvreux. Please go ahead.

Maja Pataki : Thank you very much for taking the question. I'd like to start off with the implant business, you've talked to the higher sensitivity of the implant business base, and the fact that the hospitals are closed and access to elective surgeries have postponed on that side. What is your view on the potential to work through pent up demand come the second half of the year? Are you expected to see a similar impact like you're talked to on the retail side? Or do you think on the surgery side, it will take longer, because there are just a certain number of implant centers that can perform surgery? That will be my first question. [Technical Difficulty] growing above the market. And 2020 was an exceptional year, where I guess a lot of the marketing plans that you had weren't put through, how should we think about EPOS profitability over the next, let's say, three to five years? Are you planning to spend a lot in R&D and marketing and sales? And therefore, margins should not go to 15% in the next three years, or do you think it's going to be a more balanced growth investment?

Søren Nielsen: Your line was not too good, but I think I got the two questions. The first one was whether the recovery, you could say, of the implant market will be as fast and also with pent up demand can we cope with meaning, will you be able to cut pain [ph] and waiting list and the last in particular, we cannot predict, we a little bit skeptical. Hearing implants is not as critical as a number of other things that have been postponed. So we a little a little cautious and being too optimistic about 2021 being a big release of pent up demand, but there for sure is created significant waiting list. When it comes to working through these waiting lists, there is also a hypothesis we have that it will be children first, of course. So you could actually see an expansion of -- further expansion of the waiting list for adults during 2021. And we are stronger with adults than pediatrics, so there is a potential risk element there for explicitly our business. EPOS and profitability, it is clearly our aim to grow the profitability of the EPOS business up to best-in-industry. But of course, as you can see in 2020, we are not there. But we invest in the business, we have for long believed that there is a very significant potential in the enterprise solution, as well as gaming. That's our reason for being in those two businesses. So we will invest in R&D and sales and marketing and at the least attempt to expand our business in US. And that will, of course, cost something in the beginning. But the underlying basis is to grow profitability basically year-over-year as we grow the business. There is a significant scale effect, as you have also seen from a number of other players in the industry. And we also expect to be able to prove that.

Maja Pataki: If I can quickly a follow up, I do realize that, in your guidance, you do not expect to see the pent up demand from the implant business to consumer in 2021, it could be if 2022 with a more realistic scenario; that's part of your assumption.

Søren Nielsen: That's my assumption, yes, Maja.

Operator: And the next question comes from the line of Christian Ryom from Nordea Markets. Please go ahead.

Christian Ryom: Hi, good afternoon, Søren. And I have a couple of questions as well. My first is to the gross margin. As I recall last year, you said that you estimated that you'd have -- that the second half would have seen a gross margin of 76.5 percentage points and adjusted for the cyber-attack. And this year, your gross margin is around 4 percentage points lower. And then the 2 point of that dilution comes from EPOS. But I was hoping you could give us some insight into what is driving the other 2 percentage points of dilution? And then, my second question is to the OpEx space and how we should expect that to develop going into the first half of 2021? So if we take out these one-offs, including the provision reversal and the government support, I believe your OpEx space is around DKK4.8 billion here in the second half of the year. But, as I understand, there's still a fairly significant element of temporary savings within that number. And how do you expect that to evolve over the first half? Should we still expect some temporary savings in the first half of 2021? That's my questions. Thank you.

René Schneider: So basically, on the gross margin, when you do compare to an adjusted second half here, it is true, you see a significant dilution also on the hearing healthcare side. But that relates to, if you adjust, then of course, it is an inherent inefficiency from lower capacity utilization, basically lower volumes, as the primary driver of that decrease in gross margin. That also means, of course, that when you look into 2021, I think that's implicit in the question. If you look into 2021, of course, we do expect, at least to some extent, to close the gap between where we are second half year 2020, to where we, let's say, have been historically, still with some effect of re-chargeability, but definitely as we have a high-end launch in four brands, and we expect to increase volumes and better capacity utilization, we will see a gross margin come back up. That is our clear expectation for next year. But of course, if you look at second half year to second half year reported, then you do see an increase and that's also on comparable volumes. On the OpEx, what to expect for first half-year, next year? Well, a good starting point, of course, is to look at what was the run rate in second half year 2020. Of course, then add back the government support and the bad debt. And then, we refer to temporary savings that are significant, and ballpark numbers, they are in the range of DKK300 million to DKK400 million, that are savings related to the lower activity level. And, of course, they might persist if sales are still depressed, but they will also come back if sales are up. So you're looking at a normalized OpEx spent of DKK5.1 billion to DKK5.2 billion. But of course, as we enter the year, you will continue to see, let's say, temporary savings to some extent, and then you need to add something for, let's say, increased activity level, inflation, etc. So I hope that gives a little flavor to it.

Christian Ryom: Yes, thank you. That's very helpful.

Operator: And the next question comes from line of Niels Leth from Carnegie, please go ahead.

Niels Leth: Yes, good afternoon. So getting back to DKK300 million to DKK400 million for cost savings per half year. And at this point, would you expect the cost level then to normalize already from the second half of this year, so that we put those treats DKK400 million back here in the second half? Is that included in your guidance? And my second question would be about product launches within your other hearing aid brands. So, is it correctly understood that you have actually launched the new products recently in the other brands outside of the older brands [ph]? Thank you.

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

Niels Leth: To your guidance?

René Schneider: Yes. And on product launches, it's true, we announced it across all four brands, we kicked it off with all the corners that have the biggest exposure to the commercial channels. And rightly after the New Year, we have launched the other brands. And it's basically now up to markets and channels on how they ramp up. But there's no constraints on the availability or what products can be sold around the world other than approval, as the example Brazil and China.

Operator: Next question comes from the line of Kit Lee from Jefferies, please go ahead.

Kit Lee: Thanks for taking my questions. My first one just on the sequence-borne launch. I think you can look at some of the markets where you can launch the product back in November or December, what's been the uptake rate in January of this year? And how do you see that developing between the first half and second half of 2021 for the launch phase? And the second question is on EPOS production capacities. Do you see any risk of capacity constraints, if this market or your business continued to grow at much higher rates? Should we expect from bottoming issues there or is there more flexibility built in today? Thank you.

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

Kit Lee: That's very helpful. Thank you.

Operator: And the next question comes from the line of Veronika Dubajova from Goldman Sachs, please go ahead.

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

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

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

Veronika Dubajova: And any interest in pharmaceutical solutions design loss or is that's something that is a little too far outside of your wheelhouse?

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

Veronika Dubajova: Understood, thank you. Just a quick clarification, the continuation of the one-off branding cost of EPOS, is that excluded from the guidance you have given today?

René Schneider: We're not going to specify any one off-cost going forward. So we will only do reported numbers, no adjustments, and no one-offs. We're just commenting on the fact that EPOS marketing costs was slightly lower in 2020 than what we had anticipated and there might be from an activity level and partly from a cost level spill over into 2021. But that is fully included in the guidance, and no one-off.

Veronika Dubajova: Okay, that's very clear. Thanks.

Operator: And the next question comes from the line of line of Oliver Metzger from Commerzbank. Please go ahead.

Oliver Metzger: Good afternoon. Thanks for taking my questions. The first one is on diagnostics. So on H2, you've organically again in positive territory. Does the development of value outperforming volume growth continue? That's the first question. Two quick ones on EPOS; first for clarification, so except for first two months, but also maybe in a year; do you see the strong outperformance of the businesses gave me to continue. And also question of the expected pacing of EPOS in 2020. You said earlier in the year with a more pronounced pacing towards the second half, it was even stronger, this was positive. So would you speak in general, also towards the strong second half and first half? Also the best case [ph], I know that you made your comments on the first two months, but more from a general underlying perspective.

Søren Nielsen: Thank you, Oliver. Just had to make sure I understood it on the diagnostic side. Generally speaking, it's very difficult to talk about ASP on the diagnostic side. There is a huge difference in different channels and what type of instruments we are talking about, from small screening audio meters to big installations for balanced treatment. So we never really talk about volume versus ASP, it doesn't really make any sense. So the business is growing across multiple segments, across multiple channels, as we highlighted, in particularly the Interacoustic business with the new Affinity Compact, have been driving share gains, as well as further expansion in balance, but also our continuous effort to move forward in the value chain doing more service calibration, selling disposables, and so on, is also part of it. Also, our newborn screening program in US, where we screen babies on behalf of hospitals, is growing. So many different avenues of growth and therefore basically impossible to answer your question directly if I understood it right. Otherwise, please come back. On gaming and enterprises, again, with the blurriness of the outlook as the reality is, this is an assumption made rather than because we know this is how it's going to be, we can also not predict the difference in the growth rate for gaming and enterprises. Both businesses are doing well, both segments are growing, popularity of gaming is growing, online gaming is growing, as well as use of enterprise. What I think we'll see in the enterprise is where 2020 definitely was a working-from-home trained and getting equipment home, I think in 2021, we might see more of office-to-office collaboration coming in place, because I still anticipate that global traveling will be highly restricted. So much more meetings between meetings, rooms, equipment type, speaker, microphone, speaker phones on the table, different kinds of video equipment. And H2 versus H1, it's a relatively fast growing business. And therefore, in absolute terms, for sure, we'll see a continued expansion into second half. There is a chance that the growth rates will be slightly less in second half than in first half. But that's all speculation around how the market develops. So we cannot get much more clarity on that at this stage.

Oliver Metzger: Okay. Just a follow up on the diagnostics question, from the part you commented that, basically, you move more from simple product to solutions, and that was also positive from a pricing perspective. Do you expect this trend to continue?

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

Oliver Metzger : Okay, thank you very much.

Operator: And the next question comes from Annette Lykke from Handelsbanken. Please go ahead.

Annette Lykke : Thank you so much for taking the questions. My first question with respect to communication and decent growth you're expecting over the next couple of years, as the demand for office headsets is still increasing, how should we -- how will you spend that growth for business going to new investments in terms of monitoring [ph]? Or will a part of this operational leverage go down and manifests in terms of the margin expansions? And then, could you say a little bit more about more -- how actual sales -- I know you had positive feedback but how is the rollout growing in space? And are you see more sticky market shares right now? Should we expect that to ease up during maybe the second quarter of this year or how should we see the impact of the new young age in general? Thank you.

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

Annette Lykke: But also, do you see a difference in the current market right now as cost efficiency to the retailers or the clinics due to COVID-19, and maybe -- I mean, market shares are more stable right now. And will that develop or change [indiscernible] mid of next quarter?

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

Operator: And the next question comes from the line of Thomas Jones from Berenberg. Please go ahead.

Thomas Jones: Good afternoon. Thank you for squeezing me in at the end. I had two quick questions. One, you gave us some unit and ASP details for the wholesale business, I wondered if you could give us some color as far as the retail business goes? And maybe as part of that just a qualitative commentary about what kind of pricing you're seeing onboard versus openness at the retail level? And then, the second question was just a big picture one really, over the last 10 years, the return on capital for those of you in the hearing aid industry has come under in a reasonable pressure is there's been a global arms race to outspend each other on R&D, distribution costs and, to some extent, competing for retail assets. And I guess the question is what was the outlook from here? And obviously, in the pandemic, you realized that there are probably more efficient ways to do distribution, do you see structurally lower distribution costs and therefore improving returns? Or do you just think that that money will get reinvested into more R&D and other areas of the business? I'm intrigued to know whether you think we've reached the bottom of the return pressure that the industry has seen and maybe the next five years improving rather than contracting with random capital?

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

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

Thomas Jones: Yes, it's very helpful. Thank you.

Operator: That was the last question. I'll hand it back to the speakers for closing remarks.

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