Earnings Transcript for DEMANT.CO - Q4 Fiscal Year 2021

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

Søren Nielsen: Thank you very much, Mathias, and welcome everybody, happy to have all of you here today. I think before we kind of head into the lead up to presentation, I would like to highlight that I think the 2021 was a absolutely fantastic year for Demant in total, strong growth across virtually our three biggest business areas, improvement of margins, and generally speaking, record high EBIT, putting distance to a troublesome 2020 of course. But also looking ahead, I think the outlook for the sector and the industry is quite positive. We post Corona still seeing big potential for pent-up demand. We still don't know when and how it will come in, but it is to the better the outlook also Corona seems to at least for now have lost its grip on the world. And the underlying demographics are still speaking to strong underlying growth. And Demant deadline lied well-positioned a number of strong business areas all entering into growth markets, strong R&D organization, strong global distribution in hearing both in hearing aids and diagnostics, and also a strong global distribution network that everyday service 1000s of clients. So strong position to participate in that Group and I think we need to keep that in mind as we walk through things today. Then agenda highlights, here in healthcare communication, then René will take over and talk more details on Group finance. I will speak to the outlook and then we'll go into Q&A. And financial highlights, the main highlight is the 27% organic growth in the latest upgraded range, a little bit below the midpoint; I will get back to that. A significant improvement on gross margin, also second half compared to first half, strong EBIT and EBIT margin expansion driven by hearing healthcare in particular the three bigger business areas. And looking at second half in particular, very strong growth and profitability in hearing healthcare, in hearing aids driven by successful product launches further expanded, not the least market share great gains in U.S. across all channels. So very strong momentum in the U.S. market, strong performance in hearing care clinics, generally speaking, boosted by the French Healthcare Reform that have led to a significant boost in the market that of course also benefits hearing aids as well as diagnostic. Diagnostic continue very strong performance and market share gains. We are now a clear leader in the market and expect to be able to continue that growth journey. We have of course seen negative impact on our implant business from the voluntary field corrective action, but we now know how to get back to the CI market have found a root cause and are optimistic that that will start in third quarter. Communication after our revised planning shared with you in September, we follow that plan. We have seen growing momentum during second half. All in all, negative growth in second half, we knew that and also a negative EBIT driven by further investments in R&D as well as global distribution. But all in all strong EBIT of DKK1.75 round numbers billion and an EBIT margin of 18.6% in the second half. And strong growth rates, organic growth rates across the businesses, hearing aids 34%, hearing care 34%, diagnostic 25%, very impressive for the three biggest business areas. All in all, second half organic growth of 10% and again further expansion of gross margin impacted by strong performance in hearing healthcare and some from business mix meaning stronger growth in hearing healthcare then communication, organic growth in OpEx, 14% which reflects normalization and at the cost base in the comparison, it appears to have two very good cost savings, and therefore the record high EBIT, and also very strong cash flow, even though the growth of cash flow was slightly less due to the high costs. Outlook for 2022 organic growth of 5% to 9%, EBIT of DKK3.45 billion to DKK3.75 billion, we're going to get back to those numbers, and then as a share buyback program of at least DKK2.5 billion. In 2021, we have also done significant advancements in our work with sustainability. Key highlights are a release Position Paper on diversity, equity, and inclusion, making sure that we benefit all the talent we have in our Group. And people feel equal opportunities for progress. We have seen a increase of women in management by 1% from 42% to 43%. I have also seen the general gender grow towards even more female employees. So, that, of course, is a natural consequence. And we still have work to be done there when we look across the different hierarchies in the business. We have committed ourselves to science-based targets initiative. We are in general, a, you could say low impact business. However, we of course want to take our share in making sure the green sensation can happen. However, only 5% is within scope 1 & 2, but we will work on that, of course. Hearing healthcare in a little more detail. 14% organic growth, driven by the performance in hearing aids, hearing care and diagnostic. Gross margin expansion, despite some headwind from supply chain cost, as we have spoken about earlier. And of course, an increase in OpEx, mainly driven by the distribution cost, reflecting a normalization of the cost base. And again, also here record high EBIT DKK1.826 billion and a margin of 20.6% all inclusive. French reform, is estimated to have a positive impact in -- extraordinary positive impact in the second half of DKK100 billion on the top-line and DKK50 billion on EBIT in second half. If we look at the world market for hearing aids, we, in the beginning of the year estimated that 2021 would be very close to expected level, if you took 2019 and added two years of growth excluded VA, NHS and what we describe as export market, we are smack on to that. The main lack is with NHS, VA and rest of the world called here. But you could see that fourth quarter came in not slower, not the least in U.S. And again, we saw a slight flattening of things towards the very end of the year, driven by Omicron. Much more on the wider spread, meaning more people are actually sick including own employees, that couldn't come to work, and therefore things would have to be moved around and postponed. And something we to some extent still deal with what where we have seen improvements since then. And things we expect to normalize pretty soon. Therefore, pent-up demand can now be concluded for 2021. And as you can see here, we have pulled in some in Europe, excluding NHS in 2021. But 400,000 units, which I think is very equivalent to the extraordinary sales in France. So if excluding that we still see a potential for pent-up demand in Europe outside France, not the least Germany. In NHS, sync has further added to it. So now more than a million unit, so a big potential in North America excluding VA, basically not adding much, but a little bit of pent-up demand being released in first half, and therefore still basically from what was lost in first half 2020, still a potential we still believe that should come in somehow not maybe not all of it, but some of it and again VA also a quite significant pent-up demand. Lasting back to 2020 and the same for rest of the world so all in all 3.8 million units or 2 million people that have probably not started treatment with hearing aids, which is likely they will do eventually. Again we cannot tell how fast or when. Looking at hearing aids, very positive development in the wholesale of our hearing aid business, driven by new flagship products across all parts, the momentum continued with the release of a non-rechargeable miniRITE. There are still markets that use a lot of instruments for ordinary batteries. And we have seen again, a significant market share gains with independent as well as some of the bigger chains, and still it's growing a lot. And then moving on to product portfolio expansion with these days and weeks release a number of new things to the portfolio based on the Polaris platform, a new miniBTE, both in rechargeable and non-rechargeable across four brands. This is still a used form factor in a number of markets and segments. We expand with two more price points in the more mid to lower priced categories, available in all the form factors, which drives typically a lot of volume in a number of markets, then a pediatric version. And then for all the new products, as well as the products at the market under Polaris platform, the ability to do a two-way audio, meaning you can use your microphones in the hearing aid as the pickup microphone when speaking on the phone on iOS Apple devices, this has been improved and will soon go into the market and also to upgrade option. Hearing Care, strong growth driven by France, but also strong performance in the number of other markets, such as UK, Ireland, Spain, Poland. And in North America, we have seen strong growth driven by acquisitions as well. Some headwind in U.S. still from managed care where we have also chosen to drop out of some of these programs as we didn't find it appropriate to spend our time just for marginal filling fees and then now trying to gain back more organic business. Canada improved significantly during second half as Canada opened up. In Europe and rest of the world, we continue our efforts to expand our network through acquisitions. This now also includes Germany as we have decided to also engage in the consolidation taking place there. Hearing Implants, several markets are still affected by COVID, and significant backlog. As I said in Italy, we feel on our field, we have found the root cause for the corrective actions needed. Now it's verification, validation, approval by notified bodies and authorities. So we can get back in the market presumably in Q3. On the bone anchored, quite good progress since adoption of the Ponto 5 Mini and we also ready to launch our Super Power version in a second. And around medical, as announced, I will in an interim position takeover from Jes Olsen that is retiring and again, just to stress, his retirement was actually planned before. The voluntary field corrective action by Jes offered to extend his services and for which I'm very thankful, but now we know that we back, we will continue with finding his successor. Diagnostic very strong growth, very strong performance, keep on taking a share, we estimate that the market grew in 2021, 10% to 15%, which is above normal, but reflects a muted 2020. We're only back at a normalized level so there's still a potential for some pent-up also on the diagnostic side. And the growth is also strong in U.S. with our strong e3 network. Communication spoken to most of it. We did had a negative organic growth of 27%, weakest performance in Enterprise due to the very high comps from 2020 and then a decline in gross margin due to lower activity level. OpEx grew as we continue to invest in R&D and distribution and therefore a negative EBIT of minus DKK78 million in the second half. But again, no changes to the expectations that this year we will make smaller loss and then in 2023, the business will turn profitable. Over to you, René.

René Schneider: Thank you, Søren. So just briefly reviewing the numbers that we put out today. Highlighting from the income statement as already mentioned, a 12% growth in the second half year comprised of 10% organic growth, 1% from acquisitions, and 1% from currency. In subsequent slides, I will review gross profit and gross profit margin development that has been extremely successful. Also OpEx I'll review. So what I want to highlight here is the line called share of profit after tax from associates and joint venture income of DKK63 million, which is actually DKK120 million for the full-year. That is an expression of the successful journey we often have in acquiring minorities in smaller businesses, and then overtime, stepping up our ownership share or eventually fully take them over. This has been part of our growth journey historically. And it is also part of what we will continue to do going forward. That also translates into positive fair value adjustments in some occasions, which is also an example of creating value in these transactions. It amounted to DKK64 million for the full-year in 2021 and DKK17 million in the comparison period and it fluctuates, of course, a little year-over-year, just slightly to the high side this year, but it is a thing that you would expect also in the future. Reviewing gross profit increased 17% to DKK7.1 billion. The gross margin expanded by 3.3 percentage points mainly driven by the positive development in hearing healthcare driving the 2.8% increase and then also, business mix supported the Group gross margin positively by just shy of one percentage point as hearing healthcare has a structurally higher gross margin than communications. Supply chain headwind impacted gross margin by an estimated 50 basis points in second half year and that is likely to continue into 2022 and we will come back to that. But again, very successful gross margin development. OpEx growth driven mostly by distribution costs, it is a reflection of a higher activity level and a normalization of the cost base compared to a very low comparative base in H2 of 2020 that included government support schemes of DKK100 million and also reversal of a bad debt provision of DKK50 million. As previously communicated, this is what we see as a lastly normalized level. EBIT was record high both in actually in H1 and in H2 and it is particularly driven by the very successful development in hearing healthcare. Group EBIT margin was 18.6% again an increase of 70 basis points versus second half year of last year. Just for housekeeping items, we have also outside of the operating profit realized a net income of DKK59 million from what we constitute as one-off items and just to go through them one by one. We had a negative EBIT impact of DKK100 million from the voluntary field corrective action in cochlear implants and it is a net loss from return products inventory write-down and other miscellaneous items. Then we had an income of DKK99 million from the divestment of FrontRow, which also gave a positive contribution on group cash of DKK161 million. And then lastly, we had an income of DKK60 million from the remaining -- reversal of the remaining provision for bad debt that has not been realized DKK60 million. So all in all, DKK59 million positive, which we consider outside of operating profit. Cash flow, very strong cash flow in second half year, driven by the strong earnings, but half year over half year, growth was impacted by a significant build-up in net working capital due to both the inventory and trade receivables build up, so a decline in cash flow from operations of 9%. Net investments was approximately 4% of sales -- CapEx was 4% of sales which is in line with our normal expectations. Net cash to acquisitions and divestments was only DKK141 million in second half year, but this is net and then included in that positively impacted by the divestment of FrontRow. And we had share buyback of DKK1.4 billion and DKK3.2 billion for the full-year. But all in all, a 25% growth in free cash flow for the year, very strong. The balance sheet, we have seen a 5% increase versus the mid-year balance, the increase is primarily related to goodwill, in connection with acquisitions, and an increase in inventory. Net working capital relative to sales remain very stable at 32%. And our gearing, at end of year is 2.0 when we measure a net interest bearing debt to EBITDA. With that, let's go to outlook.

Søren Nielsen: Thank you very much, René. And just a little bit on recent development. I started out in the beginning, speaking to this, that we saw this slight softening in the beginning -- at the end of 2021, due to the rapid increase of infection rates, and at that time, a lot of uncertainty. What was it? What was it not? How much would society have to lockdown? We have seen some of this continue into 2022 but in a very different way, I think we all experienced that. This is much more about being able to come to work and the complications that are coming with that. So there has been issues with keeping all clinics open and so on but this is rapidly improving. And therefore I consider this a short-term postponement more than building to pent-up demand. And communication, despite the mixed development in 2001, we still see the demand for video and audio solutions in enterprise to have largely normalized here in 2022. And in the first part of the year, there might still be issues centered around supply chain. We have not been highly exposed to that, but it is a fact as one of this generic electronics, shipping et cetera has some uncertainty related. So outlook expectations looking at the market. Hearing healthcare market is to normalize in 2022 with a normal growth rate; people say general population of 4% to 6%. And in addition to that, some pent-up demand, we don't know how much. I would say our expectation is a modest; a lot of it is in healthcare system that needs to recover. But again, we will of course, follow it closely during the year. We expect a slightly more negative development to ASP than normal. This has nothing to do with lowering prices. This is just channel and geography mix. We do expect bigger growth rates in channels and markets with a low ASP, because they have been more muted for longer of Corona and therefore the biggest upside and therefore they would pull down ASP on the other hand more units. We -- our plan, our expectation for the year is that we'll see negative growth in the French market from the extraordinary demand and translating into Group revenue it is these DKK300 million revenue and EBIT of DKK150 million that we see as extraordinary. We expect the demand for enterprise and gaming headsets to grow at a normal structural level of 12%. And for Demant, both segments hearing healthcare and communication, we expect to grow market share in 2022. We will resume the sales of implants cochlear implants in Q3 2022. We will remain to have a supply -- dynamic supply chain which costs something on the gross margin, but no material impact on our ability to sell. OpEx we'll see no further benefit from temporary savings in 2022 which we estimated in first half to be on DKK150 million to DKK200 million in first half of 2021. And communication will in general show strong growth but Q1 different due to the very high comps where we will see a double-digit negative organic growth. But then we also out of the, we will say, tough compared and again we will have slight negative EBIT for 2022 in total but a significant improvement compared to 2021. So summarized in organic growth 5% to 9%, you already know 1% from acquisition and of course more will happen during the leap year. We will have 2% from exchange rates as we know them today they are positive tailwind. EBIT based on all of the above DKK3.45 million to DKK3.75 million. Effective tax rate 22% to 23%. No changes to the Gearing and share buyback of at least DKK2.5 billion. And then, before rounding off and opening up for questions, just final to the EBIT development. Again, we have tried to illustrate here in the graph, how you build the bridge from 2021 to our guidance. And if you take out the temporary savings and French reform, this is actually quite a strong growth of EBIT of 13% to 23% with the guidance we give. So I think strong ambitions in a 5% to 9% organic growth scenario. And then a little bit to the reporting. We have decided to bring out growth rates by business area in after Q1 and Q3 in order to better support you in following the business on a continuous basis. So with that, that was the presentation and we will open up the floor for Q&A.

Operator: [Operator Instructions]. We have our first question is from Patrick Wood, Bank of America. The line is now open for you.

Patrick Wood: Perfect. Thank you very much. I'll keep this to two and thanks to the extra disclosure, both in the slides, but also on the quarters that's going to be really helpful. So thank you. The two questions, so I guess the first one is, obviously, a reasonable amount of pent-up demand, and so on the unit side coming through and appreciate that those are in some channels maybe with low ASPs. But if that's the case, why wouldn't we have maybe [Technical Difficulty] being on the chipset side or has that been relatively stable? Thanks.

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

Patrick Wood: Super. Thanks for taking the questions.

Operator: The next question is from Martin Parkhøi, Danske Bank. The line is now open for you.

Martin Parkhøi: Thank you very much. Martin Parkhøi. Just maybe you could elaborate a little bit more on the calculations on France because what kind of you -- you state that you don't expect -- you expect negative growth in France, but to what magnitude are we talking with this DKK300 million decline in your own sales. Can you maybe put a little bit more granularity into that? And then, secondly, on the EBIT result, can you talk a little bit about the profitability between the high and the low-end? I can see that the margin on -- the applied margin on the growth in the low-end is around 26% and on the high-end is around 31% is what -- shouldn't it be even higher giving that the last sold unit comes with a very high margin.

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

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

Martin Parkhøi: Okay, thank you very much. Can I just follow-up, just on the report, where you stated we should expect a double-digit decline in the first quarter on the communications side. What about the hearing aid side, given that you are comparing with the model was probably still relatively weak, at least in the beginning of the year, but you also launched the FrontRow and sold to French before kicking from 1st of January? So how are the comparison numbers in the first quarter on the hearing aid side?

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

Martin Parkhøi: Okay, great. Thanks.

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

Operator: The next question is by Maja Pataki, Kepler Cheuvreux. The line is now open for you.

Maja Pataki: Yes, hi, good afternoon and thank you for taking my questions. One question on general cost inflation, are you seeing any trends in any of your markets where labor costs are increasing or anything else we should be, you know, that we should bear in mind that could throughout the year represent some upward trends? And then the second question is around to VA, what do you think you need to do to go back again to the mid-teens level on the market share side and how do you think you can go closer to 20%? So just what are the market dynamics right now at VA? And how can you improve your share? Thank you.

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

Operator: The next question is by Aisyah Noor, Morgan Stanley. Your line is now open for you.

Aisyah Noor: Good afternoon, and thanks for taking my questions. My first one is on the communications business, where you mentioned that the demand for enterprise had normalized in the beginning of 2022. Could you describe what you're seeing that's giving you confidence in that? And is it channel inventory? Is it your order backlog? Could you give us some color there that will be helpful? And my second question is just a follow-up around your comments on ASP. Could I just confirm that if we exclude France from your forecast, then you would expect the typical 1% to 2% ASP erosion for 2022? Thanks.

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

Operator: The next question is by Oliver Metzger, ODDO BHF. The line is now also open for you.

Oliver Metzger: Okay, good afternoon. Thanks a lot for taking my questions. So the first one is on the guidance again. So your range of 5% to 9% is wider compared to your mid to long-term range. So my tendency you still have a hearing platform, which obviously performs pretty well. You also mentioned in Patrick's question the pent-up demand. So could you elaborate why you have in particular widened the range at the lower end? That's question number one. Question number two is also on France. So some months ago, the comments on France regarding the 2022 development also four years after appeared more bullish and this increase demand was regard as the new normal. Also, the country was named as an example of really released accumulated demand. Now your expectations appear clearly more cautious. So could you elaborate this is just a more conservative view after one or two months which were not so strong as expected or whether you have observed really any meaningful deterioration compared to your previous expectations.

Søren Nielsen: Yes, Oliver thanks a lot. I would like to like to then start with the second. Then there is a misunderstanding there's no changes, if anything, then the effect was longer and stronger into second half than maybe you are -- we originally anticipated. We have seen a strong lift up. What we try to communicate is the new level in France is for sure higher than it would have been without the reform. So forward going to penetration. If it in the past was in the high 30s, now it will be in the low 40s. No doubt about that. More people will get a hearing device, but the pent-up demand from people that have for many years not done anything, that now do something because it's for free. That's kind of what we saw come into the market in 2021 and which will, of course, be exhausted at some time and not be the same extent in 2022, 2023. So let me be very clear the French market have taken up to a new level, it's only the transition from 2022 into -- 2021 into 2022, where we'll see a decline. But comparing back to, let's say 2019, we'll see a significant market expansion also in 2022. Is that okay, clear?

Oliver Metzger: Yes.

Søren Nielsen: And no change from what we have said previously. We have always said we believe 2022 will be smaller than 2021.

Oliver Metzger: But yes, greater visibility into France, in particular, on a monthly basis. So would you say that even, let's say the January was clearly below this 2021 level or is just more cautious to you?

Søren Nielsen: It's basically here, as I said before, in the beginning of the year, February, March, April. We really saw a boom, very significant. So we are not at that level assumably for the next three months, but then we will get into a phase where you potentially start to see growth, because the comparison base is getting closer and closer to the new level. So in first half, that's where you will see the main, year-over-year, same half year over same half year decline, it will be less in second half. And then, you will see growth. The sequential run rate will soon I think plateau to the new level. So we move from there.

Oliver Metzger: Okay. Thanks.

Søren Nielsen: And then your first one, on the guidance. It is a wider, exactly for the reason of how will the French market develop? How will pent-up demand develop? These are the single two biggest factors. And as René just talked about, it does not take much movement on the pent-up demand to move the market to percentage. So when the range is wider, it's not due to you would say the uncertainty of our own business, it is much more how big is the hearing aid market going to be in 2022.

Operator: The next question is by Lisa Clive, Bernstein. The line is now open for you.

Lisa Clive: Hi, there. I'm just thinking a little bit into the commentary around the channel mix and the headwind that that's creating. If we think about the independent channel and their growth rate relative to your larger customers, has the delta between those two been pretty steady or are the independent, sort of having a tougher time recovering through the pandemic. I'm just trying to understand if their growth has shifted much?

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

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

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

Operator: The next question is by Veronika Dubajova, Goldman Sachs. The line is now open for you.

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

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

Veronika Dubajova: In turn, would you say me, it's fair for us to assume your target here would be to get back to the pre recall revenues already in 2023?

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

Operator: The next question is by David Adlington, J.P. Morgan. The line is now open for you.

David Adlington: Thanks, guys. So just four [ph] questions please, most questions asked. But maybe just on gross margins, maybe the moving parts here, maybe you could just give us some background on gross margins. And then secondly, just wondering how you're seeing the M&A?

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

Mathias Møller: The moving parts on the gross margins, generally speaking.

David Adlington: Yes, sorry.

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

David Adlington: Yes.

Søren Nielsen: Good, René.

René Schneider: Yes, so on gross margin, on a Group level, it is, of course, what is the relative growth first of all, between a hearing healthcare and communications, so that's an easy one to get a handle around. And then within hearing healthcare, of course, there is a big different for us in having, let's say, 3%, 6% or 8% organic growth when it comes to a unit cost utilization of capacity and driving down unit cost and thus also gross margin up. I think we have seen quite a significant increase in 2021, over 2020, which is also a sustainable improvement, which is why I would also mention that we set out to our general guidance is that a Group gross margin of 74% to 75% is our ambition. I think, with the performance that we have seen recently we can up that by 50 basis points as a general let's say, guidance or expectations. And I think that we will carry into 2022 as a benefit, for sure. And then, of course, short-term here, a key moving part is the supply chain additional cost that we have. Currently, we are running at this half percentage point, negative impact, and that's the level that we would expect for the first half year and then tail off. Meaning that year-over-year, it will be similar to 2021. But of course, that's also generally speaking an uncertainty.

Søren Nielsen: M&A?

David Adlington: On M&A?

René Schneider: So, if the question was, where do we intend to do M&A, it historically at least, has predominantly been in distribution, in hearing care, and also once in a while in our diagnostics business. And I do intend that that is what you should also expect going forward. And I would say predominantly in geographies that we are already present and have a strong position. But of course also key markets where we are not strongly present today like Germany would also be a key area for us to acquire in.

David Adlington: That's a more -- on the M&A side, it was more talking about whether you're seeing opportunities come up and what the pricing environment was like?

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

Operator: The next question is by Daniel Jelovcan from Mirabaud. The line is now open for you.

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

Søren Nielsen: Let me take the first one, then René or Mathias review the other one to make sure there's no mistakes. Actually, our growth in North America is quite broad-based. We have done very well, on the hearing aid side again with both Oticon More and Philips HearLink, the diagnostic group has also grown very nicely. And we have also seen strong growth in our own retail but that's of course also comps whereas in diagnostic and hearing aids, we for sure have taken significant action.

René Schneider: Yes. And I think then we will just, we'll just have to look it up. I can follow-up with you separately on that line. We have a lot of numbers in front of us on papers here.

Søren Nielsen: Yes, we will get back to you and get back to the questions.

Operator: Your next question is by Martin Parkhøi, Danske Bank. The line is now open for you.

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

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

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

Søren Nielsen: Bye-bye.