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 Holten Møller. Before we go to Q&A, we'll be going through a presentation of our results for 2020, outlook for 2021. 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.
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 group financials. First thing to mention, which I'm sure you have all noticed, is a 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. The biggest change is to make two individual segments for Hearing Healthcare covering hearing aids, hearing care, former retail, hearing implants, and diagnostic, and then a separate 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 far less overlap and shared service elements than within the hearing healthcare segment. We have changed names on two sub-segments. The hearing aid wholesale is from now on described as hearing aids. It is a R&D 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 end users, where we are handling the counseling process and delivering the actual hearing care, including fitting hearing instruments, but also the broader hearing care aspects. Therefore, hearing care, in our view, the right name for that business.
We have chosen to split up the reported revenue on hearing aids and hearing care, 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 BAHS when it comes to the growth rates. They are still growing at a different speed and phases, as we are approaching entering into the U.S. and a more global footprint under CI, it is the two businesses together that we think is relevant to report on. There will always be seasonality and different life cycles and so on.
All in all, it is the growth that we can generate in the implant space that's the primary interest. With this as a starting point, the highlights of 2020's 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 loss of scale in operation, and also, in the second half, a little bit different recovery rates between hearing care and hearing aids. Adjusted EBIT and in 2020, adjusted for one-offs related to EPOS is, of course, a low EBIT for the year of DKK 1.3 billion against DKK 2.1 last year.
That was also low due to the IT incident. Not the best years to judge the company from. If, as we're going to get back to look at second half, we made it in with DKK 1.5 billion, and I'll give more to that, and that of course indicate 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 debtors and inventory, et cetera, coming out very strongly with significant free float or 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%-14%, indicating a good end to the year and a good resilience, not the least of the hearing healthcare business, both retail and wholesale, but in particular diagnostics, despite new restrictions. We saw some stalling of the recovery, still the business carried through in a good manner. We continue to see strong performance of the communication group of EPOS, supported by increased production capacity, 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, less sales and marketing, less travel, et cetera, also structural savings that we commented on earlier, primarily in the hearing care sector in U.S., North America.
All in all, leading to a strong profitability in the second half of DKK 1.506 billion, before one-off and an EBIT margin of 17.9%, and again, a very strong cash flow from operation. As you can see here, the revenue across geographies, it has been stronger in Europe. The overall growth come 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 U.K. operation on the retail side up running, and a number of other European assets were also longer in their recovery. In contradiction to North America, where the IT impact was faster dealt with. 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. Going out to clients, we saw a decline towards the end of the year, in line with the new lockdowns in U.K. In Asia-Pacific, strong recovery, generally speaking, strongest in China, where we have seen a significant growth to our business. In Pacific, Australia, New Zealand, strong growth driven by soft comparison figures. The longest recovery process on the IT incident was in Australia. 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's again, EPOS being stronger in Europe than in North America, also the faster than average recovery in Europe versus in North America. Also a little bit out of normal balance still. 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, 3% on hearing implants. Just a little bit more, the hearing healthcare in total, significant revenue improvement since the low point in spring, still below normal level, minus 5% underlying organic growth.
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, original organic growth of minus 9%, therefore a material lift to the profitability, coming in at 1.425 billion DKK, or a margin of 18.7%, which I think, given the corona pandemic's consequences on our business, is quite strong performance. On the hearing aid market, reviewing the full year, we have updated this table with all the latest statistics, we earlier estimated Q1 to be around minus 5%. We can see from the markets we have statistics, it came in minus 6%. We estimated minus 50% on Q2, it came in 48%. Q3 was only down 3%, whereas Q4 is down 4%.
Again, if we correct a little bit for the NHS being a little bit out of sync with it was probably even a little less in Q3 and a little more in Q4. 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 15% below last year.
We have to remember that on top of this, we should have had an average 5% growth. 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. That leads to the entire discussion of magnitude and timing of pent-up demand. Hearing aids, not that much more to add than what has been said. We saw a very fast recovery across Europe in the third quarter. All the countries where the pandemic basically disappeared and normalized, we quickly saw uptake, especially on the commercial side. We have seen stronger resilience here towards the end of the year. We have simply found a way to operate, or our customers have, to operate on the commercial side. 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. Again, we launched our new flagship product lines 30th of November, or announced it. We started shipping mid-December, a little material impact in 2020. We are off to a good start and well-positioned for growth in 2021. You can see units being down 18% in the year and ASP a bit up. That is primarily channel mix and the way the revenue played out. As you can see, we are very far in the introduction. We basically only miss a few countries here in February, Brazil and China come later due to homologation processes being longer.
Hearing care, former retail, underlying minus 4% when we correct for the IT, that again, shows the, you could say, better recovery, but in reality, it's more the exposure to geography. We have seen very strong development in Europe despite of new lockdowns in Q4. Of course, U.K. have seen some impact, of course, also a country like Portugal are now seeing being away from normal. 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 so on as special care.
We have seen positive growth in Australia. 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. Nothing special there. 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 bone anchor do a bit better because you can do upgrades, you can try it with a headband and so on. A number of opportunities that are not present for the cochlear implant business to the same extent.
All in all, a minus 16% revenue growth in the full year. Strongest in the first half, also significant in the second half. Diagnostic, doing very well in the second half and ending the full year with just one percentage down from 2019. Very strong performance in the second half in Europe and Asia-Pacific, a little bit slower in the U.S. It is driven by good new strong product portfolio from Interacoustics, 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. EPOS Communication. Significant growth acceleration as the pandemic started and strong again in the second half. We have seen some normalization of freight rates, which have improved the gross margin moving into the 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. Even despite of that, we have seen a very nice EBIT here in the second half of DKK 81 million against DKK 38. We are, of course, as you can see below, some of the peers in the industry, 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, we still think we are off to a very good start with EPOS and have managed well to steer through these limitations. Then the word to you, René. Group financials.
Thank you, Søren. 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. As shown, it is still the revenue growth of 11%, constituting 2% organic growth, 12% from acquisitions, of which 10% relates to EPOS, then a headwind of 3% from currency. A higher growth in production cost, leading to an 8% growth in gross profit, and thus a reduction in our gross profit margin from 74 to 72.5. I will 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 a 9% savings from, say, organic savings. I would also highlight the EBIT result, DKK 1.5 billion, just above that. A very strong number with the 17.9% EBIT margin, of course with a one-off tailwind on some of the cost lines that I will also revert to. On the EPOS one-off, added up to DKK 90 million in second half-year, constituting a little bit different than what we had originally anticipated. DKK 52 million in a one-off marketing cost related to EPOS, then DKK 38 million in inventory re-evaluation as we have finalized the purchase price allocation of EPOS, this is an accounting and non-cash item. A little bit more detail on the group gross margin.
The main driver of the group's decrease in gross margin in second half-year from 74%-72.5%, is a 2% dilution effect from the consolidation of EPOS that just structurally has a lower gross margin. Partly offsetting that, we see a half a percentage point from improved gross margin in hearing healthcare, driven by predominantly the change in business mix, where our hearing care business is growing 9% in local currency and thus 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, 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. In addition, we have realized DKK 125 million from structural savings, predominantly related to our hearing care business in North America, but also apart from that, broadly based. DKK 100 million from government support schemes globally, and then DKK 50 million from reversal of provision of bad debt, where we took DKK 150 million in first half year and then reverted DKK 50 in the second half year due to an improved outlook on that parameter.
This leads to the strong profitability that we have seen in second half year, DKK 1.5 billion in the upper end of our latest guidance of DKK 1.4 billion-DKK 1.55 billion. All in all, a good half year on that account, but with a few one-offs included as mentioned previously. When looking at cash flow, this is really a highlight of the year and where we managed it quite strongly. 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 have also seen a lower M&A activity than normal.
This leads us to the balance sheet, which has been very stable throughout the year, but looking at it over full year, it increases by 1%. We do include 6% from the consolidation of EPOS, so it's 6% acquisitive growth. It is offset more or less by minus 1% organic growth and minus 5% from currency. The fact that we have, as mentioned before, had tight working capital management, which leads to a reduction of 24% in net working capital. Year-end over year-end, net interest-bearing debt declined 13%, leading to a gearing multiple on historical earning numbers of 2.8, and basically not fully in line with our target of 2-2.5. That is due to the suppressed EBITDA, which on a more normalized basis, would have been clearly in our guidance range.
Lastly, just for backup housekeeping, this is the specification of one-offs, I would just highlight the effect on distribution cost for the full year, DKK 89 million, which does relate to the extraordinary spending on establishing the EPOS brand. This is the only line that has a real cash flow effect. It is significantly lower than the DKK 100 million-DKK 200 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. With this, to the outlook, Jan.
Thank you very much, René. 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, far less than we saw in spring. We and the world have learned to live with COVID. As classified as special care, we have all stores open. Of course, see some effect in U.K. and also in Portugal right now, nothing that can disturb the big picture. Of course, still some slower recovery in NHS, in VA, emerging markets. Other than that, relatively stable development despite recent restrictions put in place, also no doubt that with effect of these in a positive way, case numbers go down, hospitalization go down, death cases go down, 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's, of course, impacted. Communication continues to see strong demand for professional headsets. We expect in the year to come that it'll be a little less working from home and a little more in the office, but still with the high restriction on traveling and so on, which will further expand the market. When we look at outlook, what is the assumption for making an outlook for 2021 is we expect a gradual normalization of the hearing healthcare market during first half, based on the fact that it again turns 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 where the primary market for our business, is developing quite nicely and fast. Looking at the 65-year population, it will not be many months until most are vaccinated. 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, 2021 could look like 2021 would have looked. Everything else unaffected by COVID means a strong second half with a tailwind in line with what we saw in 2020. 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 effectful. In the headset space, we believe the market growth will go down, but still be in line with the normal level of 8%-10% on top of what we have seen this year. Still a significant expansion of the market compared to just a year ago. 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%-27%, slightly more on the hearing healthcare side than 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 DKK 2.85 billion and a high point at DKK 3.15 billion, and skewed toward the second half. 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 2.0 and 2.5. Please note, we do no longer have this effect of leasing contracts, et cetera. Just speak about the 2.0 to 2.5.
We are almost there today. With the full normalization of EBIT, we will definitely be there. Therefore we feel or are quite sure that we can buy back shares for more than DKK 2 billion, as that is, we also expect a significant surplus of cash, even after some acquisitions. We will return to a share buyback program to do that. As we have included, I will not comment more on it here, we have also listed, you could say, the things we always mention 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.
Of course, what really varies is the mix between the businesses, how they develop. Some grow 2%, 3%, 4%, 5%. Some grow 15%-20%, and therefore these mix effects, of course, end up impacting the EBIT margin, why we do not guide on it. So does FX development as well as acquisitions that are typically having, at least at the beginning, some dilutive element. No changes to gearing levels. Again, capital allocation, things that are not well spent on acquisitions, we will return to shareholders in form of a share buyback program. With that, we open up the floor for question and answers.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. Our first question comes from the line of Patrick Wood from Bank of America. Please go ahead.
Perfect. Thank you very much for taking my questions. I have two, please. The first on EPOS. I'm a little surprised the guidance that you guys gave. I would've thought it would've 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 there, why you felt that was the right range, given how strong performance has been of late. That was the first question. The second one, I'm just curious, there's obviously a lot of pent-up demand on the hearing aid side. If you have, let's say, a slightly slower start to 2021 than you expect, and so more of the demand is going to get pulled through into the second half of the 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 there within retail to work through and churn through that backlog? Or does some of it, even more of it, get pushed into 2022 or do you think they can work through in the second half? Thanks.
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. There's 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. Our share, as I said, is to expect to grow in that market, so you can expect more than the 10% from us. We have grown 15%-20% in the past many years.
If that's the normal 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. 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. We saw markets like Denmark, Norway, and so on, working overtime in a period to cut down on waiting lists. Yes, I think it's very realistic that the various channels, including commercial retail, can expand capacity short term to deal with more appointments.
Very clear. Thank you, and thanks for the incremental disclosure as well. Thanks, guys.
The next question comes from the line of Michael Duering from Morgan Stanley. Please go ahead.
Great. Good afternoon all. 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, I guess, a positive share price reaction. You really came out sort of with quite a storm, quite unlike what Demant does normally. Why did 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? Thirdly, I would like to know your view on a competitor's product, this Instant-Fit Signia Active Pro, the sort of earbud style, which is quite unique and quite differentiated.
Is this sort of a style that you think can do well? If so, is this something that you will plan to do shortly? Thank you.
Thank you, Michael. I think we always try to guide realistically, yet a bit ambitious. 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. There is a very significant pent-up demand, and I am a firm believer that we will see that come in. I think also seeing how the business has developed during the latest pandemic lockdowns and restrictions, it has shown to be very resilient. In that light, I find it, yes, a 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.
The first two months in first half will have quite a significant market expansion still. Yes, those two months will be higher than average, and the average for the last 10 months will be a little less. We are in the finer details. The bigger picture is a normalization of the growth rates to 8%-10%. Again, there is less solid ground to stand on. It is very unpredictable exactly how this market will develop going into 2021. I have no detailed opinion on competitive products. One comment 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 kind of take on and put on when they're needed. At least I don't think 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. We'll follow it closely, of course, as always. I think that's it for now.
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. Even if we are resilient on top line, we are certainly also resilient on the bottom line. I think that's also important. Therefore, of course, we are confident in the guidance.
Maybe I could just follow up or maybe rephrase the question on EPOS. Do you expect an EPOS to grow in the second half?
Yes.
Of course. You think you'll do positive growth in the second half of this year?
Yes.
Yes.
Yeah.
Thank you.
The next question comes from the line of Maja Pataki from Kepler Cheuvreux. Please go ahead.
Yeah, thank you very much for taking my question. I'd like to start off with the implant business. You've talked to the higher sensitivity of the implant business based on the fact that the hospitals are closed and access to elective surgeries are 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 expecting to see a similar impact like you 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 these surgeries? That would be my first question.
Yeah. Should we take your second as well?
Yeah. Your second as well. 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? Do you think it's going to be a more balanced growth investment outlook?
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 whether pent-up demand can be coped with. Meaning, will you be able to cut back on waiting list? The last in particular, we cannot predict. We are a little bit skeptical. Hearing implants is not as critical as a number of other things that have been postponed. We are a little cautious on being too optimistic about 2021 being a big release of pent-up demand, but that for sure has created significant waiting list. When it comes to working through these waiting list, there is also a hypothesis we have that it will be children first, of course.
You could actually see a further expansion of the waiting list for adults during 2021, and we are stronger with adults than pediatrics. There is a potential risk element there for especially our business. EPOS and profitability, it is clearly our aim to grow the profitability of the EPOS business up to best in class or best in industry. Of course, as you can see in 2020, we are not there. 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. We will invest in R&D and sales and marketing, and not the least, attempt to expand our business in U.S.
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 significant scale effect, as you have also seen from a number of other players in the industry. We also expect to be able to prove that.
Perfect. Just quickly a follow-up. Sorry. I do read you right that in your guidance, you do not expect to see the full pent-up demand from the implant business to come through in 2021. It could be 2022 with a more realistic scenario that's part of your assumption.
Of our assumptions. Yes, Maya.
Thanks.
The next question comes from the line of Kassian Royall from Nordea Markets. Please go ahead.
Hi, good afternoon, Søren and René. 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 the second half would have seen a gross margin of 76.5% adjusted for the cyberattack. This year, your gross margin is around four percentage points lower. I understand that two percentage point of that dilution comes from EPOS. I was hoping you could give us some insight into what is driving the other two percentage points of dilution. My second question is to the OpEx base and how we should expect that to develop going into the first half of 2021. If we take out these one-offs, including the provision reversal and the government support. I believe your OpEx base is around DKK 4.8 billion here in the second half of the year.
As I understand it, there's still a fairly significant element of temporary savings within that number. How do you expect that to evolve over the first half? Should we still expect some temporary savings here in the first half of 2021? That's my questions. Thank you.
Thank you, Christian. Basically, on the gross margin, when you do compare to an adjusted second half year, it is true you see a significant dilution also on the hearing healthcare side. That relates to, if you adjust, then of course it is an inherent inefficiency from a 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 your 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 rechargeability, 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. 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. Then add back the government support and the bad debt, and then we refer to temporary savings that are significant. Ballpark numbers, they are in the range of DKK 300 million to DKK 400 million that are savings related to the lower activity level.
Of course, they might persist if sales are still depressed, but they will also come back if sales are up. You're looking at a normalized OpEx spend of DKK 5.1 billion-DKK 5.2 billion. 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, et cetera. I hope that gives a little flavor to it.
Yes. Thank you. That's very helpful.
The next question comes from the line of Niels Granholm-Leth from Carnegie. Please go ahead.
Yes, good afternoon. Getting back to the DKK 300 million to DKK 400 million of cost savings per half year. 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 DKK 300 million, DKK 400 million back in the second half? Again, is that included in your guidance? My second question would be about product launches within your other hearing aid brands. Is it correctly understood that you have actually launched new products recently in the other brands outside of the Oticon brand? Thank you.
On the first question, yes, largely speaking, you would expect to be normalized on the cost side in second half year, since that is also our, let's say, similar expectations on the top line. Of course, if that doesn't materialize, then of course things will change. That is our base case assumption.
Based on to your guidance.
Yes.
On product launches, it's true. We announced it across all four brands. We kicked it off with Oticon, as that has the biggest exposure to the commercial channels. Rightly after, here in the new year, we have launched the other brands, and it's basically now up to markets and channels on how they ramp up. There's no constraints on availability or what products can be sold around the world. Other than approval, as the example with Brazil and China.
The next question comes from the line of Kit Lee from Jefferies. Please go ahead.
Thanks for taking my questions. My first one is just on the Oticon More launch. I think if you look at some of the markets where you've launched the product back in November or December, what's been the uptick rate in January of this year, and how do you see that developing between the first half and the second half of 2021 for the launch, please? My second question is just on the post-production capacity. Do you see any risk of capacity constraints if this market or your business does continue to grow at a much higher rate? Should we expect some bottleneck issues there, or is there more flexibility built in today in terms of capacity? Thank you.
Yeah. Thank you very much.
In the beginning, you see very rapid conversion from one product line to another. Of course, here in the beginning, despite very high numbers going out, also out to customers and More, we of course also see a big cannibalization effect of existing products. The real growth is coming through the first half and into the second half. Of course, we should see an even stronger growth rate, everything else equal. It's going to be difficult to see as first half was so low. We expect the whole platform that we have launched to grow throughout the year in absolute numbers. We expand it further with brands here in the beginning, but there will also, of course, come more new products based on that platform during the year.
All in all, it is a key growth driver this year and next year, the products that are going to be based on this new platform. On EPOS, we have multiple times during the year continued to expand capacity. 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 electronic sector is some shortage of components now and then, because the whole phones and computers and stereos and what have you, is quite booming under the whole pandemic. From time to time, we and other players are searching different components to support the supply chain. We have no known constraints if the market develops beyond our expectations.
That's very helpful. Thank you.
The next question comes from the line of Veronika Dubajova from Goldman Sachs. Please go ahead.
Excellent. Thank you guys for taking my questions. I'll keep it to two, please. Kind of trying to disaggregate your guidance versus your expectations for the hearing aid market. Sorry that 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 incentive, et cetera, I get to sort of your hearing aid revenues being up 3%-7%, 4%-8% versus your 2019 sales. I'm just kind of curious, if you were to guide for the market, what would that number look like versus 2019? Just 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 kind of appreciate in the retail space, there isn't a ton, but we've seen, for instance, Novartis go down the route of thinking about maybe some pharmaceutical solutions to hearing loss. Just kind of curious if that's on your radar at all. Is that something that you've given any thought? If you could comment on that would be great. Thanks so much.
Yeah. Thank you, Veronica. Let's start with the assumption. We assume that the market in 2021, if we disregard NHS, VA, and the emerging markets, would see double annual growth rate. Based on that market, we will take share. I think that's how you should look at the 2021 guidance. That is driven by our success with the Philips brand. It's driven by launch of new products that we of course have great expectation for during 2021. Share buyback versus acquisitions. If unpredicted things happens and we have to do significant acquisitions, we would 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 buy back.
I would say, implicit in this guidance is, of course, a normal expectation of continued acquisitions, but maybe not just major acquisitions.
Right. Any interest in pharmaceutical solutions to hearing loss, or is that something that is a little too far outside of your wheelhouse?
We, of course, look carefully at everything that happens in our space, including pharmaceuticals. Our best estimates is still that these are pretty long-term.
Understood. Thank you. Just a quick clarification. The continuation of the one-off branding cost in EPOS, is that excluded from the guidance you guys have given today?
We're not going to specify any one-off cost going forward. We will only do reported numbers. No adjustments, no one-offs. We are just commenting on the fact that EPOS marketing cost was slightly lower in 2020 than what we had anticipated, and that might be from an activity level and partly from a cost level, a spillover into 2021, but that is fully included in the guidance and no one-off.
Okay. That's very clear. Thanks.
The next question comes from the line of Oliver Metzger from Commerzbank. Please go ahead.
Hi. Good afternoon. Thanks a lot for taking my questions. The first one is on diagnostics. In H2, you were organically again in a positive territory. Does the development of value outperforming volume growth continue? That's the first question. Two quick ones on EPOS. First for clarification, except for first two months, but also for the remaining year, do we see the strong outperformance of the business versus gaming to continue? Also question of the expected phasing of EPOS in 2020. You said early in the year there was a more pronounced phasing towards the second half. It was even stronger, which was again positive. Would you stick in general also towards a stronger second half than the first half? Also the base case, I know that you made your comments on the first two months, but more from a general underlying perspective.
Thank you, Oliver. I just have 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 audiometers to bigger installations for balance treatment. We never really talk about volume versus ASP. It doesn't really make any sense. The business is growing across multiple segments, across multiple channels. As we highlighted, in particularly the acoustic business with the new Affinity Compact have been driving share gains, as well as further expansion in balance. 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 U.S. where we screen babies on behalf of hospitals is growing.
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 kind of blurredness of the outlook as there in 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 on the enterprise is where 2020 definitely was a working from home trend 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.
Much more meetings between meetings, rooms kind of equipment type, speaker microphones on the table, different kind of video equipment. 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. We cannot give much more clarity on that at this stage.
Okay. Thank you. Just one follow-up on the diagnostics question. In the past, you commented that basically you moved more from simple products to solutions, and that was also positive from a pricing perspective. Do you expect this trend to continue?
Yeah. What is growing is the share of service calibration disposable is growing, but we are not seeing that this is becoming a software business, if that's what you are 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. There's no big drift in the way the market structure is.
Okay. Thank you very much.
The next question comes from the line of Anette Risgaard from Handelsbanken. Please go ahead.
Thank you so much for taking my questions. Congrats on a very nice result. My first question was to go in respect to the communication and the decent growth you're expecting over the next couple of years as the demand for office headsets are still increasing. How will you spend that growth? Will this go into new investments in terms of marketing and R&D, or will part of this operational leverage go down and manifest in terms of margin expansions? Could you say a little bit more about More? How actual sales are? I know you had positive feedback, but how is the rollout going in the States? Are you seeing more sticky market shares right now? Should we expect that to even out during maybe the second quarter of this year, or how should we see the impact of the new hearing aid in general?
Thank you.
Thank you very much, Anette. As I think it was the same line as Maya was asking into, we will invest more as we are upscaling R&D, sales and marketing, expanding global distribution, building the brand, stay at the same time with an eye for growing profitability. Yes, we should see expanding margins in the EPOS business also in the near coming years. That's definitely the ambition. On More launch, we are off to a good start. Sales numbers are good. Some markets, you don't see sales right away. You definitely would work with some kind of consignment or demo instruments being out, invoicing comes a little later. 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 a quarter. Yes, it is both our ambition, and I'm also sure we'll deliver market share gains based on the More concept. No doubt about that.
Also, do you see a difference in the current market right now as it's hard to visit the retailers or the clinics due to COVID-19? It's maybe, market share more stable right now, and will that sort of develop or change, for example, through mid of next quarter?
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. On the other side, the reach, the number of people you can actually reach is significantly more efficient. We can just see a simple stat, like how many calls have we been able to conduct here in January in the U.S. market to customers about Opn. It's significantly higher than it used to be because you can simply do more a day. There's both pro 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.
You will have to be patient a little longer, and then we will comment on that. As of now and where we have reached today, we are very happy and positive around the market feedback and the pickup also in sales and numbers shipped to customers, units shipped to customers.
Thank you so much. Thank you.
The next question comes from the line of Tom Jones from Berenberg. Please go ahead.
Oh, good afternoon. Thank you for squeezing me in at the end. I had two quick questions, really. 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 some qualitative commentary about what kind of pricing you're seeing on More versus Opn S at the retail level. The second question, was just a big picture one really. Over the last 10 years, the return on capital for both you and the hearing aid industry has come under reasonable pressure as there's been a kind of global arms race to outspend each other on R&D, distribution costs, and to some extent, competing for retail assets. I guess the question is, what's the outlook from here?
Obviously, in the pandemic, you've realized that there are probably more efficient ways to do distribution. Did you see kind of structurally lower distribution costs and therefore improving returns, or do you just think that that money will get reinvested into more R&D in other areas of the business? I'm intrigued to know whether you think we've sort of reached the bottom of the return pressure that the industry has seen, and maybe the next five years could be a period of improving rather than contracting returns on capital.
Yes, Tom, thank you very much. Retail is relatively stable. Retail pricing, whether it's the one product or the other. A new generation, of course, everybody try from time to time to up it up a bit, and so do we encourage people to do on More and try ourself in on retail, but it's not dramatic. It is a more natural development. What really helps is the mix. The mix change improve the ASP for us, and that's where we really want to use the new products we have launched to drive share gain in the upper end of the market. Why we get it out at three price points, why we get it out at all four brands, and that's a much more important factor.
On the wholesale side, you cannot typically change a lot in the line-by-line ASP. You can also see at least temporary mix changes when new exciting products are out. Typically stronger in the smaller, independent channel, where they very quickly run out and find candidates and sell in a little bit stronger on the premium, that will help the ASP. Again, it's not price increases as such as much often mix changes. Return on capital is a longer education. Maybe you will comment on that, René. Just R&D and distribution, whatever have 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.
It's not that there has been kind of new business models, if that's where your question is going to in the future, we can do it all with less cost. There is a certain underlying demand that come in with less marketing spend. If you want the market to normalize, you also have to spend the money.
I think on the return on invested capital, of course, you have seen a declining trend in the last decade driven by the consolidation predominantly on the distribution side of things. Of course, it is driven by the fact that you have, let's say, consolidated a lot of the, let's say, major chains that have been, let's say, free in the market. There are only very little of that you can say left. Even though consolidation will continue, it's likely to take place at a lower pace than what you have seen in the recent decade. Thus, limiting the decline from that effect. On the other hand, you have seen consolidation on the wholesale side and basically the potential for scale and let's say optimizing and growing margins on that side from the industry as such.
You can say maybe outbalancing the other effects leading to a flat or maybe even slightly improving returns on invested capital going forward. These are some of the swing factors at least.
Yeah. No, that's very helpful. Thank you very much.
Thank you very much.
That was the last question. I'll hand it back to the speakers for closing remarks.
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. Have a good day all. Thank you.
Thank you very much.