Good afternoon, everyone. Welcome to our conference call, held in connection with the publication of our interim report for H1 '23, which we released after the market closed yesterday. Plan is to run through a presentation, as always, digging into the results and, and the upgraded outlook we delivered, followed by a Q&A session. Presentation has already been uploaded to our website. This session will be around an hour or maximum of an hour as usual. No changes to the team here. President and CEO, Søren Nielsen, CFO, René Schneider, and the IR team is represented by Peter Pudselykke and myself, Mathias Holten Møller. Over to you, Søren.
Yeah, thank you very much, Mathias, and welcome, everybody. I'll try to do this quick, so we have time for questions. We came out with our report for the first half yesterday, and it is a very strong result we come with, and it points well for the fall as well. It is driven by very strong growth in hearing aids, which is broad-based market share gains across channels, across geographies, fueled by our recent product launches that we have seen continue to deliver and drive share gain in the market. We have also seen strong growth in both hearing care and diagnostic. Strong organic growth, but also fueled by and supported by meaningful number of acquisitions over the past 12 months.
Communication, on the other hand, saw disappointing performance below our expectation, that this is primarily due to a weak market, not just in gaming, but now also in enterprise, where we see a growing number of businesses holding back on the expected investments in this type of equipment. Our CO2e emissions, reduction targets, science-based targets, have been approved, which we've had before, and our effort and work to live up to that continues. As already announced on the 22nd of June, I've only had approval for, I would say, almost transferring our obligation towards CI patients to Cochlear, whereas the Bone-A nchored Implant business remains and stay with the Demant for now, and we will later on decide the exact future for that. For now, it stays with the group.
Key financial takeaways from the first half, organic growth of 13% for the group, a decline to gross margin, that I'm sure we're going to get back to in more details, of 1.3%, which is below original expectation, but mainly related to a number of adverse exchange rate effects that I'm sure René will explain in further details in a moment. OpEx increased 7% organically, reflected, of course, continued investment in the hearing healthcare business, while at the same time, saving cost in communication in order in a weak market to minimize the loss. EBIT for the group was a record high, just above EUR two billion, an increase of 27%.
Margin increased 1.4 percentage points, driven by material operating leverage, of course, in the hearing healthcare business. Very strong cash flow from operation of DKK 1.8 billion. This has improved also gearing leverage, et cetera. Based on all this, and also a, you could say, an adjusted update to our expectation for the development of the hearing aid market, we have adjusted. The two main adjustments to our outlook is the organic growth rate, we have increased from 6%-10% to now 11%-14%, and our EBIT, full year EBIT, from previously DKK 3.8 billion-DKK 4.2 billion, to now DKK 4 billion-DKK 4.4 billion. On sustainability achievements, first half this year has been a good one.
We have seen approval of our science-based targets. We have seen a reduction of our emissions, and the share of renewable energy is at 22%, which means we can now measure and follow it, and I'm sure it has increased. We have also seen an increase to gender diversity, meaning more women, especially in top management, but also across all management. Hearing healthcare in a few more details. Organic growth of 15%, primarily driven by very strong performance in hearing aids, but also a hearing care and diagnostic. Gross margin declined 1.4%, again, related to, you will call it higher unit cost, but it is related to exchange rate effects. Again, René will explain in more details.
OpEx grew 9%, reflecting that we continue to invest in this business and see, of course, now good or have seen good returns. Acquisitions was on OpEx 5% and driven primarily by the expansion in hearing care, where we have seen significant expansion also through acquisitions. EBIT in hearing healthcare, DKK 2.16 billion, 28% up from first half last year, and a significant margin expansion of 1.2 percentage points. Again, of course, reflecting strong operating leverage, not the least in hearing aids. The hearing aid market in first half 2023 have developed positively. We have seen in Q1, 7% as already reported, and then you would say only 3% in Q2.
This is the whole trick that this is exactly the same size of the market. It all relates to the comparison figures. If we allow ourselves to look back to 2019, which we see as the last stable year, we actually have seen exactly 5% growth on a CAGR for the both quarters and for the full half year. We have seen Europe being more flattish, where NHS have grown and that have outmatched the negative development in Germany and France. North America has been solid, and that is, you could say, a recovery after last year's somewhat depressed market. We continue to see growing share of managed care in US in the first half of the year.
Rest of the world, growth is very strong. This is primarily driven by the recovery in China after long periods with lockdowns and various Corona effects. Hearing aids in details, very strong growth, 20% in second quarter, and therefore, a continued strong performance. Remembering the market was, you know, you could say, a stronger comparison was stronger, so this doesn't really reflect much of a decline, but more a continued, very strong momentum, fueled by not the least Oticon Real, but also the other new products released. It was 18% on units, 4% on ASP, mainly reflecting geography, channel mix, but also price increases implemented last July. Hearing care, positive momentum, organic growth in most major markets outside US and France.
U.S. flattish, but France declining. As the market, however, in France, we gain share, so we have declined less than the market. Other regions, basically all, perform very well in Europe, especially Poland and U.K., North America, Canada and of course, China and Australia, I would say, leaving Corona behind. Diagnostic, we estimate that we, you know, the market has grown in line with expectations. We have grown more. Part of it in Q2 is a catch-up from first quarter, where we got a little bit behind schedule, due to the ramp-up in our new factory. All in all, a solid organic growth in the first half and also a nice contribution from acquisition.
Communication, as spoken to earlier, a 15% negative organic growth, reflecting basically the market. We think this is more or less in line with the market. Of course, not the same level of statistics as we have on the hearing aid side, but that's our best estimate. We have seen a substantial decline to the gross margin. This is both a scale issue, but also significant promotions that have had to take place to push sales, especially within gaming. OpEx decreased by 16%.
This reflect the cost-saving measures that we did in the first half this year and second half last year, and unfortunately, not able, of course, to fully cover up for the decline in gross margin, as well as the negative growth in the sales side, and therefore, an EBIT bigger EBIT loss than last year, DKK 148 million, which is, of course, not to our satisfaction. We estimate that we saw negative growth in the market in Q2. Our growth disappointing, and again, it now have both affected gaming as well as enterprise solutions.
With the launch of our new flagship product, EPOS IMPACT 1000, and following releases, we expect we can improve the run rate during second half of the year. With that, over to you, René .
Thank you, Søren. A slight repetition of our segment reporting, but again, just highlighting the very strong hearing healthcare performance and operating margin of more than 20%. Of course, on the group numbers, partly offset by the negative contribution from our communication segment. All in all, 18% operating margin in the first half year and a strong improvement over first half year of last year. If you go into the more detailed analysis of the different components, we have seen a gross profit increase of 15% to now above DKK 8 billion. Whereas if we look at the gross margin, it declined 1.3 percentage point, and is below our original expectations going in to the year.
There are a number of effects, but as in order of importance, it's important to understand what exchange rate means year, in the year-over-year comparison. In ballpark numbers, looking at first half year last year, we had a tailwind from FX of a little more than 0.5 percentage point, meaning that the underlying gross margin in first half year of 2022 was actually very close to 74%. Actually, this year, first half year, we have had a headwind of also just above 0.5 percentage point on the margin, meaning that the underlying gross margin in the first half year has actually been 74%.
That's one important element, and that is part of what gives us comfort in the gross margin going into second half year. Another important effect that we have seen in the first half year is basically the effect of FIFO accounting, meaning that the raw materials purchased, the work in progress produced in second half year of last year, was done at a very high US dollar. But since sales were below our expectations last year, in effect, we have been expensing and selling those products in the first half year of this year. Which means that the high dollar effect actually hits our P&L in the first half year of this year.
Looking at sort of the growth margin in our group towards the end of first half year, we have seen a significant improvement, improvement also as a result of us getting basically through the expensive inventory stemming from last year. The last effect to highlight is the effect that Søren Nielsen already spoke of, which was the high level of promotional activities in gaming. All in all, the run rate going into second half year is the around 74%, and also with some opportunity to improve from there. Therefore, we have a high degree of confidence in the fact that we will see improvement in second half year compared to first half year on this particular financial margin.
OpEx, we grew that 7% organically, driven by hearing healthcare, so significantly below our organic sales growth, reflecting strong operational leverage. Also, acquisitions contributed by 5%. Obviously, we have seen savings in communications, as already alluded to. EBIT was just above DKK two billion, a growth of 27%, driven by our hearing healthcare business. Exchange rate had a negative effect of slightly more than DKK 50 million, part of what was in the gross margin, as I explained before. In the period, we have seen a net positive fair value adjustment of actually, exactly DKK 29 million. Cash flow was also very strong in the first half year.
Cash flow from operations, just shy of DKK 1.9 billion, driven by strong EBIT and strong working capital management, and particularly driven by lowering of inventories. CapEx in line with our medium to long-term expectations of 4%, and investments in acquisitions amounted to DKK 313 million. A little bit shy of our expectations, but we still feel that for the full year, we will be above the normal level, so it's mostly related to timing of acquisitions. The balance sheet year-over-year or since the beginning of the year, has been flat. A small effect from FX downwards of 1%, but offset by predominantly goodwill related to acquisitions and a write-down of CI-related assets.
End of the period, our net interest-bearing debt was DKK 12.2 billion, and we are now slightly below the upper level of our leverage guidance range of 2-2.5, meaning that we are now back in the range where a share buyback is an opportunity. That brings us to the outlook.
Yeah, thank you very much, René. Thank you for that. A number of things have been upgraded and adjusted. The first, important one to understand is that our outlook for the hearing aid market, we upgrade, and we do that because we see a new level of stability. We have seen a very, very stable run rate in most markets, France and a few other excluded, but it's always like that. Back to the 5% CAGR, back to 19, we expect basically the same for second half, which implies a small growth from first half into second half. If you do that, mathematically, you will simply come to growth rates above the 4%-6% for the full year.
We now believe we'll be outside that, and of course, that implies for second half that it will be even more above. You, I'm sure, can quickly do the math yourself, and you will see it. We still expect ASP to decline with 1%-2%. That's basically mix effects, some channels growing more than others, natural competition, and also as you know, we still have a China coming back after a very weak period. That's an example of a geography with lower ASP and strong unit growth, so that's unchanged. We now also expect a weak momentum in the market for enterprise solution and gaming headsets to continue throughout 2023.
We previously had a somewhat positive idea towards the end of the year, but we have no line of sight to that, and therefore, remains negative on the development for the rest of the year. Therefore, also now believe in negative organic growth for communication for the full year. Hopefully, an improvement, or we expect an improvement from first half into second half of the run rate of sales, but it will, despite of the efforts to do cost savings, lead to an EBIT loss that is bigger than the level of 2022. We will, of course, continue to look for opportunities to further reduce cost and be careful on how we spend the money.
On the other hand, we also need to stay in the game, in the belief that long-term, the market will, of course, come back at some stage. Then, also the divestment of cochlear implant, we assume it's still to close at the end of the year, and again, Bone Anchored will remain with us for now. Organic growth, upgrade from 6-10, to now 11-14, and EBIT up as well, as I mentioned, to now 4-4.4. Also, we have to say that the net financials, despite of us actually decreasing our debt, will increase, more likely to be $700 million instead of assumed $600 million.
expect to go down a little bit compared to previous expectations, and then we narrow a bit the loss related to the discontinued business. It actually reflects, of course, more clarity on timing and cost, but also the fact that the operating business underneath is performing slightly better than anticipated. The big part of this loss is the adjustment to various assets and goodwill on the balance sheet. And with that, let's open for Q&A
At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing the pound key. Once again, if you would like to ask a question, please press star one at this time. Our first question will come from Hassan Al-Wakeel with Barclays.
Hi, thank you for taking my questions. I have two, please. Firstly, could you break down your commentary of a better than 4%-6% market growth rate for 2023 by region? Particularly given you mentioned that H1 was 5%, and Europe was flat and decelerated Q1 to Q2. I understand some of the comments you made around comps, but what is the assumption for the second half? Secondly, could you walk us through your confidence and drivers around H2 implied margins, given the midpoint implies, you know, over 350 basis points of margin expansion year-over-year in the second half and around 150 basis points sequentially. Are there any one-offs that we should be thinking of? Thank you.
Thank you very much. Let me try to elaborate on the market, and it's gonna be a little bit round, but again, our main, main assumption is when you put it all together, we will see a CAGR growth since 19 of 5%. You can basically do the same for all markets, except France, which has had significant ups and downs in the period, and maybe a little bit China and a few other markets. The majority of markets would fundamentally land around their, their natural growth rate, you could say.
That implies that we will see, just from the bare fact of continuing the absolute market size we have seen in first half, and a little bit of growth just by the nature of going, moving forward, that you will find growth rates above the 4% to 6% in basically all regions. Stronger in Asia due to China, a little stronger in US, since the uncertainty in second half coming from inflation, et cetera, was stronger in US than it was in Europe. Europe was kind of lacking that effect compared to North America. That's basically it. Again, it's quite simple to model it out. Rene, if you could.
Yeah
speak to margin.
On the implied margin for second half year, I already pointed to our expectations towards a higher gross margin, which is, of course, one driver that has, you can say, pulled, pulled down H1 extraordinary, we have a firm belief that that will revert in second half year. As also in our guidance, you have an implied significant organic growth, and as we see in first half year, when we are growing the business, we also have operating leverage, and on particularly also on the OpEx side, and that will also continue into and potentially further improve into second half year.
As a business, if you look into previous years, we have a level of just, just general seasonality and higher profitability across businesses in the second half year. All of that combined gives us significant confidence in margin expansion.
That's helpful. Sorry, and if I could just follow up on, EMEA, and, I, I guess, what are you seeing in, in, you know, exiting, last quarter, July, and, and, and, and this quarter, in terms of any potential recovery? How are you thinking about, you know, replacements, versus new customers in, in Europe? Thank you.
Yeah. I, I, I don't have that, you know, level of granularity. Here, my message is stability, you know, Europe have had and will have a less than the 5, 6% growth they have had it. Many countries in Europe are more likely growing 2, 3%. I think you will find that that's the cake guy is maybe a little bit lower in Europe than it is in the rest of the world. We also, in Europe, see stability again outside France. Not a lot of, you know, going up and down, that's the main communication here, that putting it all together, including Europe, you will see a slight growth from first half into second half, that in itself implies a higher than the 4-6% growth rate.
We have not broken it down on each market, and you will see, as always, ups and downs and swings and a reform here and not one there. That's not- we're not down to individual markets. This is putting it all together. We are within the normal deviation market for market, and altogether, a very, very high level of stability, basically first time for four years, where we believe that there's at least not sight to any significant uncertainty that should change this. That's the reason for the upgrade.
Perfect. Thank you.
Thank you. We'll take our next question from Veronika Dubajova Citi. Please go ahead.
Good afternoon, guys, and thank you for taking my questions. I will keep it to two as well. Just want to get a little bit of flavor for the competitive environment that you're seeing, Søren, and, and your relative events versus peers. I noticed in the VA for the last couple of months, we've seen a little bit of a slippage in your market share. Just curious if that mirrors what you're seeing in the broader market, and obviously, we get your Q1 and Q2 growth rates, but if you could maybe give us a flavor for how you think you're competitively doing exiting the half year and moving into the back half, that, that would be really helpful. That's my first question. Then my second question is just M&A.
Veronica, sorry, if the line is not very good, but I can see Peter got the question, so now I'll ask him to repeat it instead of trying you to repeat it.
I guess, Veronika-
Okay, go for it.
The competitive environment and how exiting, kind of H1 on a competitive side. Is that correctly understood?
We assume so. Second question. Thank you.
Yep, my second question was just around your M&A appetite. Obviously, I know when you came in for this year, you were hoping to be more acquisitive. You've done a bit more than usual, but I'm taking your sort of buyback commentary to mean that maybe it's not going to be as much as you had thought. What's changed in the market? Is it that you have less appetite? Is it that there are fewer assets, or is it that the process is more competitive?
, and the answer. First of all, competitive environment. Again, I think it's stability. We know and have now confidence and evidence for the strength of our own product portfolio. You know, I always say it takes three months, four months before you're really sure whether it bites. It does bite. We continue to continue Oticon Real and the other products we have launched, open doors to new customers. So we still see share gain, not across all markets, all channels, but if nothing else, maintaining strong momentum, but also in a number of channels, obviously still having, you know, effect of a full period. VA is an example. There's only two months in first half, there will be six months in second half
Also again, on among the independent dispensers, there's a long way around, and we continue to see Oticon Real and the other products deliver new opportunities and growing sales. On the M&A, there's no change to the full year guidance. This is simply timing. We had expected that a few more things would land in the first half than second half. It is a pipeline. Things sometimes take a little longer. It can be, you know, final discussions or authorities that have an opinion, the seller gets second thought, whatever. There's no change. We have no more or less appetite. We have not changed our view on where we should acquire. We have not seen changes to pricing anything.
Also, they are pure, pure timing, timing between the two half years. The commentary on the share buyback, just to take that, is just that the residual after acquisitions, after investing in the business, after servicing our debt, you know, there is a variable on all the three, and therefore, we can see we are, you know, within range. When we are within range, we can buy back share if we want to. We have not the, you know, full transparency to if it will happen and if when, and therefore, we are only now flagging that it could happen in second half because we are theoretically there, where it is a relevant discussion.
Very clear. Søren, can I just ask, any tailwind you saw in the second quarter from the manufacturing and supply chain issues that one of your large competitors is having? Was that a notable driver in Q2?
Not that I'm aware of. Again, this is...
Fantastic.
broad-based and across channels, and so no. I attribute it to our own, the strength of our own product portfolio.
Thank you. We'll take our next-
Thank you.
Thank you. We'll take our next question from Martin Parkhøi with SEB.
Hi, there, with Martin Parkhøi, with SEB. A couple of questions.
You are impossible to hear. If there's a closer to a microphone or something?
I'm usually a Jabra headset.
Oh, yeah, that's the reason.
It, it cannot be closer to my mouth unless it's in my mouth.
Yes, you're better.
Great. Just, just maybe, Søren, I know it's, it's still one year down the road, but we're getting closer to...
to the VA update, the five-year update with also respect to price negotiations. Now we see that the Costco prices again, on the branded segment, going down again just recently, and that has happened a lot of times since the VA was negotiated the last time. Should we expect to see a significant reset of the pricing in the VA when you will update your contracts next year? The second question on communications. You are of course now guiding an even larger loss in 2023 than in 2022. If I look at the last two years, the loss has actually also been larger in the second half than in the first half.
how should we look at the at the communications loss in the second half, compared with the $148 million you delivered in, in, in the first half? Then just maybe lastly, to René, just on your cash flow generation in the in the second half. Of course, some things you cannot say right now compared to, to the first half, but how should we look at the the the the cash flow generation with respect to working capital changes? Like, you elaborate a little bit on that?
Let me take, I will not comment on pricing. It's, you will see when it's done, how things go. Remember that Costco also, to some extent, went the other way. When KS was canceled, you saw an uplift to the consumer prices, so I wouldn't see it as dramatic as as you might see it. Then, regarding losses, growing sales and cost down, that's the recipe. We expect a, you know, less, but up to the same-ish, kind of, I think is a fair, estimate for second half, but, don't, don't take it more precise than that. That was not a guidance.
A kind of similar answer to cash flow, but no, one of the most difficult items to actually forecast. You know, we feel, feeling confident that, of course, it's, it's positive and it's strong, and whether it's in line with first half year or above or below, we cannot be specific on. We are, we are continuously, month by month, generating a strong positive cash flow, so I assume the same for second half year, but a specific number, I, I cannot give you.
If I could just follow up on the, on communications, because now then, then we're looking at a loss of more than EUR 250 million this year, which is one quarter of the sales you probably generate. Even with 10% growth every year, it will take a lot of years before you will be positive again. You are always quite comfortable when the market picks up, it will also be good for us. Do you actually think that you will be the first in line to capture market growth once it happen, considering the significant scale-down you have done in your cost base?
Yeah. Yes, I think you have to remember, we are very unevenly distributed company. We are not a global company acting in all markets. We do actually have a number of markets where we have a good, decent share, and we'll also get our share when the market picks up, I'm sure. One of the cost reductions we have done is to better fit. You know, we were scaling the business for a lot of growth and expansion in new markets, so one of the things we have done is to narrow the number of markets we actually address right now, and make sure there's a better local alignment between cost and sales. That is one example.
Secondly, we also do expect that we, with a somewhat changed product mix, more of the new stuff and wireless products on enterprise, instead of selling out high inventory of gaming headsets at low prices, we'll see an improvement to the margin, gross margin. That's also part of the solution. Otherwise, yes, it would take a very long time.
Thank you.
Thank you. We'll take our next question from Christoph Gretler with Credit Suisse. Please go ahead.
Thank you, operator. Good morning or good afternoon, Søren and René. I have two questions. Maybe, the first, not just on operating expense growth, you know, in hearing healthcare. I think, you know, that was, you know, somewhere around 9% organic, you know? Is there something special in there, or, can you maybe, kind of, you know, clarify why we've seen, you know, such strong growth, you know, which is obviously way ahead of inflation, et cetera, and so... You know, and what were the, you know, investments specifically, maybe?
Yeah.
That would be my first question.
Yeah, please continue, Chris.
The second question would, you know, just come back to communication, EPOS, you know? I think, you know, in your slides and your half-year report, you mentioned that, you know, you might review that business and to align it to the current, you know, activity levels, you know. Is there something, you know, else you can do, you know, just from, you know, poor cutting, you know, cost here, you know, I mean, structurally, that, you know, would, you know, improve margins? In particular also, where, where do you see actually a reasonable gross margin for that business, you know, since, you know, we had this substantial drop on this first half? Thank you.
Yeah, thank you, Chris. The OpEx organic growth, there's an element, I would say, almost of normalization also there. As we came through 2022, we kind of pulled the brakes especially on the hiring for open positions, which hits, among others, R&D quite significantly. The normalization and getting all the position filled was part of it, but also further investments in the R&D. That is the, the main organic growth, and that is, of course, because we once again think we have seen and proven that it is a key driver for share gain to bring out the innovation and products that are significantly above your competitors. That's the, the main area.
On the communication, the alignment I talked about, so you're sure, you know, we were in much more of growth mode and investing in new markets and building markets where we had very low share, building, basically a new brand and so on. Some of these things we reduced, sponsorship of, of gaming teams and what have you. You simply have to have a better alignment between the market size and your sales and marketing cost. There's both geography, but there is also promotional elements where we have just seen too low a return in the market. It's that kind of review we will do ongoingly, as an example.
Thank you, and maybe if you allow, I have one, you know, follow-up, you know, just on, you know, your substantial market share gains in hearing aids, now, is there any way you can, you know, kind of discuss, you know, what kind of accounts that you are actually kind of being so successful, you know? Is there a kind of, you know, kind of a common factor or, or something, you know? It's really kind of very impressive, I think, you know, in, in units, you know, in particular.
Yeah. It is, as I said before, really broad-based. There is, of course, you could say a part of the unit element that comes from markets that have seen a high growth rate and returning. NHS have been above the normal, China have been above the normal. Of course, the strongest effect is in markets where the share of people that are willing to go for the best, and I know I've spoken to this many time, you know, free choice leads to better product mix when there's something good around. The product mix is not a dy-- a fixed dimension. It's very dynamic.
Independent dispensers, well-trained, well-educated audiologists, they fundamentally want to do a good job, and they are just good in explaining the benefits, let people try one or two models, and if you do that and feel and see the benefits, you go for the best. It would be exactly the same as basically any other healthcare cost. Of course, if you're in a more fixed system where somebody controls what you get, then you see less of that effect. It is the very significant uptake to our newer and latest products that are primarily sold in, you know, the premium end of the market, that is where we have seen both the volume uptake and, of course, also a nice ASP.
A U.S. market is a key market, you know, across Europe and, yeah, markets with, I would say, free choice.
Thank you. I appreciate your comments. Thank you.
Thank you. We'll take our next question from Susannah Ludwig with Bernstein. Please go ahead.
Great. Thanks so much. Good afternoon, thanks for taking my questions. Just on the retail side, could you give a bit more color on your performance in the U.S. market? Specifically, to what extent is the exit of managed care contracts, is that still impacting growth this quarter? I guess more broadly, do you feel the restructuring you've done has positioned you for growth, or is there more work needed there?
Yeah. Thank you. I would say if you look at the market and say managed care is still growing, then our US business is organically flattish, but that's also our best estimate for the market. It has also seen some positive effects from, you know, better product mix, also benefiting from a new, stronger premium introduction, but it also seen a headwind from closed stores where the traffic was not high enough. Of course, a growing share of managed care continue to make the marketing effort more and more intense. That, that's just the nature of it. Given those circumstances, given the reduced network, we have seen a very good performance in US.
It's in line with what we expect and had planned for, and we have seen growing profitability, and that was the main driver. For the exercise, it was not to generate growth, but it was to grow profitability. Less managed care, replaced, not maybe one to one, by private pay sales, reduced network where we could not fill the schedule without too much managed care, et cetera, black spots where we couldn't hire staff, et cetera. There's a, there's a growing profitability in the business despite of a flattish organic growth.
Okay, great. Thank you.
Thank you. We'll take our next question from David Adlington with J.P. Morgan. Please go ahead.
Hey, guys. Thanks for taking the questions. Maybe first on communications, just wondering how you're feeling about that purchase and the carrying value of the assets. Then just on the gross margins there, just any sort of thoughts around whether you've peaked in terms of promotional activities and how we should be thinking about the evolution of the gross margins through the second half and possibly into next year? Then just on the Cochlear business, I did wonder, any further color and update on the processes happening on the Cochlear side?
Yeah, thank you very much. I, yeah, you know, again, we are still firm believers in the health and strength of this market in the long run. There will be more online gamers. There will be more people working from home. We will all work more virtual. The long-term growth is gonna be there. I think we have fundamentally seen a reset. You know, before COVID, there was one extrapolation of the world, then everybody got maybe overexcited during COVID and post-COVID for working from home and so on, and the estimates for the future growth was kind of endless. Now we have seen a, you could say, a reset to another level, and from some point there, we will start to see growth again, I'm sure.
It still makes sense for us to be there, but we need to align the business to the size of the market, and that's that's key. We do have scaling issues, of course, and that's part of the gross margin in addition to the promotions. The promotions will tailor off when, yes, we are out of, it is related to some co-branded products we can only sell for a certain period, so, you know, we better sell them for what we can get. Then the product mix and the business mix, which again, a newer product range in enterprise, will also work for a better gross margin.
Long- term, we still believe the natural place for that is between 40 and 50, but again, we cannot put an exact dot as the scalings effects, you know, come pretty hard into play when we're at this level of sales as we are right now. On the CI, nothing to add. We are working on the details, and hopefully, as planned, we expect as planned, to finalize the deal and close at the end of this year.
That's great. Thanks.
Thank you. We'll take our next question from Mattias Häggblom with Handelsbanken.
Yeah, thank you so much. Two questions, please. Firstly, in June, one of your key competitors decided to move into the OTC market with a new product introduction from Sennheiser. What do you see in this early creation of the OTC market that keeps you outside, or are you in a wait-and-see mode to evaluate the business or the market creation, or has a permanent decision been made not to launch in the OTC channel? Then secondly, can you remind us around the key currencies leading to the gross margin headwind in H1 '23, compared to a tailwind in H1 '22 for hearing, as it seemed to have surprised the market somewhat? Thanks for that.
Yeah, thank you. I will take the first, and René will comment on the second. There's no change to our OTC policy. We still see this as very, very early, and we don't see that there is a very strong first-mover advantage. Secondly, I must say, so far, from a pure financial and statistical point of view, the sales is not overwhelming, and I think I'll still be somewhat conservative in the changes among the consumer. The reason for a slightly lower penetration in US, against, for instance, Denmark, is not whether or not OTC is available, that's purely that you have a free-to-client system here in many European countries.
The chance that either online sales, which we, I think we have seen several evidence of, or sales taking place in a store with no professional, no guidance at all, is a long change, if ever.
Yeah. To elaborate a little bit more on, on the margin, gross margin part, if I should point to one main driver, it is the development in the US dollar over the last 1.5 year. It, it translates into two different effects. One is the translation and sort of hedging effects that we realize on an ongoing basis. That's one effect, and the other effect is that we continuously, when we source raw material for production, we predominantly buy in US dollars. It was an effect 2nd half year of last year, that we bought a lot of inventory, let's say an unusual high level of inventory at a very high US dollar rate.
Combined with the fact last year that we sold less than we had expected, meaning that we, end of year, sit with a very high value inventory that we are essentially selling in the first half year of this year, where on the sales side, the US dollar is lower. It is, to point to one thing, the driver of these effects is the US dollar. That's where I say, if we stay at the US dollar level that we have today, or at least see, say, less material swings month-over-month, as we saw last year, then we are in a situation where the gross margin is back to the levels that we know of historically, and also with an opportunity to improve from here.
Perfect. That's very clear.
Thank you. We'll take our next question from Oliver Metzger with BHF.
Yeah, good afternoon. Thanks a lot for taking my questions. The first one is on the market. Regarding the repurchase cycle, the reason for the slowdown last year, did you observe a reversion to previous levels, or just that after the lengthening last year, this period has remained more stable from now? Second, can you quantify the pent up demand in diagnostics? Is it fair to assume that if you look for H1 organic growth, that this is more of a proxy of the underlying development because you had this quarterly volatility related to the Poland issue? Thank you.
Yeah, thank you, Oliver. Let me take market first. You know, it's always difficult to separate the hot and cold water when you have mixed it. Whether there's still some that postpone a bit and some that come back from the fall, you cannot tell. People are not tagged like that. We can just conclude that the absolute size of the market is exactly where you would have expected it to be, had you predicted it back in 19. That of course means, well, maybe there is a little bit of pent-up demand, and maybe it's just a wave that still move ahead of us. We will never really know.
I think from COVID, we had some, much bigger deviations, and you can discuss whether we have ever seen them back or whether we have seen as much postponement as we have seen pent-up demand coming in, and I guess that theoretical discussion will never end until, you know, 20 years has passed. We no longer spend a lot of speculation into pent-up demand. We just say the market size now seems incredibly stable. Sales per day, run rate, split between new user and then existing users, length of repurchase periods, and so on, things seems to, finally, after a long period with a lot of fluctuations, to be, back to the normal stability.
Doesn't mean that you don't have fluctuations in individual markets, but when you put it all together, the predictability and the stability that we have known for many years of the hearing aid market seems to have refound its balance. Maybe, René, you could go around on the diagnostic.
Yeah, well, on the diagnostic side, we, we haven't talked about pent-up demand as a theme because, contrary to the hearing aid side, the diagnostics business actually went through the COVID period relatively un- un- impacted or unaffected, and has been performing fairly stable since then. That's not really a, a topic, and there's no pent-up demand out there, you can say.
Just to clarify, the pent-up demand was related in Q1, growth was slower as you had?
Yeah.
Inventory stuff.
Yeah. Thank you. Thank you for clarifying. Surely, we went into the second quarter with a fairly high order book and backlog. Of course, that has fueled Q2 to some extent.
Okay. Great. Thank you. regarding the market-
First half in totality, and see that as a reflection of the underlying business.
Yeah. Okay, okay, great. A quick follow-up on the market and also on China, because the dynamics in China seems to be different. There was this huge pent-up demand after stopping the zero-COVID policy. Do you see right now, after this first wave of pent-up demand, that underlying growth is still as healthy as you would expect it or as it was before the whole pandemic?
Yeah, thank you for the question. The reason why the immediate pent-up demand was so strong was when you totally lock down, then there are people simply waiting to get help. That's exactly the same we have seen all around the world. It's more when there was COVID, and you were under restrictions to do, you know, who came out and not out. That part is, is, was primarily a Q1 effect. What we see now is not a China. You wouldn't apply a 5% CAGR since 2019. You would have had to take a bigger number.
Yes, it seems like the further development of the Chinese market, and remember, it's not a mature market, it's one where you need to open stores, train audiologists, and so on, before you tap into that basically enormous untapped potential that is there. That process, for sure, have been delayed, and therefore, the market today is smaller than you would have stipulated back in 2019. That's because it's a growing market driven by a growing structure. And that's, of course, different than, let's say, a Europe or US, where, where that part is very steady and only growing in line with the underlying demographics because the penetration is unchanged. When the penetration grow, number of stores grow, then there is a setback.
You cannot just catch up and open, you know, hundreds of stores that should have been open in 2020 and 2021.
Okay, thank you very much.
Thank you. We'll take our next question from Robert Davies with Morgan Stanley.
Hello, it's Rob with Morgan Stanley. Just a couple of questions. Most of them have been covered, actually. One was just around the boost you think within the numbers you had in hearing healthcare over the last quarter, just from Oticon Real, specifically, if you can kind of separate out that kind of benefit, I guess, as part of the overall growth print. Secondly, just coming back to the communications commentary. I know you've obviously given some guidance for 2023. I'd be interested to know what your view is in terms of a timeline for break even, if there's any sort of change in thoughts there in terms of the medium-term profitability timeline. Thank you.
Yeah. You know, it-- the boost from Oticon Real and these products are very big because the ASP is high, and the volume is strong. You know, a very big number of instruments are sold in this category at very attractive pricing, and therefore, the absolute element is very big. That's also why you see, you know, share gain and growth like we have seen. Of course, we are broad-based, so we also grow, you know, not all the extra units are Oticon Real, but from a revenue point of view, it's quite meaningful. On communication, we don't guide on that, but of course, next year have to be better than this year. That's for sure. We have to find a way to a much better result.
It is very painful to see losses at this level. I cannot tell exactly when it happens, but it's, I can assure you, high on the agenda.
Okay, thank you.
Thank you. We'll take our next question from Martin Brenøe with Nordea. Go ahead.
Hi, thank you so much for taking my question. Maybe just one clarifying question on the diagnostics. Could you provide some colors on the large tender that you've won in Q2, just in terms of what, what the contribution is and, and whether you see the full contribution now, or whether it's a gradual one, and maybe also for how long that contract will run? Secondly, you saw accelerated growth in China in the hearing aids business, and, and the hearing care business. Do you think that the market is just an upward trajectory from here, or do you see any potential clouds in the sky there? Thank you.
Yeah, thank you very much. On the diagnostic, you know, it's just a mentioning of one example like we have in others. It is part of it. I can say it is, and I think it's a very good illustrative example. It is within balance, and it is a market where we, over the past years, have invested a lot in training and education, which is exactly what happens. Eventually, a healthcare system, whether it's private or governmental, decides, "Okay, we step into after various trials, offering this treatment and diagnostic, broader-based." You need a certain level of equipment. Yeah, in this case, there was a tender, and part of it has been delivered and some will still come, but it's just an example of a meaningful, of course, sized tender.
They are there, all the time. It is a to a large extent, a tender-driven business, so don't read too much into that. Could you take the last one, one more time? Sorry, I just lost... My notes were not good enough.
Yeah, sorry, it was about China.
Yeah, sorry.
Accelerated growth.
Yeah, yeah. Well, just from the pure demographics and the low penetration, China will grow above the global level of the 4%-6%. Yes, we will think it could very well be double-digit. Of course, like any other market, you will see fluctuations from year-to-year, and you should be very careful in a market where we don't have statistics and where sales is not a pipeline. China is still working like this, that when you come in in the morning, there is people in the waiting room, and you don't know where they came from or how many are there today, and if there's not enough, you go out and try and get some more or call out.
It is not at all mature to the level we are used to here in Europe, where we know a booking system and know how many, you know, when there's overbooking and underbooking and so on. We are not at all at that level yet. Therefore, we are very cautious in, you know, short-term estimation of market growth and guiding for the next three months. China, big picture, next five years will grow significantly more than the rest of the world.
Okay. Thank you so much. Very clear.
Thank you. We'll take our next question from Niels Granholm-Leth with Carnegie.
Good afternoon. Just a question and clarification about your longer term guidance, which you provided, I believe, at your capital market day last year. You're mentioning that you want to improve your margin level. Would that include margin expansion even in 2024, you think? You also aim for 6%-8% annual organic growth. Should we see this as an average, or would you say that 6% is kind of a floor guidance? Thank you.
Thank you, Niels. I think you also almost know the answer yourself. The six to eight is an average, and we have to ambitiously be in there. Could there be one year below six? Of course, it can happen. Would it be a great year? No. We aim for being in that interval and preferably in the higher end than the lower end. Margin level, it is the scalability, and I think we have argued numerous times for the value of the scalability. With the level of growth here, we see it. Had we had the not the exchange rate effect on the gross margin, you would have seen also strong leverage on the cost of goods sold from an 18% uplift in volume.
Taking a little bit down by more rechargeable, which is still a conversion going on, but you would have seen very, very clear evidence of scalability. I also mentioned the focus in US on retail, that the, the transformation or the changes we do are meant to grow margin instead of just growing top line. It is with that focus, and I will not guide on 2024, you know, that's too early. Yes, the ambition is the same, to get the scalability out of all the businesses and show that they can grow margin. We know hearing aids is the strongest when, when the growth rates get high, it comes right away. It's, it's more difficult in in hearing care, the, the store, because so much of the cost happens in the store.
That's more of a, you know, customer business mix in the store, and then in between you have diagnostic because it has growing, you know, also distribution element, and therefore, dampers the scalability a little bit. Over the past, three or four, five years, where we have seen very strong growth rate, we have also there seen a strong scalability. Then obviously in communication, we both plan to and have to see over the next few years, a significant improvement to the margin, obviously.
Thank you.
Thank you. At this time, we have no further questions in queue. I'll turn it back to management for any additional or closing remarks.
Thank you, thank you, operator, and thanks for taking care of the Q&A session here. This is it for today. Thanks for joining us, all of you, and let us know if you have any follow-up questions. Look forward to seeing you on the road soon. Have a good day.