Good afternoon, everyone. Welcome to our conference call, which we hold in connection with our release this morning of the interim management statement. We plan for the call, as usual, to last around an hour, including the Q and A session. We'll see if we go a little bit over time, then that can work as well. We have, as usual, President and CEO, Soren Nielsen CFO, Rene Schneider and then the IR team, Carsten Langen and myself, Matthias Holtenmuller.
We are present here. Before we hand it over to Q and A, we'll be going through a presentation, which has been uploaded to the website a short while ago. So I'll leave it over to you now, Sjaan.
Thank you very much, Matthias, and welcome, everyone. I'll try to do this relatively brief to have time for Q and A. If we take the key takeaways, we continue to see a strong recovery in most Hearing Healthcare markets and also some support from pent up demand. But there are still a number of important markets and channels that are recovering in a more modest pace, remembering we are in multiple businesses. So this is applying to the broader Hearing Healthcare market.
Guidance for the group revenue in second half, including EPOS, is narrowed from previously 5% to 15% to 8% to 13%. We expect a negative FX effect of around 3%. Continued to see significant OpEx saving and therefore expect low single digit growth from H2 last year to H2 this year, including EPOS, which was not part of last year and of which around $240,000,000 on annual basis is considered structural savings of structural nature, where most others is temporary and related to the COVID pandemic. Strong EBIT so far in H2 due to continued recovery and cost savings. We have now an EBIT outlook for second half of DKK 1,200,000,000 to DKK 1,500,000,000 before E plus one off effects of now DKK 85,000,000 to negative one off effects of now €85,000,000 to €105,000,000 which was previously €75,000,000 to 125,000,000 We see a better than expected cash flow generation, thanks to the strong EBIT and a continued tight working capital management.
Cash flows from operation is now expected to grow in second half compared to first half. And look at key takeaways, outlook, how do we see the year across the business areas. And this is, of course, with continued high uncertainty exactly how this plays out between the various areas. I think the world is still quite dynamic, And we, of course, have to relate to that. Our best judgment is that hearing aid wholesale will come out more or less flat, that hearing aid retail will come out with positive mid single digit growth, that implants will be less negative than we saw mid August where we saw minus 20 to minus 10, but with big variations month to month and therefore less easy to predict.
Diagnostic being slightly positive and communication adding in second half 9 to 10 percentage points to growth compared to last year. We, of course, have to keep in mind the comparison figures from last year. If you have to compensate for the IT event, is quite high. If you take them on a reported basis, that is, of course, you would say, tailwind coming from the IT incident last year. EBIT, DKK 1,200,000,000 to DKK 1.5 billion and the A plus one off, as I just mentioned, minus DKK 85,000,000 to minus DKK 105,000,000 And the outlook assumptions are based on no further widespread lockdowns.
They it is a further and continued approach towards normalization towards the end of the year, basically as we also said at the half year report. And we see no changes to that. It will be a mix across markets, some a little ahead and some a little behind. But we all in all believe the market will have normalized towards the end of the year. We have not seen any significant impact in current business from recent spikes in corona infections.
We saw a bit, I'll get back to that, in Australia when there was a real lockdown implemented, but broadly speaking, very little or nothing. If we look at the global hearing aid market, we still only have limited statistics for Q3, so there is an element of estimations in this. We saw Q1 being minus 5%. We saw Q2 being minus 50%. And we estimate Q3 to be around minus 5%, which year to date means around minus 20%.
This is very round numbers as we don't have statistics yet from a number of markets, but it comes from our own touch and feel with the markets around the world. We do have U. S. Where we can see minus 6% to total unit growth, which was slightly positive on the commercial side, but still 34.5% down in VA, which is one of the channels that remains to drag behind the commercial markets recovery. And for Europe, we have seen seen excluding NHS strong growth coming from release of pent up demand, but NHS still only operating around 50% of normal, so a significant drag to the growth in Europe.
Asia Pacific, generally making good progress. We saw some effects of the spot lockdowns in Australia, but on the other hand, see China, we assume, are growing again. Continued recovery driven by commercial markets. I think I've said most on what is here. We've seen strong performance, strong recovery in Germany, France, Spain, Italy.
And the private part of U. K. Is also getting there now lately, but not for the quarter in total. And the NHS behind. And the same with VA being behind, but around 80% of normal now.
And we have seen the independent being the 1st and fastest out in the recovery, but also large chains have normalized. We can just look at ourselves and see own retail being up. Emerging markets are still heavily impacted. A big group of many smaller countries, but adding up also to significant volume in the world, they are still heavily impacted by the financial consequences of coronavirus. So all in all, expectations for second half more or less flat growth in local currency.
Revenue in retail, close to normal, supported to some extent by pent up demand, not the least in Europe, where we have seen very strong recovery in France, Ireland, Spain and Switzerland. U. K. Lagged behind but are now delivering growth. North America lagged behind, are not yet delivering growth, but have normalized.
And Canada is also delivering growth, but have also just recently normalized. There is an element of acquisition in the Canadian market. And Pacific, negative impact from restrictions back in Victoria in August, but and therefore, revenue in second half will be below normal. And then a lot of questions over time to how does what kind of clients do we see. And in the graph here on the yellow curve is kind of the number of appointments relative.
You can see the big drop in March, April, then coming back up or starting to get back up in May, June, July with a little bit of summer holiday effect in August and then continuing to ramp up in September to a very close to same level as the beginning of the year. When it's not fully 100% is because there's simply some coming into the stores and others that doesn't come through marketing activities, but just come directly into stores. The dark blue is existing users that are either out of warranty or where it's broken or it's time for an upgrade because current technology is not sufficient. Then the gray one, the middle one is database prospects, meaning they're not current users of hearing aids, but they have raised their hand at some stage. And we have their contact information and call on them and do mailing to them, etcetera.
And then new prospects are leads from basically scratch coming into the funnel. And you can say the existing users are lower than the 50%, but I would assume that a significant part of the installed people are typically people with existing hearing aids that just walk in because something doesn't work. So it is most likely the dark blue you would have to add further to get to the 100%. We have this is very close to normal picture. You can still see the blue is a little bigger than the other 2.
So we still see significant traffic in retail coming from pent up demand, so basically in retail. And then hearing implants, basically same picture, relatively slower recovery back to surgeries being postponed in a number of hospital systems around the world, the bone anchored less because it's a smaller surgery. You're not in full anesthesia, etcetera. And then you can also do upgrades easier and use it with a soft band. And this, all in all, have made it more resilient.
We're also very comfortable we still take continue to take significant market share in that domain. Diagnostic performed well and have also gained market share. There is a bit of a market headwind from postponed investments or lack of ability to install, but the underlying business is strong and healthy and gain share. And we have seen a full normalization in Asia. We are getting close in Europe and lag a little bit behind in U.
S. EPOS is still benefiting from a very high level of demand for virtual collaboration tools, headsets, speakerphones, etcetera. We also see good tailwind in the gaming area still. And therefore, as I've said now a number of times, second half expectations is 9 to 10 percentage points growth to the group's total revenue compared to last year in local currencies coming from the EPOS business. And I think that was the bigger picture.
Rainer, if you would take over and take us through the financials, they are still in words, but a bit more flavor to the financials.
Yes. Thank you, Soren. So if we move on to the next slide here. So exactly, we have seen strong EBIT in the second half year so far driven by the strong revenue recovery and our execution on the cost savings side that has been very significant. So we already covered to cover the revenue recovery.
So, to put a few more words on the operating margin, we have also there the gross margin, we also there seen an improvement compared to the first half year where we saw 70%. So we are improving over that, driven by an increase in production output and also a positive mix effect driven predominantly by the fact that the independents are the key driver of the recovery. On the operating expense side, we did enter second half year at a low level and we have actually continued with quite significant cost savings. And we have a part contribution from government support subsidies of around €100,000,000 but it is predominantly driven by real savings on lower sales and marketing activities, lower headcount, traveling and so on and so forth. All in all, we do expect low single digit growth in local currencies second half year over second half year.
And this does include the acquired growth from the APOS business as well as a small contribution from acquisitions, meaning organically negative growth year over year in our OpEx level. So, to put a few more words on the cost reduction and the structural elements around that, we estimate currently at EUR 250,000,000 dollars on an annual basis that will be recurring. And it is back to the approximately 200 white collar positions that we removed during the first half year, predominantly driven by streamlining of administrative functions, back office functions in the U. S. Retail, but also more broadly.
And we have also aligned our marketing models across the U. S. Retail network, leading to higher efficiency in sales and marketing activities. And then lastly, we do see that part of the traveling conference activities and the savings from that will persist going forward. So we believe quite significantly cost reduction savings that will carry forward into the future.
And also, the strong EBIT translates into better than expected cash flow generation. Combined with the tight capital management, we can now estimate that free cash flow and cash flow from operations in the second half year will be higher than what we saw in the first half year versus our previous expectations of negative free cash flow in second half year. So also there, a strong improvement. And then lastly, just an update on the expected one offs related to the rebranding of Sennheiser Communication into EPOS. We narrow the range of 1 off to minus €85,000,000 to €105,000,000 for the second half year.
With that, to the outlook. Jan?
Yes. Thank you very much, Rene, and I'll do this quickly. Of course, always a number of assumptions for how the outlook is built. Again, no further widespread lockdowns that sales across hearing healthcare, broadly speaking, normalizes. It is in particular in the hearing aids side that this applies.
There will most likely still be a lag when we finish the year on implants. Diagnostic, I think, will also normalize. And there are no fundamental changes to the fundamental drivers of the hearing health care market. It is the same number of people out there that are hearing impaired, and there will be no more, no less because of COVID. So a new and narrowed outlook, new on EBIT and narrowed on revenue.
On the revenue side, we have to keep in mind that EPAS will contribute with 9 to 10 percentage points as it was not consolidated last year. And also, we have to keep in mind that revenue in second half was negatively impacted by the IT incident, which we estimated to be $575,000,000 or 7.6 percent, while, of course, altogether, we get, you could say, tailwind from Ebers and the IT incident in the level of 17 percentage points. So that is still in the second half an underlying negative organic growth, which relates to the COVID and the way that's playing out across channels and geographies. And we are highly exposed in NHS and also still lack recovery in VA as well as export as the main ones, whereas our retail business is not exposed to those and therefore much closer and will be very close to a positive organic growth for the second half and definitely towards the end of the year. Outlook on EBIT, dollars 1,200,000,000 to $1,500,000,000 before one offs of $85,000,000 to $105,000,000 again related to the rebranding and that is, as everybody can calculate, round numbers, dollars 1,000,000,000 to $1,300,000,000 for the year, Danish kroner for the year.
And we maintain the suspension of our share buyback but have bought year to date just short of DKK 200,000,000. And with that, we'll go to Q and A.
Thank you. Our first question comes from Annette Slijk from Handelsbanken. Please go ahead with your question.
Thank you so much. And my first question will be on the hearing aid sales, in particular, also both wholesale but also retail in European markets like France and Spain, where we have seen resurgence in the number of COVID-nineteen patients. Have you seen any impact whatsoever? Or is this very different in respect to growth. So if you could comment on that.
The other question I would have is in the U. S, which is slightly behind the curve where we are sort of seeing a normalization here as well, how do you see the pent up demand? What is included in your forecast for the second half? And then finally, for the communication, what do you see as a strong market growth for that part of the business looking forward? Thank you so much.
Thank you very much, Enide. Ed. We continue to see a very positive development in both France and Spain on the retail as well as wholesale side. It is across Europe generally that we have seen significant pent up demand being released. And not the least, in France, we have captured a significant part of that with our big retail network in France.
So very positive and no negative effect from recent virus this virus spread picking up. It is our judgment that it has to come to a lockdown situation where you ask people to stay at home and not go out like we saw in the spring. And we sense from all markets that that's really a last resort to go to that kind of lockdown. So you work intensively on limiting the more social part of life with restaurants and bars and stuff like that. And even if you're not allowed to move in and out of Madrid, then people living in Madrid, they try to make everyday life go on.
So we haven't seen any effect. And U. S, it's true. We have not seen pent up demand. Of course, there are huge differences across states.
So, some states have seen some and others have continued to lag behind. But altogether, they are just getting up there to, as we have seen in the year statistics, a very small growth over last year on the Q3. So there is a very significant backlog. And we have not based our outlook for the second half of a significant release of that. That is, of course, you could say an element of an upside.
If you believe that this will come out as in Europe, that is for sure a significant upside. And you can always discuss who knows what. We don't know what will happen in U. S. We still find the situation relatively unstable and fluctuating a lot from state to state and over time, and therefore, cautious to sell the pent up demand already.
But I am a firm believer that it's also there and it will come out at some time. And the underlying growth in the enterprise headset business, we assume, is around 10%. But I would say, for still some time, I'm sure it's going to be above 10%. There is still a significant, I believe, structural change in the way corporate offices are designed and operate, where there is still a lot of equipment, particularly in speakerphones and later on cameras, etcetera, that will support even stronger collaborative meetings.
Okay. Thank you so much.
Thank you. Our next question comes from Michael Jochen from Morgan Stanley. Please go ahead with your question.
Great. Thank you. I have three questions. Firstly, when it comes to EPOS, can we expect that the one off effects this year will not be repeated next year? Question number 2 is when it comes to the EPOS profitability, should we expect based on stronger top line performance as a result of market developments for you to return this business to a higher profitability sooner?
And then question 3 is on Hearing collectively. It doesn't require a lot of math to work out that the recovery that you are seeing is slower than your peers. And I'm just curious what you think your organic growth is for the second half if you take away some of the things that you would claim are a little bit unfortunate. So for instance, like your large exposure to the NHS, perhaps some sort of guidance as to why you think you're doing worse than your peers in the recovery? Thank you.
Yes. So I will cover the 2 questions on EPAs. So first of all, on the one off effect, it is a one off effect for 2020 and thus will not be recurring for next year. So that's on that part. With regards to profitability, yes, of course, the current, let's say, tailwind that the EPOS business is experiencing is, of course, benefiting the business' profitability as such.
However, the joint venture was initiated kind of subscale since we took over the full R and D and back office staff from the joint venture. So there's no doubt that our midterm aspiration is to have a fully competitive operating margin on the EPO side, and we will see year over year improvement, but we have not yet laid out what are the exact, let's say, operating margin aspirations for 2021.
And I will comment on the hearing aid side. If we correct for NHS where we are highly exposed and where the market is still channel, is still halved and we also the fact is that our position in VA have changed over the past 12 months. We were in the 16%, 17% market share a year ago and an hour more in the 11%, 12%. And at the same time, this market is still down 20%. And we all know that it's turnover that have gained.
If we eliminate these things as well as our export lag, which has basically been collapsed for quite a while, it's starting to recover, then I don't think we are that far from one another.
Okay. And may I briefly follow-up on EPOS? So these nonrecurring charges that you're occurring this year, while they may not be while there'll be no nonrecurring items next year, does it though form the base? So these costs that you're incurring this year will actually be as part of your base cost next year?
No. So the one off costs are one off costs in nature. And related to the extraordinary efforts on rebranding from Synagis Communication to EPAS. And they will not be recurring next year. But the part the operating cost that is part of the, say, ordinary OpEx spend that we have at the moment.
That will, of course, be recurring into next year with whatever growth element that will be into it because the top line is growing as significant as it is.
Okay. That's very clear. Thank you.
Thank you. Our next question comes from Martin Poggi from Danske Bank. Please go ahead with your question.
That was not really close. It's Martin Pargary Pakehard from Danske Bank. I have a couple of questions also. Firstly, with the structural cost savings that you have made this year, where some of them are people which have laid off. I acknowledge that this is mostly in the first half.
But are there any cost of one off nature related to redundancy payments and stuff like that in the first half and of course also in the second half. And then just back to Michael's question on you can adjust for VA, you can adjust for NSS, you can adjust and then you end up at the same point. But can we just alone look at NSS and speak to how much that in itself is impacting your growth negatively here in the second half?
Yes. So Martin, just let me address the structural. Yes. So I would say the one off related to the whole restructuring, they are So yes, you shouldn't consider those as one offs.
Yes. And on the negative organic growth, it's around 2 percentage points negative organic growth that's steamed from the weak sales to NHS.
Okay. Thank you very much.
Thank you. Our next question comes from Neil Senlin from Carnegie. Please go ahead with your question.
Good afternoon. My first question is about product launches. Are you able to confirm that your product roadmap is on track for a soon to come new product family? And the reason for asking is that at the virtual UHA Congress that place last week, you should have mentioned that you're on track for launching in the next VA open window in some of your presentations. And my second question would be, what proportion of the DKK 2 50,000,000 of cost savings have already been realized in 2020?
Thank you.
Yes. Michael, I have not seen the exact communication from Euler. I must admit, I was attending something else. But we are, largely speaking, on track with our R and D effort, including a future road map. And I think that's as far as I can take it here.
Yes. And on the $250,000,000 of structural saving, I would say the majority has already had an impact in 2020 since it was executed on during first half year. So a significant not the full, but a significant element in this year.
So just to follow-up on the UHA Congress. So you're not able to confirm that you actually talked about new products or the upcoming new product family at the U. R.
I think we always talk about things are coming and they are, but I will not confirm the opposite, whether it's within the current or the next VA window or not.
Okay. Thank you.
Thank you. Our next question comes from Christian Reum from Nordea. Please go ahead.
Hi. Good afternoon, and Renee. I have a couple of questions. My first is just to understand what you mean when you say that, for instance, the retail business is now back to close to normal? Is normal same level as last year?
Or is it the growth trend that the market was expected to be on prior to the impact of COVID-nineteen? And then the second question is for how to think about your total OpEx space as we go into next year. Can you just recap for us when you guide for this low single digit organic OpEx growth in second half or total OpEx growth, sorry, in second half and we move from that base into next year, what are the temporary cost savings that will not reoccur in first half of next year and for that matter the rest of 2021? Thank you.
Yes, I will comment. The normalization in retail as all other businesses as the growth have not really materialized in the market. It is the comparison to last year's. And when we talk about U. K, U.
S. And Canada have now also reached normalization, it means that they are in line with last year. But there is also a number of markets that are above. And that's in particular in Europe and driven by pent up demand being released, meaning that we expect to see when we see statistics that there have been significant growth in these markets in Q3.
Yes. And to give some more flavor on how to think about OpEx for next year, I can repeat the elements that we have given. And if you take a starting point on the, let's say, guided OpEx for second half year 2020, which is low single digit growth. From that, you need to subtract the FX element of minus 3%. So that brings you to a reported OpEx for second half year, whatever you get to there.
And have in mind that OpEx includes €100,000,000 of government support that will be nonrecurring. And then it includes where we guide roughly that savings in second half year will be around half of the savings that we saw in the first half year, which was €600,000,000 So it includes $300,000,000 of savings. And of those $300,000,000 what we say is that we're going to see $250,000,000 that are recurring on a full year basis. So, that's the part of the savings that you can carry on into next year, dollars 250,000,000 on a full year. That would be a starting point.
And then, of course, we need to see the business grow into next year, definitely.
Thanks. Our next question comes from Kit Lee from Jefferies. Please go ahead with your question.
Thank you. I have two questions as well. I think firstly just follow-up on the structural savings of around DKK 250,000,000. Can you just talk about your willingness to reinvest this savings next year? What do you need to see in the market or opportunity to maybe deploy some of the savings back into OpEx?
My second question is on ePOS. Just
when do
you think the backlog situation can be resolved? And also, I guess, a slightly related question is, what's the current inventory level in the market today? And what's the normal level of inventory in the market typically? Thank you.
Yes. So first of all, on the structural savings, so we have not made the structural savings with the intent to reinvest anywhere else. We have made those basically to improve profitability and operating margin of the business and they are structural in nature. So, I think that's the thinking that it is a structural and permanent saving.
The investment in the business is awaiting, of course, to see market growth and things normalize, no doubt. The more temporary savings come from holding back still on rehires from people that stop and expansions. And we'll not do that until we truly see the market conditions pick back up. And then also, I would say, it is a special market dynamics right now where a lot of the traditional sales and marketing activities on the wholesale side, in particular, cannot take place. Big customer events and so on.
And they are, of course, done because they typically are part of moving share in the business. So you could say the profitability of the existing business go up, but you cannot do what you normally do to move share around. Therefore, it's going to be very interesting to see how this develops over time and we would reinvest when we think and feel that it's time to do it and we are sure we get return. Currently, we hold back and we see very strong profitability despite of the business still being impacted by COVID, not as much as it was, but still with the high uncertainty. So the discussions on significantly reinvesting in the business will come with further evidence of a full normalization of the market and an opportunity to execute on marketing with the outcome that we were used to see when such activities were carried out.
And on the backlog on EPOS, there is always a backlog and an order book. It is higher than normal. We have taken it down a bit and constantly work to ramp up production to take it down. But of course, we also have to be careful we don't expand capacity to a level where we'll then have too much. So as long as it's working well in the pipeline and working well with customers, We are okay with also an increased backlog when the sales is so much up as it is.
And we don't feel we miss opportunities or see major cancellations because we have this backlog. So it seems to be a decent balance we have right now. But of course, we would like to get things out there, no doubt.
And do your customers have any inventory today? Or are they just selling everything they've got today? It
depends on the type of channel. The bigger online as they have less where, of course, those that have more shops, for instance, on the gaming, have more inventory than normal, I'm sure. But it's not like this is a lot of stock filling and dead meat on warehouses. It's moving goods very quickly through the channel.
Great. Thank you.
Thank you. Our next question comes from Veronika Daghouva from Goldman Sachs. Please go ahead with your question.
Hi, good afternoon. Veronika Dubajova here. I have three questions please if I can. 1, I just want to go back to the comments that you have around the sort of expected organic revenue growth in the second half of the year for the wholesale business. Again, if I add back the 300,000,000 dollars or so that you've discussed from the IT incident, it does imply high single digit decline in the wholesale business, I guess.
I'm just trying to contextualize this against the minus 5% that you're talking about in terms of the market as of the 3rd quarter. Presumably, that's recovering and getting closer to flat in Q4. I appreciate geographic differences, etcetera. But it would seem to me that in particular the Sunnova launch is having some impact on your performance. Is that a fair statement to make at this stage?
I guess if you can talk a little bit to what you're seeing on that competitive dynamic, that would be helpful. And then if it's all right, I have two financial questions for Renee, which I'll ask after that.
Okay. Thank you, Veron. The dynamics of new introductions are, of course, always that you try to move a lot of goods out in the channel to make sure it's being tested and tried. We have not seen a significant impact on our business coming from these. So I must say, I attribute most of the variation to them selling aggressively into maybe primarily their own good customers and also the growth they have seen in VA and the negative effect we similarly have had in VA and also in NHS due to this channel not operating at normal level.
Okay, understood. Understood. And on the financial side, so two questions for Renato, if that's all right. 1, just trying to think about the gross margin dynamics as we move into 2021. I guess you are talking about some pressure from rechargeables and broader mix.
Is that something, Renee, that you think that persists as we move into the second into 2021? And I guess, is the second half gross margin a helpful starting point for that? Or would you expect some recovery on that? And then my second question is also just thinking about 2021 and the OpEx dynamics. I guess, normally, you've run the business seeing a fairly high single digit consistently fairly high single digit growth in the OpEx space.
Is that something you would expect to resume as we move into 2021?
Yes. So on the gross margin, first of all, let's see how second half year turns out, but that could end up looking like a normalized gross margin level for the elements going forward. Having in mind, we come from a level of pre IT incident and pre rechargeable from a 76%, 77% gross margin level. And then, having a dilutive effect from the consolidation of EPOS and other structural items such as rechargeability to the tune of 400 basis points. So, if you sort of subtract that structural dilution, that's kind of where we are on an underlying basis.
And then, of course, scalability from there on depends, of course, on how volumes in general are going to play out. And if we are going to see volume growth above, let's say, general market growth, then we have typically seen, in particular on the wholesale side, an ability to increase gross margin from there. And Yes. On OpEx development, I will be reluctant to give guidance on 2021 growth rates in this call. But I think the structural savings that we have seen on $250,000,000 is at least a strong element in keeping the underlying or the organic growth rate down.
That's clearly our intention. And then, of course, we will see growth in OpEx, but strictly related to, let's say, overall top line and business growth from thereon. But we haven't guided on that either yet. So therefore, it's difficult to guide on OpEx growth.
Okay. I guess maybe let me ask that question differently because I think we've seen obviously some structural cost savings from you. We've seen something from Cinnova. We've seen something from GN. I guess, is your thought this is a reflection of fact in the business that's been accumulated through heavy investment into selling and marketing and R and D over the last couple of years.
And I guess is this a new normal? Are we going to see a little bit more moderated OpEx spend growth going forward? Or is this kind of one timer and we go back to the historical P and L dynamics? I guess, let's not talk about 21, but just more broadly over the medium term.
Let me repeat. I think it's a very clear ambition for all our businesses to grow margin and expand. And that, of course, entails a modest and healthy development of OpEx. The one business where that's a more longer one is the implant business, where we know we have to invest significantly in getting into U. S.
And also to close the gap to much bigger players. But other than that, our various businesses have opportunity for scale and further leverage as we grow, and we'll keep a close eye on that.
Thanks, guys.
Thank you. Our next question comes from Oliver Metzger from Commerzbank. Please go ahead with your question.
Yes. Hi. Thanks a lot for taking my questions. The first one is on clarification. So the current run rate in HS, have I understood you correctly that you spoke about current run rate of 80%?
And when do you expect also, I would say, some more normalization? What must happen that financial has comes normal? That's the first question. The second one is for second half, the guidance for Diagnostics looks even pretty low in my view. So even including the corona headwinds from first half, you were down by only 2% given some impact of end up demand and also the described normalization, which you mentioned for Asia Pacific and Europe.
Growth would be even higher also compared to previous years. Are there any other factors which have some negative impact on growth for the second half? And my third question
is We'll get more questions. We are still simply confused by the first question. Could you repeat that?
Yes. It's on the current run rate in NHS. Have I heard you correctly that you're it is right now at 80%?
No, no, 50%.
50%. Okay. So was this 50% in the quarter or right now 50%?
Right now.
Right now, okay.
And it generally improves very slowly. I think that's the main message, that there is an improvement, but UK NHS in particular also for implants and so on is very slow progress. They are afraid of getting back into the spring setting with a high number of people coming into hospitals, getting cross infections and so on. So we really see UK being in another place when it comes to the public health care system than most other European countries, And therefore, have modest expectations for a significant improvement short term in NHS.
Okay. Thank you. Then my next question is on Diagnostics. So shall I repeat this question?
Please. We got a little bit trapped in trying to
Yes. Okay, okay. So in my view, the guidance for Diagnostics looks pretty low. So if I look into the first half, you were down by only 2%, which is,
I would say,
comparatively resilient. However, given some impact from pent up demand as well as the your described normalization in Asia Pacific and Europe, growth would be even higher in particular compared to previous years where you saw where you showed rather growth in the high single digit territory. So are there any factors which have some further negative impact on growth in the second half?
Yes. I think the market is still not too good. There is a number of especially fitting the fitting area, meaning dispensers that postpone buying new equipment even though we have some very attractive news. And also the access to hospitals could be NHS of actually installing what have already been sold is lagging behind. And the reason why we do as well as we do in Diagnostics is because we take share rather than a strong market recovery.
So that's why you don't see the situation develop that much half year over half year. We are very pleased with the development in Diagnostics. We feel very comfortable. We do significantly better than our peers.
Okay. And then my last question, a quick one. Could you give us a few words about the potential delay related to the corona pandemic for the cochlear implant approval process in the U. S?
Yes. It's every man's best guess. We are interacting with the VA and are not fully on schedule and see some delays. But the uncertainty general for how long the process is, is still bigger than the delay. So, presumably, we'll conclude somewhere in second half next year.
Okay. Thank you very much.
Thank you. Our next question comes from Lisa Klein from Bernstein. Please go ahead with your question.
Hi. Two questions, please. Can you just remind us of your hedging impact in H2 2019 versus H2 2020? Am I correct in my math that this is a fairly notable tailwind to EBIT into the second half of this year? And then second question, just with several new competitors in the market, what is the pricing dynamic like for Open S?
Is it fair to assume that there's discounting, which is pretty normal towards the end of a product life cycle? And I'm just thinking about sort of pricing within channels, so not sort of considering channel mix.
I can take the last question first. I can see we are finding numbers here for the first one. No, there's always a competitive environment. And when others are introducing, they typically give good intra offers. So we have, of course, also sharpened our commercial approach a bit here in the Q3.
But it's not that open air have to go on sale because there's new products out. It's more the dynamics when others are introducing, we are of course also there with attractive offers to our customers.
Yes. So on the FX, our just back of the envelope calculation here roughly states, as you mentioned, a tailwind on net tailwind of around CHF 40,000,000 half year over half year from FX.
Okay. Thank you.
Thank you. Our next question comes from Maja Paretsky from Kepler Cheuvreux. Please go ahead with your question.
Yes, hi. Good afternoon. Actually my questions have all been answered already, so I'll pass on. Thank you.
Thank you. Our next question comes from Carsten Lundberg from STC. Please go ahead with your question.
Yes. Thank you very much. In terms of second part of this year, how much benefit will come from any acquisitions you make? You mentioned there's a little bit of an impact on growth from acquisitions made in Canada. But I don't know whether this is a meaningful amount in terms of the retail growth you are guiding for in the 2nd part of the year.
And then in terms of capital structure, now that you are seeing a massive significant improvement in the free cash flow before acquisitions, how do you prioritize spending from here? Will you prioritize debt repayment, share buyback, acquisitions? How do you rank the 3 options here going forward?
Yes. So, on the acquisition contribution on group level, with some a little bit of uncertainty since it is binary in nature by in its essence, but it is a contribution of 1% to 2% that we see on top line. And of course, also on OpEx, as you saw in the first half year, a 2% growth from acquisition there. You will see, all things being equal, a similar element in the second half year. And on capital structure, yes, you can say from a financial liquidity standpoint, we were prepared for a much worse scenario back in April when we increased unused credit facilities by a significant amount.
And we have been also cautious on investments and M and A and haven't done share buyback. So, I would say, we are still highly leveraged. So, structurally, we need to bring down our overall leverage level going forward. We haven't provided new guidance, but our overall general thinking hasn't really changed on where it makes sense to be as a company. So there will, of course, be an element of maybe not debt reduction, but at least looking into the fact that we're going to increase operating profit significantly before we can also increase debt absolutely.
We have still suspended share buyback, But of course, that's also something that's in the toolbox as we see the markets or our profitability coming back, then of course, it is clearly an element of redistributing the excess cash that we can take up. And there's nothing that we have done that prevents us in doing that. So I think that's also still in the toolbox. And then on the M and A side, well, we have resumed some activity level already now in second half year and see close to normalized level of M and A activities. But there's no, let's say, ranked priority in these things.
It is all that is, you can say, in play.
Okay. And in terms of acquisitions, you said 1% to 2% on the total top line of the demand in the second part of 2020?
Yes. Okay. Thanks. Thank you. Thank you.
Our next question comes from Tom Jones from Berenberg. Please go ahead with your question.
Good afternoon. I had two questions. I may have missed this, apologies if I did, but could you give us some indication of the sort of underlying or end user, however you want to define it, EPOS growth in Q3 and perhaps how they compare to Q2 and Q1? And then the second question I
had was, I mean, if I
look at your performance in H1 and your expected performance in H2, and I kind of exed out the IT incident and the contribution from EPOS.
I guess at the start of
the year, you would have expected to see your business grow. So if I compare what you're now looking at delivering this year versus that number, maybe 20%, 25% of your business has not materialized this year. Could you perhaps give us some sense from your perspective of how much of that number you think is business that's kind of just lost to the industry forever? How much is business that you perhaps lost to a competitor? And how much is kind of business that's just sitting there on ice waiting to be captured by somebody, hopefully you, but definitely somebody, at some point over the next 12 to 24 months?
Yes. I will start with the last, Tom. I am a firm believer of the pent up demand, whether it's 100% or 80% or 50%, I don't know. But there is evidence of very significant pent up demand being released once society in a given country gets comfortable that going to a hearing care professional is not an issue. And we have seen that across most European markets, U.
K. Being slower, Sweden being slower and then significantly slower in U. S, not just in VA, but across most channels and still not any pent up demand being released. So yes, I think it's sitting out there. How long time it will take before it starts to come in?
Whether it's a long process to get it in or a short process, we cannot tell. We have only guesswork to do and we will not. So we are a little bit conservative, in particularly, on the U. S. Market as we see these continued dynamics and major fluctuation, whereas we feel much more comfortable about Europe, markets like Germany, France, Denmark, Holland, Spain, Italy, UK, also in the private sector.
When NHS is closed, there is a significant opportunity for a spillover effect to the private sector, etcetera. And also, we have seen, but it has taken some time, also in China to build up. So it's coming, but at what speed and at what level it fully reoccurs is difficult, but the underlying dynamics of the market, I'm sure, is intact. So that's you could say is a potential upside going into 2021 if the pandemic gets fully under control across all markets. The one where it most the biggest risk of being lost forever is not structurally going forward, but the pent up part or the non delivered part is in export markets where it's much more driven by the financial situation of the individual markets.
And if that volume comes back at some point next year, it will come back at the same time for everybody, the market to market. So how quickly do you think you might need to ramp up distribution costs and marketing expenses? And are you still
That's, Tom, where I'm trying to get across that you know, we are not holding back, in the markets that are there. As such, we can just operate it at a lower level because there's a lot of things that you're used to do. On the wholesale side, you don't do. And you could either say, either you're simply just more busy store by store and marketing euro by marketing euro in retail or we don't spend as much. It's a little bit different from country to country.
But we are, generally speaking, in the countries where pent up demand have been released, busy in the industry. So I think it's much more channel and geography exposure than it is whether you spend the 1 or the other. The OpEx level is a result of the way as well that you can operate the business in combination, of course, with holding back on expansions in uncertain times.
Okay, fair enough. And then on EPOS?
Yes, if I could have the question. Sorry, Tom.
Sorry, I might have missed it earlier in the call, but I just wondered if you could give us some indication of the kind of growth that you saw in the underlying growth, sort of the end user demand growth in that business in Q3 and how that compared to Q2 and Q1?
We don't have a data for that. We can only see the selling into the distribution channel. We, of course, have a little bit on our own websites and so on and insights to Amazon and the gaming. And it seems to be intact on the other side. I see no reason for any significant changes.
There is a strong demand out there for more equipment like this.
Okay. That's very helpful. Thanks.
Thank you. Our next question comes from Martin from Danske Bank. Please go ahead with your question.
Yes. Martin Parker, Danske Bank. Just a follow-up question and to you, Soren, again on VA, but maybe not so much on VA. But if you look at the end of year share in VA, we have all seen that it has increased markedly since the Starry, of course, came with leverage AI, which are with rechargeability in May. But one thing it is rechargeable.
Another thing is also that the stock, of course, do love to promote the fact that due to the wearing of facial mask, it's mostly it's maybe more convenient to have an in the ear product instead of something behind the year, which can interfere with the mask. So can you just elaborate a bit on that? And then also, have we seen similar trends outside VA, whether has this been this is a significant pickup in the ITE share? And then secondly, on Managed Care growth in U. S, can you maybe talk about how that has evolved?
And if there is anything changing with increased unemployment rates in U. S? I know it has improved and where people are positioned with respect to insurance. And then it's a little bit going back to the same question before with respect to the pent up demand, but and maybe I've missed what you talked about, but both the VA and HSS in UK, what kind of capacity do they actually have? According to my calculations, VA should have sold 300,000 units more from March to September, if it had not been to the corona crisis.
But can they actually do they have the capacity both these organizations to deliver on such a massive pent up demand?
Thank you, Martin. I got three questions here. No, we have not seen a general kind of significant expansion of IT share around the world. I think it is a certain political element in U. S.
Around face mask. There's also face mask being used in a number of other countries, France, Spain and so on. But it has not impacted. I think it's the rechargeability in the ITE that have given Starkey some tailwind. And generally speaking, Starkey's stronghold in VA have always been ITE.
So when they come with some, then they have picked up and people have wanted to try that. I think it more than anything shows that rechargeability is extremely popular in the VA channel. It may be also a slightly younger audience and that's it. I don't think we will see a reversal of the trend towards fewer and fewer custom products made in the world. On Managed Care, no significant changes.
What I would add, you mentioned this about higher unemployment and so on. I think we have to remember in U. S, a lot of the people that came on unemployment was due to these furlough schemes, but they were actually well paid by being out of the ordinary job. And at least I saw a walk through from a financial expert in U. S.
That says there's never been as many money in the pockets of the average American citizen as there is right now, exactly due to the very high subsidies and money redistributed into society for the average American household last year or it's not last year, sorry, before summer in first half year. And we see that also in a number of other markets. And that could also be an element when not traveling and so on that supports growth coming ahead of us in hearing aid markets. And then pent up demand, you're absolutely right. It is very significant, both the U.
S. Market total and VA in particular and NHS and some of these public systems. And the users are out there, so there will be tremendous pressure on expanding capacity. Maybe they will use more private opportunities, which both of the systems have done over time. We cannot say tell.
They have not told anything about it. We could take a country like Denmark, where the government have decided to add additional funding to make sure across basically all chronic diseases to catch up before year end, not just in hearing aids, but also knee surgeries, etcetera. And for hearing, in particular, that have led to expanding capacity by paying overtime and people work and fit hearing aids until 8 o'clock in the evening now for a while. And we see very strong release also in the public system of pent up demand. But we can, of course, not tell whether such initiatives will be installed.
We hear nothing when we ask about what will happen from VA or NHS. So we don't have that clarity and that's back to the uncertainty that remains. But there are good examples of government schemes that have ensured that whatever had been postponed during COVID at hospitals will undergo significant catch up because people are out there and have exactly the same diseases as they had before COVID. And there will be public pressure on getting that back in. Or there will be a spillover effect of some kind to the private sector once you figure out how long time you have to wait.
But of course, if you're in the middle of COVID, you are waiting. But I'm sure that also a part of the non fitted devices, both in NHS and VA, will find a way to be fitted going forward.
Thank you very much.
Thank you. Our next question comes from Matt Fikiran from Select Equity. Please go ahead with your question.
Thank you for the call today. Just curious if there's any clarity from an industry perspective on the FDA OTC review. Thank you.
The only thing we can add there is we have seen FDA comment to a Danish paper or online paper that they expect to revisit their outstanding issues in a November meeting where they then issue a new list of priorities and not until then we will know anything new. There is no clarification on when we expect to hear anything on the OTC legislation.
Thank you. Our next question comes from Daniel Zolofkan from Medeco. Please go ahead with your question.
Yes. Hello. My question was also on OTC. But the other one is on the VA, you mentioned that you had some export issues. Can you elaborate a bit on
No, that must be a misunderstanding. When we talk about export, sorry for being unclear, that's our wholesale sales to distributors in typically 3rd world countries. There's no problem with export to VA. Sorry if I've led to a misunderstanding.
You are okay. Thanks.
Okay. So thank you, everybody. I think that concludes today's call. Thanks for participating. Reach out to Christian or myself if you have any further questions, and then we're going over the on the road over the coming days.
Look forward to catching up with all of you. So good day to all.