Demant A/S (WILLF) Q3 2023 Earnings Call Transcript

Demant A/S (OTCPK:WILLF) Q3 2023 Earnings Conference Call February 8, 2023 8:00 AM ET

Company Participants

Mathias Møller – Director, Head, IR

Søren Nielsen – President & CEO

René Schneider – CFO

Conference Call Participants

Maja Pataki – Kepler Cheuvreux

Hassan Al-Wakeel – Barclays

Christian Ryom – Danske Bank

Rajesh Kumar – HSBC

Hugo Solvet – BNP Paribas

David Adlington – JPMorgan

Shubhangi Gupta – HSBC

Mattias Haggblom – Danske Bank

Robert Davies – Morgan Stanley

Operator

Mathias Møller

Good afternoon, everyone. Welcome to our conference call held in Health in connection with the publication of our Annual Report for 2022, which we released this morning. As always, we have Soren and Rene with us, and they’ll walk you through a presentation of our results and outlook; then we’ll turn to Q&A. Presentation has also been uploaded to our website, so you can find it in there. As usual, we plan for the call to last no more than 1 hour, including the Q&A session. So besides Soren and Rene, we have the IR team, which is myself, Mathias Holten Moller and Peter Pudselykke. And over to yours, Soren.

Søren Nielsen

Yes. Thank you, very much, Mathias, and welcome everybody. Let’s hit right into it. The agenda for today is financial highlights, briefly on our sustainability efforts, and key events for the year; then diving a bit more into Hearing Healthcare, Communications; and then Rene will handle financial review, will speak to outlook, and then the Q&A.

The financial highlights for ’22 is all-in-all 10% growth for the group, half of it from currencies, 4% from organic, and then 1% from acquisitions. So clearly a growth year. However, a small decline in the gross margin and a decline in EBIT, also in the margin which is due to the weaker-than-expected market growth in both Hearing Healthcare and Communication and that, of course, also translates into the free cash flow , which is both because of lower earnings but also normalization of working capital.

Sustainability advancements in ’22, outside being the kind of company, we are working in in hearing health, then we have 2 other focus areas, and that’s diversity, equity, and inclusion where we have seen an increase in women and gender balance in top management teams as well as our top management group, and then climate effort and green transition where we have seen effort now and clear goals being established for both ’25 with a 50% reduction of our renewable electricity and 100% in 2030. We are a relatively low consumer, so our own scope 1 and 2 emissions are something we, of course, focus on now and then later we follow with the with scope 3.

Key events in the second half is, of course, increased macroeconomic uncertainty is the biggest. It has profoundly impacted our business in a negative way in both young healthcare and Communication. And then China, where we saw a change in policy towards the end of the year which lifted restrictions, but where we saw the unexpected effect of very high virus numbers, and with that a number or many staff at home and the customers that couldn’ t meet up, but a necessary transition from a lot of restrictions to a more open society, so all in all positive.

We have seen further margin gains in Hearing Aids and Diagnostics in second half, particularly in the US, but the weaker-than-expected market have negatively impacted growth in Hearing Care. However, we saw all in all a significant sequential increase in the organic growth from Q3 into Q4. Communications, weak growth, particularly attributed to gaming but also in enterprise where we saw some slowdown in Q4 and where for the whole business the normal seasonality did not materialize.

Key financial figures, organic — for second half, organic growth for the group of 3%, 6% in Q4, back to the acceleration in fourth quarter, and Hearing Healthcare did 5% for the half year and 8% for the quarter, driven by very strong performance in Hearing Aids and Diagnostics, whereas Hearing Care on the half year contributed negatively to the growth, but in fourth quarter positively.

Communication down for the half year 13%, for Q4 ’23, but please keep in mind that there’s also where you normally have a seasonality, so a hockey-stick that didn’t materialize, more than a worsening of the situation. But it is a very tough market for gaming, and again also enterprise saw some negative growth in Q4.

OpEx increased due to acquisitions and further investments in R&D. That is still key to growth and future success, and we continue to invest in that and then some — to some extent also higher inflation that impacts, of course, some of the groups’ cost lines. EBIT was a decline of 12%, basically due to negative growth — organic growth in Hearing Care and Communication, so a relatively fixed cost base, but as you know, we have taken measures also to lower the cost base to create a better balance between top line growth and cost base. Outlook for ’23, at this stage, very brief. Organic growth of 3% to 7% and an EBIT of DKK3.6 billion to DKK4 billion. A little more details on Hearing Healthcare.

I have spoken to the organic growth rates, but gross margin declined due to primarily geography and channel mix, as well as mix effects in Hearing Aids, and with that also an increased share of rechargeability higher than originally planned due to channel mix development and this, of course, have a slightly dilutive effect. Also, some of the channels have lower ASP, so we have had to sell more units to get to the organic growth — the high organic growth.

OpEx grew 17%, 6% was organic, and there is limited short-term flexibility. However, we have done things in hearing and Hearing Aids to reduce some of the cost elements. The acquisition of Sheng Wang added almost — acquisitions added 6%, but most of it related to Sheng Wang. EBIT was down 8%, and the margin down in Hearing Healthcare 4% — 4.2 percentage points, and it is driven by Hearing Care and the lower than originally anticipated revenue and only short term — limited short-term OpEx flexibility.

The Hearing Aid market we have statistics from around 2/3 of the markets now, and as you can see from the table, we have seen a continuous decline in the growth rate. Also, when you compare to back to ’19, it is across the board [ that we ] in fourth quarter, except for the rest of the world, which is in this context is a smaller proportion, saw negative growth.

That’s something, at least, I cannot remember that we have seen in the past, so it is a negative market, and we have seen Europe sequential slowdown driven by Germany, France — France, more naturally — North America is basically the commercial market, but now also VA had, of course, higher comps in last year, but also they are a decline.

So we have also seen in the period a larger-than-expected, or we believe a larger-than-expected normal ASP decline due to unfavorable geography and channel mix. So all in all, not a strong Hearing Aid market, but even more importantly then underlines the performance element of Hearing Aids, which in Q4 grew 11% in total, including sales to own retail, but to external customers 14%. This is both across the Oticon and Philips brand.

We have seen that it is entirely unit growth, so ASP is basically unchanged from last year, and as we have worked with the increasing prices, it means that it has been offset by exactly channel and geography mix changes. We also today announced the launch of a new premium platform which will start here in February ’23. But you can see also in the graph to the right, the solid over the years development of the Hearing Aid business quarter by quarter.

And Oticon Real is the flagship product in the new portfolio. It builds on all the things we started with Oticon Opn and on top of Oticon More. It still centers around the ability to even in the most difficult listening situations hear things naturally all around you, but where things are much better balanced, now also include sounds that have a tendency to be very disruptive and annoying for the user. The neural network can identify these and make sure they are better balanced to the surrounding. So full portfolio in right and miniBTE’s 3 price points, all brands, we are ready to roll it out basically in the coming weeks.

Hearing Care continues negative impact from macroeconomic uncertainty, especially in markets dominated by private pay or very high share of private pay. We have seen improved growth rates in Q4. We come in at an organic growth of 1%, but that is mainly due to lower comparison figures and not as such a fundamental change to the performance of the business. However, we do see a better traction on lead generation and have some good hopes here for the beginning of the new year.

Positive revenue contribution from acquisitions, broad based, but in particular North America, Germany, Japan, and China. And, again, a continued growth of the Hearing Care part of the group. Diagnostic continued very strong performance. It delivered 7% organic growth in the fourth quarter and basically a continuation of what we have seen. The reason why it have might been a little softer or one of the main reason for little softer than maybe the other quarters was the situation in China. That also significantly impacted the Diagnostic group.

Communication EPOS, a challenging year and continue to be. Organic growth of negative 13%. Also, some pressure on gross margin, which is partly an exchange rate element as all cost of goods sold are bought in dollar not all of it sold in dollar and higher-than-normal freight rates continue to be an issue. Very modest OpEx growth in order to protect the EBIT, but not enough. It has worsened since ’21, but we are very busy with trying to ensure a better balance.

And as the initiatives were announced in November, even though they were in size — maybe absolute size the same across the different business areas, the impact on the EPOS business was most profound, of course, due to the relative size. So in Q4, minus 23% and below expectations on gaming. However, enterprise being a little more stable, but a number of customers seems to have pushed the actual purchase past the year change, and we are now rolling out the video solutions, the Vision 1 and 2, and we expect them to contribute to growth in ’23.

Over to you, Rene, for group financials.

René Schneider

Thank you, Soren. So putting a little bit more flavor to the financial numbers, we start out by looking at the income statement for second half year of ’22, and repeating our gross profit of DKK7.6 billion and a gross margin of 74.3%, down 1.5 percentage points compared to last year. And likewise, the operating profit or EBIT of DKK1.6 billion and an EBIT margin of 15.9%, which is segmented into our Hearing Healthcare that does an EBIT margin of 18%, whereas our Communications business has an operating loss of DKK129 million and an EBIT margin of minus DKK25.4 million.

If you look at the adjusted growth, reported 11% is an organic growth of 3%, acquired of 2%, and a significant impact from exchange rates of 6%, whereas if you look at the operating expenses, you would see that the underlying growth organically of 6% predominantly comes from continued investment in R&D that amounts to 12% organic growth, whereas on the distribution side, the growth is predominantly driven by 7% from acquisitions and also 5% from organic growth.

Looking further into our gross profit, it increases by 9%. And as I mentioned before, the operating margin decreases by 1.5 percentage points, driven by predominantly the Hearing Healthcare where a channel mix has been seen, basically selling more in government, less in private, more towards export markets versus the U.S., and then broadly across all geographies and channels, a significant higher level of rechargeability. Adding to this, we have seen a slight negative impact from exchange rates.

We continue to see some impact of a dynamic supply chain situation related to higher freight charges, but it is becoming less pronounced than previously. We also see some impact of higher-than-normal wage inflation. However, as we have also said previously, not in any dramatic way. Further commenting on the operating expenses. The growth in local currencies was 12%, of which half, meaning 6%, related to acquisitions. And this is, of course, predominantly Sheng Wang, our Hearing Care business in China, and Inventis, our newly-acquired diagnostics business.

The organic growth in OpEx was 6%. And it was predominantly again related to our continued investment in R&D to secure technological leadership, as well as 5% organic growth in Hearing Care where we short term did have only limited flexibility to adjust the cost base to the organic growth level. On that notion, we took cost reduction measures in Hearing Aids, Hearing Care, and Communications. By end of year, we estimate that this will amount to approximately DKK100 million in annual cost savings from ’23, and it had very limited effect in ’22.

EBIT for ’22 is in relation to — when comparing to ’21, down 12%. And just reminding ourselves that ’21 numbers were extraordinarily strong due to a tailwind from the French Hearing Healthcare reform and also temporary savings. Looking at the EBIT margin of 15.9%, that’s a decline of 4.1 percentage points compared to second half year of ’21.

That is driven by lower profitability in Hearing Care and Communications where we, in both instances, had a limited ability to adjust our cost base to revenue that was below our expectations. And when it comes to end of year, we would highlight China as a particular geography across business areas where we saw a significant impact from actually the reopening of the society, which we deem to be a temporary effect.

On cash flow, we had a strong second half year after a more modest first half year where we normalized working capital, saw a strong second half year in terms of cash flow and a relatively high level of acquisitions driven by, again, Sheng Wang as the primary driver of that. CapEx is slightly above our medium- to long-term expectations due to investments in production facilities in Poland and Mexico.

Looking at the balance sheet, compared to end of first half year, we see a 9% increase, and compared to full year end of ’21 we see a 20% increase. That 20% increase is 5% organically and 13% from acquisitions, predominantly under goodwill, and only 2% from exchange rates.

Net working capital in the second half year declined by 11%, which was mainly due to a decrease in prepaid expenses following the full acquisition of Sheng Wang. Our net interest-bearing debt at yearend is DKK12.7 billion, and we have a gearing multiple of 2.9, which is above our medium- to long-term expectations of 2% to 2.5%.

With that, Soren, let’s go to outlook.

Søren Nielsen

Yes. And first of all, around the market, we expect to continue to see macroeconomic headwinds. In the Hearing Aid market, we expect the unit growth rate to be slightly below the structural 4% to 6%, and it’s the best we have for now, the normal negative ASP development coming from various mix effects. In the market for audio equipment, we see still very high uncertainty, and we cannot really predict the growth rate. We expect still enterprise to be more stable than gaming. But that’s it for now.

In Communications segment, as basis or based on that expect a modest positive organic growth, but negative in the beginning. It is our effort in video equipment and a number of product launches we have coming that should support organic growth. We also expect EBIT to be less negative than in ’22.

We have taken certain measures on the cost side, and with a modest organic growth we will see an improvement of EBIT. Due to a high level of attractive options on the acquisition side, we expect the level of bolt-on acquisitions in ’23 to be slightly higher than normal. And our gearing multiple at the end of the year is, therefore, expected to be around the high end of our medium- to long-term guidance of the 2x to 2.5x.

And higher than normal — despite of the higher-than-normal cost inflation, we expect to grow group’s OpEx less than revenue, and that is simply the way we have built things for ’23. We go into the year much more cautious than we did in ’22, and again, have already taken a number of steps to reduce some costs, but also, again, the way we look at further expansions. It is very conservative and modest plans we have as long as the market development is like it is. So, therefore, we can also cope with the expected inflation.

The discontinued operation, Hearing Implants, is still expected to close in second quarter of ’23, resulting in a payment of DKK700 million — of the first DKK700 million out of a total of DKK850 million. And the matrix is organic growth rate of 3% to 7%; acquisitions around 3%, and that’s what we know for now, more could come; FX at minus 1%, as we know the currencies as of today; EBIT DKK3.6 billion to DKK4 billion; net financials, negative around DKK600 million.

So this is an increase coming naturally from the higher debt and the higher interest rate; and then also an increased effective tax rate; and then as I said, gearing multiple between 2 to 2.5, but most likely around the higher end of that [ interval ]. No share buyback, we are focused on bringing down debt and the gearing multiple, and also to be able to do relevant and necessary acquisitions. Profit after tax from discontinued business, negative around DKK100 million.

And with that, over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Julien Ouaddour. Your line is open.

UnidentifiedAnalyst

Thank you very much and good afternoon, everyone. So I have three, please. The first one on guidance. So I think it’s fair to say that we were all positively surprised for you calling the Hearing Aids market growth not far from the usual 4% to 6% in units while we see, let’s say, current market conditions, not really showing sign of improvement yet.

So could you walk us through your reflection when it comes to market growth? Basically, what makes you confident about the market rebound in 2023? And also if you can give more color about the base case scenario for the 3% to 7% organic growth in your guidance, basically, where you expect to take share and especially at the top end of the guide.

The second one is on profitability. So guidance, again. You guide for, let’s say, 200 bps higher EBIT margin next year at the midpoint of the range, up to 250 bps at the top end. And this despite a more challenging H2 this year, margin down sequentially, which is rarely — which has rarely happened in the past. Just what makes you confident that you can bring up the margins so much this year?

And last question, very quickly, Rene, as you mentioned, high level of attractive opportunities when it comes to acquisitive growth. Does it refer mostly to bolt-on and retail store acquisitions, or do you see other kind of larger opportunities this year?

Søren Nielsen

That was a lot of questions also in [indiscernible]. So I will try to handle as many as possible. The unit growth, it is below the structure, but I still think you can see, even though it has been negative in the second half and it still comes out very close to the structural expectations for the past three to four years, so there is a resilience, there is a certain rhythm, and you also have markets that still have opportunities; China, just one example from being severely impacted during the year that has passed. So it is our best take that with the general stability and so on, we will not be in the 4% to 6% but slightly below, whether that’s then 2% or 3%, I think that time will show.

And then base case versus top end, that is, of course, part of the uncertainty that is the market growth rate. But other than that, it is, of course, also some full year effect of things we have already gained. I’m sure you can see the momentum that we are currently seeing, especially in the Hearing Aid wholesale business and the Diagnostic business.

And, yes, we expect those to continue, but of course, with some uncertainty. And therefore, I think they are part of it. And then also the consumer sentiment to Hearing Care and the Communication, but mostly the Hearing Care, I think that’s where you see the uncertainty in the range. I don’t know, Rene, if you will comment on the EBIT. I can do it as well, but I think you can put flavor to that.

René Schneider

Just add to the, let’s say, the margin improvement that is implied by our outlook, that’s very evident. And I think it’s all the things that Soren mentioned but also the fact that you can say we have — we come out of ’22 with a very strong momentum on the Hearing Aids side. We continue to have strong momentum on Diagnostics.

We have clear expectations that contrary to ’22, we would see a positive organic growth in our Hearing Care business. And that is a big, big swing factor for the group margin as it constitutes 40% of our business. And that’s something where we have different expectations than what we saw in ’22 for sure. So there are many drivers of also margin expansion in our business. And then lastly on Communications. It is also there our expectations to have less of a loss than what we had in ’22.

Søren Nielsen

And in general, again, conservatism in going into the planning for ’23, we have a much stronger focus on working out of the established cost base and growing it further, so I would add that in. And that altogether gives us comfort that this is the translation we should see from continued strong organic growth. And then on the acquisitions, it is within distribution.

It is a bolt-on to what we do already, and that is where we see opportunities and have a number of things done already. So this is — just to confirm that consolidation on the retail side, distribution side continue to be a key play in our sector, and we are firm in continuing to be part of that.

Operator

Our next question comes from Maja Pataki.

Maja Pataki

Yes. I think I have 2 or 3. I would like to start with your momentum that you’re seeing in Q4 and that you’re seeing also — expecting to see again in 2023. You have clearly benefited from the KS 10 contract being removed and Sonova exiting Costco. How are you thinking that this is going to translate into 2023 on top line growth and on EBIT margin?

Then the second question, [ loose ] from that, you have seen quite a strong pickup in momentum in third-party sales. Can you maybe elaborate a bit more what you’re seeing in the market? Is it a broad-based market share gain, or is it more head to head with specific competitors where you think you’re taking more shares? I don’t know if you’re willing to comment on that.

And then the third question is really on how is Europe behaving with regards to trading down? For the longest period of time, we haven’t really seen a impact on trading down. Is that something that you’re starting to see?

Søren Nielsen

Yes, Maja, well, it is obvious that the change in the U.S. market when it comes to Costco is an opportunity that we have pursued and benefited from. And we see it as — there seems to be no new changes. Of course, it is with uncertainty, but we have no visibility that this is not a new way of operating the business. So at least for now, that’s a tailwind for us. Of course, when we come to fourth quarter, we don’t expect the same tailwind from growth there. But that is part of the guidance, but also with some uncertainty that it can change up or down.

I cannot really speak to the EBIT translation on single customers and so on. But it is, of course, one of the areas where it’s very incremental sales and doesn’t release a big step-up in cost base, more people on the phone, and more in the stockroom and production lines and so on. But that’s just to build the volume. So the incremental is, of course, positive for EBIT.

The external sales to third party, yes, it is broad-based, and the broad-based is bigger than the change in Costco. So, it is basically almost all markets where we have seen market share gains. So I feel very comfortable about the momentum where it’s coming from. Still there’s not full transparency. We will see as the various players that come out with numbers, bring their numbers out, and then we can get a better overview of that.

Generally speaking, I would also say outside Europe trade down is not the main effect. There is something on units total, meaning some people postpone or wait. But I would still say the biggest effect is channel shift towards channels where the pricing is lower or there is more reimbursement, I don’t have to pay anything. There is a bit of trade down, but I think I’ve said many times, it’s really difficult to take apart whether that’s because you have a strong offering or whether that’s the market because we have very few markets where there’s any insight to what the actual mix is in the market. And generally speaking, it’s quite stable.

Operator

And our next question comes from Hassan Al-Wakeel with Barclays.

Hassan Al-Wakeel

I have two, please. If I can follow up on guidance. How do you see the phasing of growth over the course of the year? And for the market as a whole, do you not consider a similar level of volatility in ’23 as we saw in 2022, but potentially for a longer part of the year? And on margin, are there any one-offs to bear in mind in terms of margin guidance, say, FX or dilution from M&A?

And secondly, could you talk about the key buckets of cost inflation and what your assumptions are for wages as well as COGS and to what extent you’re seeing some normalization this year?

Søren Nielsen

Yes. I will speak on the volatility and, Rene, you can dive into some of the others. No, we don’t — of course, it’s uncertain and the uncertainty is there, but the dramatic change happened in the transition from, let’s say, during second quarter into the second half.

And, yes, then the comps will start to change and so on. So we will, of course, see the comparison figures being higher in the first quarter and also due to the way ’22 developed in fourth quarter, but second and third, there would be good growth. But then, of course, on top of that, the organic growth does come during the year as we benefit from product introductions and so on. So there is a bit of phasing where you would say the middle section is probably the strongest. And then, Rene, if you…

René Schneider

Yes. So on one-offs, I would say, when it comes to FX, it is year-over-year on an EBIT level neutral. There’s a slight negative effect on top line, but due to hedging, it becomes neutral on the EBIT line from ’22 into ’23. When it comes to dilutive effects of acquisitions, I would not really highlight that as a particular topic since it is bolt-on acquisitions to businesses that we already, you can say, are in, and therefore, representative of how we look today as a business. Wages…

Søren Nielsen

Maybe, also, as the organic growth rate is at least right now bigger in Hearing Aids and Diagnostic in comparison to Hearing Care, there is also the opposite effect from that, I would say.

René Schneider

Exactly. When it comes to inflation on wages, what we experienced is in line with what — or consistent with what we have communicated in our previous calls is that, yes, it is slightly higher than what we normally see. But just to quantify it on a global level, we are maybe in the range of 3.5% to maybe up to 4%, but it is in that range, and that might be 0.5 to 1 percentage point higher than normal. But that’s on a like-for-like basis. And to some extent, we, of course, mitigate that by looking at our global footprint of people and where do we sit. And, therefore, it will not have the same overall effect on our cost base.

On the cost of goods sold, also, we are, you can say, to some extent protected by the fact that a lot of the materials that we buy are particular to — either to us or to our industry, and thus, say, less volatile when it comes to a spot market by at least when it comes to the Hearing Healthcare business, the situation is slightly different on Communications. So also, there are some impact from inflation, but not a lot.

Hassan Al-Wakeel

That’s very helpful. If I could just follow up on the transition that you talked about from second quarter to second half. That was mainly a U.S. weakness that the market saw. How are you thinking about the relative strength of U.S. versus Europe in 2023?

Søren Nielsen

Yes, Europe is just, in general, more resilient due to higher level of reimbursements and so on. And the majority effect in U.S. is also what I would call it, a channel mix change. More people have benefited from their own personal health insurance or managed care growing.

That’s just an example of the channel shift that is more profound than the actual unit growth, and that’s unit growth development. So back to whether it’s unit growth or whether it’s channel shift, I still think the majority of the effect we see on our own numbers come from channel and mix effect, it’s rather than the market being down in units back to my initial comments that the market also in U.S. is relatively resilient when it comes to the number of people that seek help.

Operator

And our next question comes from Christian Ryom with Danske Bank.

Christian Ryom

I also have a couple. So first, can you comment on how you’ve seen the market develop here in Q1, whether there are any changes to the trend from what you reported for the market or estimated for the market in Q4?

And then the second question is sort of a split question to your EBIT margin guide. So my understanding is that you’re basically guiding that most of the EBIT margin expansion should come from OpEx growth that is slower than top line growth. Can you explain that? Is that a reflection of, say, faster growth in Hearing Aids than Hearing Care? Or what is the underlying driver of that lower OpEx growth?

Søren Nielsen

Christian, well, we cannot comment on Q1. It has barely closed, and we don’t have statistics that tell us anything, so we cannot speak to that. On the EBIT margin split, yes, the scalability fundamentally is stronger in Hearing Aids than it is in Hearing Care, of course, outside short-term, negative market development where there’s simply fewer people, you could say, in each store.

When we drive a strong organic growth, we do see a scale effect on the Hearing Aid business. And again, the way we went into the year being more conservative on what we assume we can and will do on further growing the company’s investment in R&D and global infrastructure, et cetera. So it is also a more conservative approach to the year when it comes to the OpEx that’s part of changing this balance between top line growth and OpEx growth.

René Schneider

Yes. And adding to that, you’ve seen the DKK100 million of expected savings in OpEx based on what we have already done of initiatives. And then I would add that, in particular, in second half year, say, revenue and cost base for our Hearing Care business was significantly out of balance compared to even our normal range. And that, of course, is also a key activity and assumption for ’23 that that is rebalanced, so to say. And when it comes to market, no, we don’t have market data as such, but we have seen nothing in January that would lead us to believe that, let’s say, neither the market nor our own guidance should be impacted by that.

Christian Ryom

Okay. Makes sense. And maybe just to confirm my understanding here. So the interpretation is not necessarily that you are guiding that Hearing Aids should grow faster in local currency than Hearing Care, including M&A for the year?

René Schneider

No, no, that’s not a logical conclusion. It might be the case, but it’s not a particular guidance.

Operator

Our next question comes from Rajesh Kumar with HSBC.

Rajesh Kumar

Just on the growth rate. Could you give us some flavor on how the inventory levels in your supply chain are looking, i.e., was the growth helped by restocking by some customers towards end of the period?

And I know usually it’s not a practice to comment on current trends, but I’m sure while setting this year’s guidance, you must have seen trading in the recent weeks. So would it be fair to assume that the momentum you saw towards the end of the year has continued?

Søren Nielsen

I’m sorry, your line is not really good. I think I got the first question, but the second, I’m not really sure. Regarding supply chain and inventory and components level, we are in good shape. That’s the headline. There can always be one small area, and it has been the longest drag has been in the Communication business where due to shipping and China’s — built in China and so on, there has been still some constraints. But for big picture and the group as such, and especially the Hearing Aid side, we’re in good shape. The second part of your question, I simply didn’t get. Maybe you can try to repeat it.

Rajesh Kumar

Yes. So the second question is basically, have you seen the growth rate continue to 2023 what we saw the performance in Q4. That momentum in [ clearing ] rate has continued in 2023?

Søren Nielsen

I think it’s quite a structural what happened in Q4. So, yes, this is the run rate of the business now. So yes, it continues.

Operator

And our next question comes from Hugo Solvet with BNP Paribas.

Hugo Solvet

Quick follow-up on the Costco. Can you help us please size the sales tailwind from Costco in Q4 2022, please, and exactly what’s your expectations for 2023?

Second, on EPOS, can you maybe give us a number or quantify a bit more your comments around the less negative EBIT for 2023? And maybe some details on the timeline for when you are expecting to bring this business to breakeven.

Lastly, still on the Communication business, you point to the rollout of some video collaboration devices that should help to accelerate growth in 2023. Yet, this is one segment that has been particularly impacted by weakening of demand, the enterprise segment. So what’s the underlying growth for your enterprise Communication business story if we want to exclude this type of new launch?

Søren Nielsen

Okay. I think got most of your questions. Again, the line was not too strong. The U.S. big retail business is looking at Hearing Aid revenue only, organic growth in the ballpark of 3% to 5%, meaning half for the group round numbers. So that’s for ’23 as well on a run rate basis what you should have in mind. EPOS, we don’t — we are not more specific on the guidance.

But, of course, if you assume a modest organic growth and a good effect from the cost initiatives and, of course, a continued very close eye on the cost side, then it is meaningful but it is not making it anywhere near breakeven in ’23. And we basically don’t comment on that right now. We need to see growth and also an improvement in the market before we can really start guiding on that.

Video, we cannot take apart the enterprise. Of course, it’s small. It’s a totally new segment we go in. So the majority of the growth has to come from the existing business and not the video systems. They’re just an important part of building actual growth. On the other hand, it’s a segment where we don’t sell anything and where we see good growth. There is being bought and installed video equipment installed in many more beating rooms as people are starting to — have returned to office work and so on. So it is a growth driver, but it’s not the predominant growth driver.

Hugo Solvet

Okay. If I can just squeeze in one follow-up, on the DKK600 million of negative financial expenses, should we assume that as a run rate from 2024 onwards? And is there a cap on this level of expense, or could this go higher as the interest rates will pick up? And lastly, on share buyback, any plans to resume that or timeline for resuming the share buyback?

René Schneider

Yes. So on interest rate, you can say it’s a function of our debt and what our — financial expenses is a function of our debt level and interest rates. And I have no particular insight on what the interest rate would be in ’24. But assuming it would be the same and debt level would be the same, then that financials would also be similar. So in terms of debt level and share buyback, currently, we are at 2.9x leverage.

It is our clear ambition to bring it down within our guidance range to 2% to 2.5%. And once we are there, as we generate excess cash, it would be natural to again resume share buyback activities. But for now, we don’t see that as something that we would do in ’23, but it might well be on the table for ’24 depending on the outlook at that point in time.

Operator

And our next question comes from David Adlington with JPMorgan.

David Adlington

Two questions, please. So maybe if you could just give — ask for an update in terms of what you’re seeing in terms of your own or market activity very early in 2023 because I know December was quite weak for the market. Just wondered if any bounce back in January.

And secondly, you point towards higher M&A. I just wondered if that was because of the tougher market conditions and whether that was being reflected in asking prices.

Søren Nielsen

David, I think big picture, the way we saw sales development in Q4 that’s aligned into ’23. So the same level of business growth, I would say, that’s how we start the year. And then M&A, it is also our own, again, appetite in participating in consolidation on the distribution side. We have started to be more active in Germany, as an example, and came a little late. So that’s also a sign of — we have seen good opportunities there and have closed some of them and building a — trying to build scale in Germany, so we try to do it fast.

Other than that, it’s — I don’t think it’s a big change to pricing or what is for sale or that the macroenvironment push people to sell their business. This is just, I think, also an element of normalization after COVID and us being still firm on our strategy to join the consolidation that’s obviously taking place.

David Adlington

Perfect. And then maybe just one housekeeping one, please. Just in terms of the tax rate, certainly a bit higher than we had in our model. Is that something we should be thinking about going forward as well?

René Schneider

Well, at least for ’23, this is the level you should think of. And one of the — the 2 major changes is that there was a temporary, you can say, additional deductibility on R&D expenses in Denmark. It is within the, you can say, it’s on the government program to reinstall that, but that’s obviously out of my hands, but that’s at least an opportunity for it to improve.

And the second part is limited deductibility of interest expenses also in Denmark. Longer term, that’s, of course, also something that we can work structurally with, which, of course, we intend to do, and so that’s also an opportunity to improve. But again, nothing that I can guide specifically on.

Operator

Our next question comes from Shubhangi Gupta with HSBC.

Shubhangi Gupta

So I wanted to ask, in Hearing Care, you have exited selected managed care plans in the U.S. which had a negative impact. So can you please elaborate on that? And also Diagnostics saw some growth deceleration in Q4 in the U.S. And U.S. is a big market share of Diagnostics, so can you also shed some light there?

Søren Nielsen

Yes. The managed care plans is the storyline that it’s not all managed care plans but the share of managed care in our Hearing Care business in U.S. had grown to a level that was not sustainable. And secondly, most of it came from a third-party administrator that’s owned by one of our competitors, and the share of Demant Hearing Aids on those contracts were just too small, so it doesn’t make any financial sense.

So it is a transition we’re going through, a transition where we do less managed care and nothing with these particular plans and, of course, builds and back to changing the business model, build a stronger pipeline, fulfilling it with private pay patients, which are still the majority in the U.S. market. And that’s the transition we are in and which we are seeing some traction on.

On the Diagnostic, the deceleration in Q4 is not U.S. based. That is primarily due to China. That was very weak year-end due to the changed corona policies. So not something structural. Yes, we have a high market share in many markets, but we also do a lot to expand the market, in particular within [ balance ], which is still a treatment that’s underdeveloped in many markets.

So the Diagnostic group is spending a lot of resources and energy in teaching the world how to build a proper and appropriate balance treatment in many countries and, therefore, see good growth rates in a segment like that. And there are segments where our growth or our share around the world is not — is still relatively lower than the average, so there are still good growth opportunities.

Operator

Our next question comes from Mattias Haggblom with Danske Bank.

Mattias Häggblom

It’s Mattias Haggblom with Handelsbanken. Two questions, please. So firstly, on the net financial guidance of DKK600 million. Given the net debt you exited ’22 with and the net debt you more or less guide for at the end of ’23, given your gearing comments, I end up with a pretty high average interest rate to get to the DKK600 million. So any more comments to help me think of your net financials and the rates?

And then secondly, 74% of your borrowing is in Danish kroner and given what you just said on deductibles for interest rates and limitations in Denmark, can you talk about any imminent maturity of your debt that could enable you to shift that to more tax-friendly currencies?

René Schneider

Yes. So a little bit more considerations regarding financials, other than it all being in round numbers, is that you are right when you look yearend-to-yearend debt ballpark, but you need to look on average debt throughout the year, which has been increasing significantly during ’22, i.e., the average debt in ’23 would be higher than on average in ’22, and that’s what you pay an interest on.

And then secondly, of course, also a significant part of financials is credit card fees, which is also seeing a, you can say, an increase and not just from, you can say, pricing or interest level but also from activity level. So that’s a couple of additional elements. And then I would say without going into the details, of course, we look for opportunities to optimize our global financing setup and also when it comes to, in particular, deductibility of interest expenses that is part of the considerations. But I think that’s as detailed as we can discuss it.

Operator

Our next question comes from Robert Davies with Morgan Stanley.

Robert Davies

I just had two. One was just on your conviction around, I guess, positive organic growth in the Communications business in ’23 in light of your comments that enterprise was slowing through the fourth quarter. Just wondered what you were expecting for that bit of business as you head through the year.

And then the second was just around the ongoing M&A comments you made. How do you balance that desire to do further M&A with the current leverage and higher interest costs? As couple of people mentioned on the call already, they do seem to be going up quite a bit from where consensus was. Was there any thought process between dialing that back and trying to bring the leverage down any quicker?

Søren Nielsen

Yes. Let me take the first one. What I tried to say around the Communication is enterprise business and demand is a B2B, so it is fundamentally more stable than a consumer type of business than gaming. And yes, we saw some slowdown towards the end of the year, but I think many companies try to optimize spend and cash flow, et cetera. The trend we still believe is healthy. And therefore, that’s the more stable of the 2 businesses. And with new equipment and new products coming out, I think the opportunity to deliver growth there should be solid.

I think the main uncertainty in the Communication business do still center around the development of the gaming market. And M&A is always a balance between opportunities. There’s definitely also M&A opportunities we shy away from. And I think as we have spoken to earlier, we are also very conscious that it’s acquisitions of good quality and not just pick up anything. So we are more selective.

I’m just saying that the activity level, in general, is still high in the sector. And it is important that we continue in the markets where it is key to build profitability by achieving a certain level of scale. And then, of course, we do — definitely we are very focused on bringing down our gearing. And that is a primary target for the group to get down in our near, at least, and best of all within, our mid- to long-term guidance on that.

Mathias Møller

So, ladies and gentlemen, I think with that, we have to conclude the call. We are at the 3 PM mark here in Copenhagen. So thanks very much for joining us and participating with questions. Let us know if you have more, we’ll be happy to follow up. We’ll be on the road and in conferences over the next couple of weeks and months, so look forward to seeing you on the road. Have a great day.