GN Store Nord A/S

CSE:GN

Earnings Call Transcript 2020-Q1

[Morten P. Toft, Vice President of Investor Relations & Treasury]

Hello. Welcome all to GN's Q1 2020 Conference Call following our release this morning, Danish time. Thank you all for dialing in. It's great to have you on the call.Participating on the call is Gitte Aabo, CEO of GN Hearing; René Svendsen-Tune, CEO of GN Audio; Marcus Desimoni, CFO of GN Store Nord; and myself, Morten Toft, Head of Investor Relations and Treasury.Today's conference call is expected to last about an hour, where we'll go through the presentation we have uploaded on our website, gn.com.The agenda for the presentation itself is that Marcus will start off with financial highlights. Then Gitte will provide an update on GN Hearing. René, we will provide an update on GN Audio. After which, we'll go back to Marcus for an update on the financial outlook.After that, we'll hand over to Q&A with questions from the queue.And with that very brief introduction, I'm happy to hand over to Marcus.

[Marcus Desimoni, Chief Financial Officer]

Thank you, Morten. Good morning, everybody. You see that we have a not very fancy day. Share price is down, at least the numbers are good, 3:1. It's better than 1:3, a colleague of mine just told me. But it's reflecting a little bit the environment that we are dealing in. You have it in the headline, COVID-19 and you can argue in any direction with this.But just let me give you a little bit of flavor about the first quarter. January started as predicted. Audio, Hearing, Store Nord, we went into the year full of optimism. In February. February, we had the slowdown because of a supply issue in China, impacting Audio and Hearing, and we come in detail to what it means on the numbers. And we needed to do all the forces we've had in the company to be able to re-ramp production and the logistic. That means that not only producing an item and the good, but also bring it to the end user, to the customer, where the demand is. And that put a lot of resource of ours into play. And then suddenly, we're in March, and it was not because it was carnival in some areas of the world, no. It was, unfortunately, the reality that the whole world started to stop because Europe got to -- started to close down and other areas followed. From the second week of March, we got a hit, it was like a knife in the back and in the front at the same time. And we have seen 2 different directions.In Hearing, we started to bleed like hell. And in Audio, the colleagues started to sweat like hell because the demand spiked massively up in the same direction as the demand on Hearing fall down. And this is where you see and you have to imagine the resources and the brain power of all the employees in GN, what to do, what to deal in a very short term of -- time of period and how to turn around the ships into the different seas. That is nothing that you can plan. There's nothing you can predict, but you have to go through this and you have to live with this. And that was the situation. And this is what we wanted to highlight that we had 3 different levels of impact. One was the production. Secondly, it was an issue of supply that we still have had into the end of the first quarter that not everyone could live up to the demand that we have on components. And the third one is a very, very different picture in terms of demand situation in our end markets.That was leading then to the so-called [Foreign Language]. All in all, we had 3% organic growth. But that's why I needed to slice it and dice it because I think that it is much more important than just what is the number. Yes, we have been growing 3% organically. Yes, we've had roughly DKK 3 billion of revenues in the quarter. Yes, we've had positive gross profit and a positive gross margin. It's all nice. But the challenges behind it, that is extremely severe. And on top of that, in a quarter like that, we have been able to launch new products and solutions in Audio and Hearing. And I think this is the underlying message. Even though there is a virus outbreak, even though the governments are shutting down the daily living, we continue to work, we continue to act, and we are there for all of our customers.And with this, at the end of the day, yes, we made a profit in Audio, great one; in Hearing, okay-ish. Overall, in the company, we had a profit. And from the different momentums, we have an impact in the free cash flow, we'll come in a second to this. I think it's super important to see that we have been matching the different momentum also in our fixed cost base with the employees and that our leverage ratio was at the same level like 12 months ago, it was 2.3. So a very, very sound balance sheet. And with ample sources of liquidity that we could tap into that, that is giving us the flexibility that we need, in particular, in the second quarter.With this, I go to the cash flow. I'm sure that's what you're all looking for. And this is why we slice it today a little bit. Let me start with Hearing. In Hearing, the drop of cash from operating activities was driven by the shortfall in EBITA. And the shortfall in EBITA, of course, is a reflection of lower revenue and the lower revenue base I just explained, where it was coming and why it was coming. If you take a look into the working capital, the working capital have had 2 different directions on the Hearing side. One was, of course, the lower accounts receivable driven by lower revenue. But then the spike in inventories that we couldn't manage in 2 weeks anymore to bring it down. This is why you see a cash outflow, but much, much lower than in the first quarter in the prior year. And with this, of course, if you have lower profits, you have lower tax, we ended up in the same ballpark, give or take, where we've had ended last year in terms of free cash flow, slightly negative.In Audio, the situation was completely different as I just elaborated. And revenues are going through the roof. Demand is left and right, up and down, and therefore, of course, the profit is going up roughly DKK 100 million. And at the same time, if you have this in the last weeks of the quarter, then of course, the inventory is going down, as we also indicated in the upgrade -- update cost during the quarter, because of the supply situation, but then the ARs are spiking because if you have such high demand, then you have the outflow and the working capital from that perspective. And therefore, the negative free cash flow in Audio is just a question of timing. So both, I would say, is healthy, even though the number is negative.If you then take a look in terms of what does it mean for GN Store Nord as a company, the summary of the 2 strong legs is giving me the flexibility, as I described, on the leverage that we are on the same number as 12 months ago, 2.3. I can imagine, of course, from the profitability run rate that the leverage will go slightly up in the next quarter and in the quarter to come. But that is still a healthy ratio, I believe, and I feel very comfortable to manage that. And the equity ratio bounced and found a ground around 30%.If you take a look in the liquidity lines that we tapped into. And you have seen me talking with all of you last year that we have been extremely active on the treasury side with going into the European Commercial paper program in the first quarter then having a rollover of the convertible bond, then tapping there into the euro bond market. We have the newly established EMTN program that we can be a frequent issuer if we need to. We have uncommitted and committed line with different banks. So we have a whole bunch of flowers that you normally only see for a birthday party that we can tap into this. Do we need to? No, we don't need to, but it's great. It's really, really good to have this. And I'm also very happy to see what ECB and other banks and governments have done it. They have provided the market with ample of liquidity so that the banks can push the money through to the ones who need it. So this is, in a nutshell, what I can say, we have the vehicles to tap into liquidity. Liquidity is available in the markets. We have not seen anywhere a shutdown of that. And with the profile that we have, and we have enough bandwidth and power in order to sustain through this crisis. Most important for all of us, and now I'm talking also here for René and Gitte and our Board. We will make it through the crisis because we're acting extremely prudent and thoughtfully. And what we're doing is just to stay in control and being active and be the owner of our own destiny. We don't want to give the key to the government. We don't want to give the key to the bank. And I think this is -- even though the numbers don't look good in one part of the business, it's very, very different to other businesses and to other industries.All right. So what are we doing now? You see the nice picture, and I love to be in a party in a bar. Unfortunately, these days, we are not allowed to, but I still wanted to have this picture in because life goes on. In order to get there, of course, we need to stay alive as a company. And this is why we initiated, across the company, cost reduction programs. We focused on driving the fixed cost base into a variable cost base. That we have much, much better leverage in the future than we would have today. We tapped, as I said before, into different areas of liquidity and pools in order to get the cash on hand as we needed to have.At the end of the first quarter, we had, in fact, roughly DKK 600 million cash on the balance sheet. Absolutely too much. If you look on the equity ratio, it's not really helpful. But you never know what you're tapping into it, and therefore, we were very happy to have this. I can also tell you that in the first 2 weeks of the month of April, customers paid their bills. So cash came in, and I'm still having a positive cash balance at the end of the month of April as it looks right now. So we are able to live, but therefore, you need to act on that one.And last but not least, of course, as we have tapped into different programs to reduce costs, including salary, it's absolutely prudent that we also do the same. So the executive management and the leadership teams of Audio and Hearing signed up with the Board of Directors to take a 10% reduction of our base salaries with immediate effect into account.So what are we doing? And how should I help you on GN Hearing to look into the markets? When you see the slide -- when you see this slide, then there is a gray line. The gray line is, give or take, the 5% to 6% growth that we normally always have in Hearing. And when you take a look below, then you see what I said before, January and February, were straightforward months as we have planned. And then in March, it went down a little bit in the beginning and massively at the end. And that speed, it's like a downhill skier. Yes, it's continuing in the month of April. So if you believe that you will have in the month of April 20%, 30% of the normalized revenue base, then you're on a good one. Then you're really, really happy because people are just -- can't go to the shops. The shops have massively restricted hours of operating. We just can't get the supply that we have towards the demand that people have, and it's very different this crisis compared to what I've seen over my last, yes, 50 years almost. It's different because it's not the impact of the GDP and people losing their jobs and people don't have money going forward. You can get all over subsidies also for hearing instruments. People are scared to go out and people are not allowed to go out. And this is why we can't match supply and demand. Do we have solutions on this? Partly, and Gitte will talk about this. But this is why this crisis is very different from the other crises. People are scared because of the virus, are not allowed to go out, and therefore, there is no physical match. And this is something that is impacting the second quarter massively. And I don't see, and I don't know if May -- no, June will be on the same level in terms of revenue as the month of March was. And I hope with this, I give you a little bit visibility into your modeling. And then we need to see how the second quarter went, and then we know how Q3 and Q4 will look like.What are we doing? Well very clearly, we tackled the fixed cost base. Give or take, rough around 70%-30% is fixed to variable plus/minus. The majority is people. Can I do this? Can I tackle them? Yes, but then I cut off my legs for running tomorrow. So I'm not doing this. I have to do it very prudent. So we tapped into all the different government programs across the world. We're looking into, as I said today, 10% salary reduction in parts of Denmark. We're doing other things across the world. Cut operations when you don't have anything to produce. Of course, the headcount cut is much, much more severe over there. And when you see the normalized P&L on the monthly basis and you see where is my fixed cost, what is my OpEx, then you also know how limited the impact is because, as I said, we are not touching R&D. They only get a haircut trim, yes, "[Foreign Language]", I would say, when I go to the haircut. But we need to have them because they need to bring the future of products out and there's a future afterwards. While in marketing, you can go in 30%, 40%, 50% cut because marketing is a discretionary spending. And you don't know what will work but you also know only half will work, but which half is it? What works? But therefore, you have different measures and different trigger points to do with this. So this is what we're going in. Activities, as I said, besides marketing, also on the ERP project. You know that we're rolling out a big major ERP project that cost a lot of cash out. But what we're doing with this is that we are stalling it for 6 months. We've taken the resources that we have and working on our other systems to re-ramp them and work through the data. But we don't need consultants right now. We don't need big workshops because no one is allowed to travel anyhow. So we have cash savings baked in for the next 3 quarters to come out of that. And this is how we look in terms of what kind of fixed cost can we take out, what kind of variable cost can we take out and push out, and what are the measures that we need to do structurally going forward if the crisis will take longer, and this is where we say we're working on specific country restructurings as well as on footprint optimizations.And with this, very different speech today, I hand over to Gitte.

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Thank you, Marcus, and thank you to everyone for attending the conference here today. I must admit, as also Marcus started out, that we are undergoing a very challenging situation currently in GN Hearing, which is also evident in our numbers, and maybe we should move to Slide 11. It is impacting our business severely. You see that we ended the quarter with the decline in our sales of 14%. And as also indicated by Marcus, the year was off to a good start in January and February, where we were more or less on plan. But due to the accelerating impact from COVID-19, we ended up delivering negative organic growth. Unfortunately, this situation is still impacting our end market. And as Marcus also just underlined, we expect Q2 to be even worse than Q1. We also saw an impact on our gross margin in the quarter also coming from COVID-19, partly due to extraordinary costs related to our extended suspension of our production in our Xiamen manufacturing site in the quarter.Our EBITA margin ended at 4.2% in Q1 as -- and we actually saw a decline of 80% in EBITA. And again, here, you have to take into account that January and February were more or less on plan in terms of the top line, and it's basically the last couple of weeks of March where we see a significant decline in sales. And although I think we've acted both prudent and responsible, as Marcus just talked about, and have initiated a number of initiatives to improve cash and reduce cost, they are only starting to take effect from April and onwards.We are working closely as a global organization in order to come out even stronger on the other side of COVID-19. That is our top priority at the moment. And I would like to take the opportunity to thank you, my entire management team as well as the wider organization, for the incredible flexibility and determination they show as we get through this. They are doing a fantastic job.Again, as Marcus also alluded to, we have implemented a number of measures, furlough, salary cuts and so on, in our wider organization, and I'm amazed with the support and flexibility given by all the employees around the world.Now let's turn to Slide 11 (sic) [ 12 ] because I would like to give some additional color on our regional performance in the quarter, which again, started out strongly as expected. In North America, we saw a strong start on top of the development in the VA. However, from the middle of March, the COVID-19 outbreak significantly started impacting our growth.In Europe, again, a strong start, in particular, in countries like Germany, Italy, Spain and the U.K. But again, at the end of the quarter, an impact from COVID-19. In our Rest of World sales region, we were negatively impacted at the beginning of the quarter, especially in China. However, towards the end of the quarter, we have observed some early signs of improvement in several countries, including China. And that actually continues into this quarter, but again, we are not back at full cadence yet.Now this leads me to Slide 13 and our targeted approach to getting through the current crisis. Again, I guess as a management team, you always need to act responsible, but I guess it puts even more demand on you to act responsible in times like these. And we have put in place 3 very clear priorities for us in GN Hearing. One is to position GN Hearing to recover stronger than ever post COVID-19, next is business continuity, and third is structural enhancements. And I'll obviously put a little bit more flavor to the 3 of them. But first, I want to emphasize that the underlying needs that we are trying to meet in GN Hearing, which is the treatment of hearing loss, is obviously still there. And that's also why it's been so important for us to put a remote solution in place in these days, and I'll come back and speak more about that. Because in these times, where a lot of people are socially -- are facing lockdown and in social isolation, and maybe especially our customer groups, I mean 90% of our customers are above 65, and if not required to stay home, may be afraid to go out. And maybe the only contact they have with their close ones is through mobile phones or computers. In situations like that, it is pivotal that you are able to hear, otherwise you become even more isolated. And therefore, it is obviously important that we continue to provide solutions to people with the hearing loss in these difficult times. And I think this is exactly what we do with ReSound Assist Live, and I'll speak more about that. And this is one great example of what we're trying to do to position us even stronger after COVID-19. It's obviously also important that we are able to scale up again quickly when the markets reopen, as Marcus were talking about. And obviously, we are therefore careful that the measures we put in place are a little bit like turning on and off the heat so that we can turn the heat back on again once the markets start to reopen.It's also evident, at least we think that it's evident that telehealth will play a bigger role. It's obviously the case right now that telehealth plays a bigger role because for many reasons, you cannot meet in person. But we actually also think that will be the case afterwards because we'll face a whole health care system that has to recover from COVID-19 and treat all the diseases that are currently put on pause. And that will also rub off on audiology and how we provide audiology services. So we actually expect that to be a lasting trend. And again, I think we position us well into that space with ReSound Assist Live. It's clear that the business continuity is crucial for us, optimize cash, reduce costs. And I will not repeat what Marcus just talked about, but again, just emphasize that this is done in a manner where we can scale back up again once the market start to reopen.In addition to that, we are also focusing on various structural enhancements. And again, Marcus spoke about that, our global footprint and maybe taking the opportunity to optimize in certain markets and certainly also in corporate functions to ensure that once the market opens, we have put ourselves in a position where we are as efficient and as competitive as possible. And we have identified a number of opportunities globally and locally to make sure that -- exactly that, and that our setup and footprint are as it needs to be.And obviously, all this is with the aim to take us through the current crisis and do that well while we are preparing for tomorrow where we want GN Hearing to be, stronger than ever.Let's turn to Page 14 because I'd like to spend a little bit time on talking about ReSound Assist Live. It's evident that as hearing-impaired people are generally restricted from visiting their HCPs, I think it's really cool that we found a way to provide a solution that works in this situation. This is why we've accelerated the launch of ReSound Assist Live. And what we're able to do with this is both help our existing hearing aid users. So actually, everybody that has bought a hearing aid from GN since 1st of January 2017, we can actually already interact with them and support them to ReSound Assist Live. And we've been able to do that for a while providing service to them. Now what we can do in addition now is that we can actually remotely both do the hearing test and do the first fitting of a hearing aid, which means that basically, a person can be at home in their living room, if you like, and get the full service of the audiology, and that -- the audiologist. And that is obviously, really, really important, especially in these days with social isolation. So I think this is something I'm very happy about that we've been able to put in place. And again, our solution does not require that you've done a hearing test. You can do everything to a person that has never been in contact with an audiologist before, which is really unique. So I think that this is a great example of how we position GN Hearing to not only strongly right now, also a strong way to support our ATPs. It's also providing us in a strong position afterwards. And obviously, once the markets reopen, we would still encourage our users around the world to go and see the audiologists. But again, this is a way to get a hearing aid even in these times.And with that, let me move on to Slide 15. So even though we are currently severely impacted by COVID-19, our strategic direction still stands and is unchanged. There are certain elements that we further accelerated, and like the individualized customer experience is probably more important than ever in the light of COVID-19. And again, our recent launch of ReSound Assist Live shows our agility in making products and solutions that are individualized for our users. And we'll continue developing initiatives that are centered around the customer experience also post COVID-19. And as for the innovation leadership, I actually, again, think that this is confirmed by the fact that we are first in putting such a solution into the market. And certainly, also, it's confirmed by the fact that we completed the ReSound LiNX Quattro portfolio by introducing 3 new BTEs and a new mini RIE. On top of this, we launched 2 new super power products under the ReSound ENZO Q family. All the products are based on the same chip platform as the original ReSound LiNX Quattro, and includes a state-of-the-art streaming solution with full connectivity with Apple and Android devices.As for our commercial and ecosystem initiative, we are focused on how we can work with our customers during and after this crisis. As an example, we expect online services to play a much bigger role going forward. ReSound Assist Live is a solution that was requested by our customers and we are happy to provide this solution for them with our accelerated launch.All in all, while we're doing our utmost to take GN Hearing through the current situation in a responsible manner, I believe we are also positioning us to get out even stronger on the other side.And with that, I'd like to hand over to René for an update on GN Audio.

[René Svendsen-Tune]

Thank you, Gitte, and thanks to all of you for taking time to be with us today. So it's now my pleasure to take you through GN Audio's results for first quarter of 2020.So let's move to Slide 17. So overall, Q1 2020 was yet again a very strong quarter for GN Audio. We delivered 22% organic growth on top of the 36% organic growth we achieved in the first quarter of 2019. The growth was primarily driven by strong enterprise demand from home office products as corporates equipped their employees to work from home as a result of COVID-19. The strong growth reflects the strength of GN Audio's innovative world-leading product portfolio. It reflects our access to channel and customers and it reflects a strong execution delivered by our teams and partners around the world. They delivered above expectations in yet another quarter.As a consequence, in this quarter, we have really been able to help a lot of corporates remain efficient and we have gotten a lot of happy customers by being able to help them at short notice in a very difficult situation. As you might recall, we were impacted on the supply side when the COVID-19 situation started in China. Despite these challenges, we were able to react quick and still generate this 22% organic growth in the quarter. However, we were not able to fully meet the accelerated demand in March, which points to a strong second quarter for the enterprise business yet again. On the consumer side, we started to experience a slowdown at the end of the quarter as the off-line, the retail channels started to shut down across the world. That led to an increased demand from online channel but not enough to absorb the negative impact from the off-line channels. With that being said, I would like to stress that actually, we still managed to grow the consumer business in Q1 2020 on top of a very strong quarter a year before in the first quarter of 2019.If you go to the other metrics here, gross margin was down 3 percentage points compared to first quarter of 2019. This was, one, a result of a positive mix effect, but being more than offset by increased freight and production cost related to COVID-19; second, it was about tariffs in North America; and third, impact from foreign exchange, 1/3 each, so to speak.EBITA increased by 49%. The EBITA margin for Q1 of 2020 was 2.9 percentage point higher than Q1 2019. However, adjusting for LTI transaction cost in 2019, the EBITA margin was slightly lower than first quarter of '19 due to the gross margin decline, as I just spoke to. Free cash flow was negative in first quarter of 2020 due to strong revenue growth impacting net working capital as we had to ship a lot of this late in the quarter due to the supply issues as well as traditional seasonality. All in all, a strong set of numbers, positioning us strongly going into Q2, especially on the enterprise side.So let's go to Slide 18, where we dig, as we normally do, a bit deeper into the development in our enterprise division. So in -- as I said, in Q1 2020, enterprise saw a significant increase in demand for home office products due to COVID-19 across all regions. This came on top of the normal business we have executed in the quarter. Given our strong execution, we were able to help customers all over the world, and once again, as I said, delivered about expected performance. This has resulted in increased market share and, again, strengthening our position in the global enterprise market.Across North America, Europe and our Rest of World regions, we delivered strong double-digit organic growth based on the product portfolio and the execution I talked to, too.Let's go to Slide 19. So I'm here excited to put some words to Jabra Evolve2. It's an entirely new range of headsets, which serves to provide the ultimate productivity boost in the office and from home. We are adding the Evolve2 products to our existing Evolve products, and the existing Evolve products is the best-selling product family the company has ever had. Now it gets a bit technical but with digital hybrid active noise cancellation and new design features, Jabra Evolve2 is able to cancel 50% more noise compared to our market-leading product, Jabra Evolve 80. Jabra Evolve2 85 possess 40% better transmitted audio and twice the voice distraction performance powered by an array of 10 microphones in the product. These products have an industry-leading 37-hour battery life empowered by a very advanced digital chipset. Jabra Evolve2 is Microsoft Teams certified for a seamless user experience. And this is a feature, obviously, that our -- a lot of our customers really appreciate. Going to Slide 20. And let me focus a bit more on the changing demands that we anticipate from our customers post COVID '19. This is no science because we don't know, but this is our anticipation based on what we have seen so far and what we are seeing as we speak. The impact of the virus make the business just now a lot less predictable than it used to be, but still, it's meaningful to elaborate on some of the changes we see emerging from the current situation. Given the abrupt changes to workspace and daily routines across the world, we expect to see a longer-term shift in workspaces to involve more flexible work compared to the traditional office-based workspace. This is nothing new, but it's probably going to be accelerated by the COVID-19 phenomenon. This same phenomena also has a consequence that we might not see huddle room phenomena growth as fast as we expected just a few months ago. Companies would be mindful not moving too many employees into a small huddle room at one time. We fundamentally still believe that the huddle room phenomenon and the market will be attracted, but the exact solutions may need to be tweaked compared to what we have thought originally. But the video conferencing phenomena, we believe, will strengthen after this.Also, COVID-19 has led to an increase in home offices, and as such, increasing equipment installed in more dedicated space at home. And with that, behavioral traits are changing along with the disruption from the COVID-19, leading to an acceptance of remote work, which has led already to less travel by design of the situation, more virtual collaboration and flexible schedules.The rise in home offices has further led to an acceleration of more advanced virtual and video meetings and increased UC adoptions. This call for stronger technology and more advanced features is obviously very positive for GN Audio. We are the innovation leader in this industry, and we do intend to drive the future innovation agenda for the industry.And lastly, we have received a lot of questions around how we think the demand for our products will be impacted near-term or medium-term as corporates see their finances being impacted by recession, and as we move into second half of this year and perhaps early next year. The reality is, we do not see any signals of corporates scaling back on buying our technology for their employees. We continue to see very significant demand, but these are challenging times for a lot of corporates, and when we ask them, they don't know. Things may change and may change fast, and hence, we have no firm answer to these questions.So turning to Slide 21. Let me just give a quick update on GN Audio's strategy execution for 2020 and beyond. I think we are off to a great start with strong launches emphasizing our focus on individualized customer experience. As mentioned earlier, we have launched Jabra Evolve2, designed specifically for setting new standards for professional workers. And together with the launch of the Elite 75t Active, Elite 45h and our MySound solution, GN Audio has already made an impressive impact on the individual user experience of our consumers and customers. What we call ecosystem-led innovation is fully on track with the Jabra Evolve2, which is GN Audio's first full headset range certified from Microsoft Teams. And also with the introduction of what we call The Soundbar, a podcast made in collaboration with leading productivity experts across the world. So in GN Audio, we continue to search for ways to drive growth through sustainable, commercial and operational excellence. And one example here is our measures taken to reduce the amount of paper and plastic materials in the packaging of our Jabra Evolve2 product family. So overall, in summary, GN Audio also continues to drive momentum, deliver strong results through focused, dedicated and strong execution. So with that, I will hand back to Marcus for an update on financial guidance. Thank you all.

[Marcus Desimoni, Chief Financial Officer]

Yes. Thank you, René. So you all saw our announcement from April 3. The COVID-19 situation has and will strongly impact our operational performance this year. It will also impact predictability and visibility across markets, partners and channels as we continue the year. And this, with an unprecedented speed and impact for all of us, therefore, it is logical and consistent to withdraw the financial guidance for 2020.If you take a look on our investment case, that is and will remain fully intact. First, we are driven by innovation. And as I said, we continue to invest into innovation, and you see the outcome, we just launched top-notch products and solutions in Audio and in Hearing, and that will continue. We have a leading position across the demographies and across the different channels we are in. And the demographic changes and the new business models, they will play into our cards.Our growth model is intact as we are refraining from vertical integration. And the vertical integration is a fixed cost base that we're also tackling to reduce further, including also our general footprint. The clear strategy to drive technology leadership also with partnerships is something that we continue even stronger going forward. Our profitability is impacted currently but we fundamentally believe that we will come out stronger post COVID-19 and then have a profitability in line with or better than competitors, again, in particular, as we don't own retail.And finally, we constantly deliver strong cash conversion. We have an asset-light business model that is helping us, of course, but that is also the focus and the gene of our company.And with this, I hand over to Morten, please.

[Morten P. Toft, Vice President of Investor Relations & Treasury]

Thank you, Gitte, René and Marcus for the updates. With that, I'm handing over to the operator for Q&A.

[Operator]

[Operator Instructions] First question comes from Carsten Lonborg from SEB.

[Carsten Lønborg Madsen, Research Analyst]

Carsten from SEB. I actually have questions to Audio, and then I'll let somebody else talk about costs and Hearing.René, I was wondering whether you can talk a little bit about price mix in the first quarter here, whether users or buyers and enterprises are trading up mainly going for the lower-end price points in the product range.And also, maybe if you could touch on the new Jabra Evolve2? How many of the models are available now? And where are they available? And also when looking at the price points, you're launching these at -- compared to the older versions. It seems to be quite a price premium. Do you think the market is ready for this right now?

[René Svendsen-Tune]

Thanks, Carsten. So on the 2 questions, I guess on the price points and the mix in Q1, it's probably -- to be very frank, it has been a lot to what we could actually deliver. So there is probably no pattern, really, on sort of how people would like to buy. It's clear that it's gone very much in the direction of USB because that's a very simple way of actually attaching headsets. So there has been a demand for low-end headsets as -- to get speed into this. We have not been able to supply the volumes that people have been looking for and then people have traded up. So on an ASP, actually, we are sort of flat to slightly up in the quarter. And just to also say here, we have not changed any direction in our sort of pricing or commercial policies. Everything is stable, we are not discounting, we are not increasing prices or anything like that.In Q2, probably also you will see that ASPs are pretty okay, I believe, in the sense that the mix we can manufacture, we're trying to manufacture up against the demand we are receiving will lead to something like that, but pretty stable from earlier. And on the Evolve2 situation. First of all, it is -- the 2 models, Evolve2 40, Evolve2 65 are in the market in certain volumes. The Evolve2 85h is not in the market yet for COVID, we simply ran into logistic issues as regard certification and so on, so we decided to delay it for a month to somehow not have to come back to market several times. So there is some moving around people kind of issues there. But first of June, it will hit the market, and also in certain volumes. Right now, I can say, demand is higher than we can deliver in the short term. This is a premium product in all aspects, and therefore, we think the price point is justified, and we have very strong belief in this proposition. We are going to keep the Evolve existing product line in the market until -- as long as -- until further and probably also in a further sort of evolutionary way. But there is a space, we think, in the market for a higher price point.

[Operator]

Question comes from the line of Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 3, please, if I can. Starting with Hearing. I thought the slide in your slide deck was really interesting this morning. It seems like you don't expect to return to normalized levels of sort of performance from a revenue perspective until December. Am I thinking about that correctly? And I guess do you have any preliminary thoughts? I know it's a bit far out, but as you think about 2021, what we might see from the Hearing side on the revenue side that would be helpful.My second question, also on Hearing, is just trying to understand some of the OpEx reductions that you've put into place. If you can give us a little bit of insight on what we should be putting into our model starting in April, that would be very helpful.And then my last question, this is a question for both Hearing and Audio. It'd be great to understand a little bit what performance you're seeing in April in China. In particular, I guess, on the hearing aid side, Gitte, you made some comments saying you're not yet back to normal, but maybe give us a sense for how far away you are. And the run rate that you see, when do you think you do get back to normal?And same for you, René, on the consumer side of the Audio business. Those comments would be very helpful for us.

[Marcus Desimoni, Chief Financial Officer]

Veronika, it's me, Marcus. Thanks for the question. It's a nice bunch of flowers, and I'm happy to take it. Let me start with China in April. It recovered compared to March. We believe we have had the lowest revenue in March, and that was lower than what I'm indicating on that one slide, how we see the group in the month of April. And in April, as I said, we recovered. We are far away from normalization, but we see in China that partly some people can travel, but it's a lot of online activities. And therefore, the market want to recover, but it's a very slow recovery.In terms of the revenue slide that you mentioned, and I think Gitte and I wanted to highlight this to give you better flavor how we think. Look, we see the actual numbers from January, February, March. We basically have seen how April looks like, and we see the forecast into May from the production forecast from the countries. So I think we have a good picture. But then it becomes blurry. And this is why we're operating in scenarios, and the scenario is having different trigger points. You know that several countries closed down travel. And therefore, older people are not allowed to go out. And therefore, you can expect that we don't really see traffic in the shops, so therefore, we have a very minimum revenue base only. We have other activities in North America from a bigger chain that is closing down the hearing centers as of middle of March and not opening up before middle of May.So you basically also know that out of this activity, you don't have any revenues. And then you see also the activities in APAC, where India closed down overnight, basically. Luckily, we are not so much having revenues out of India, but still gives you an indication what can happen overnight. The same in ANZ. ANZ is not closed down, but people are not allowed, above 70, to go out. Yes, so it's basically in a virtual lockdown. And these have the different impacts. And out of these scenarios and trigger points, we basically have this corridor where we see how could a recovery based on reopening of shops and reopening from traffics could look like. And this is why I'm saying April will be the lowest month and I think everyone can figure it out, it's at best 20% of the normalized run rate of revenues that you see over here and then we come up. And maybe in June, maybe in July, we are back on the levels of March, and it's a double maybe. And therefore, we clearly can see that the September quarter will be better than the June quarter. The June quarter will be bloody in all dimensions. And only then if we see how the development in the June quarter per month and the September quarter kicking in, then we have the prediction for the fourth quarter.I'm sure that is no rocket science what I told you right now, but I think it's good that it's out and that you can basically see this. And based on that, we are not only doing the scenario planning from the revenues, but of course, in also our cost planning and the measurements that I come in a second to this. In terms of revenue going into '21. Well, if you see this corridor, then the corridor might widen in '21, and you have to have ample assumptions over here. First of all, that the governments are acting prudent and also seeing -- in Germany, we say the [Foreign Language], yes? So that you act more prudent and that you're able to reopen the countries again, and people can live like normal people again, that would drive some business in there. With this, we would, of course, see a higher base in terms of activity. But personally, I doubt it that we get in '21 the unit numbers that we have seen in the Hearing industry in '19. Secondly, we need to adjust -- and now I'm coming to the cost base. And secondly, we need to adjust the cost base, not only in the short-term in order to preserve the cash flows as we're doing, of course, but of course, now if we have these scenarios that going out there, and we don't even know if a second wave of virus shutdown will hit us, that could be very likely. But it's a big question mark behind this. Then we also need to work structurally in terms of our fixed cost base in order to be more flexible going forward because a quarter like the June quarter, we can have 1 or 2 quarters like this in the year. And as I said before, I have ample of liquidity and cash sources until next year, but if I have this every year 2 quarters, then I'm in a situation like maybe the friends of Boeing and Airbus, and I don't want to be there or even the airline industry. And with this, we need to tackle the cost right now.In terms of costs, as I said, you can always take 10% out. And of course, in the first quarter, we decided to have a general hiring freeze. So with this, you are having, of course, the cost in control against the budget. But on the year-over-year basis, you're not there because with the massive growth that we have in our industry, in particular, we, in our company, then you're also ramping up. So you need to turn the ship. And with hiring freeze, it helped us a little bit in the first quarter, but it will, of course, helping us in the second quarter and the remainder of the year.On top of that, we're looking into the different government programs that you have seen that are announced, and we're not taking one fit size or solution, we go country-by-country and solution-by-solution. So if you don't have any sales, oh my God, then you don't get any salary, you should go home and you need to ask the government to pay you. In Germany, we have the [Foreign Language] that covers 50% to 65% of the normal salary for sales reps or for the shop base, but not 100%, and the company need to make a markup, but then you can't fire the people. On other areas, where we have temps and loaners in the gov part, of course, there are a couple of hundred people out within a week, yes? But then the cost of a loaner or of temp worker on the gov part is very differently to a highly educated, sophisticated sales rep like what we have in the U.S. and with this, you also have a different cost impact. So the FTE numbers that we're using is one measure, the different company -- government programs into the company is the second one. And with this, you will normally be easily in the scenarios, 10% and 20%, taking the OpEx out. And as we said before, we are focusing on innovation. Therefore, we are not -- we may be trimming a little bit on the R&D. And of course, they also need to be very prudent in terms whom do they want to hire and what do they want to do. But we strongly believe that at one point of time this year, this summer, the crisis is behind us, and this is why we continue to invest into all the R&D projects. And therefore, we're not taking the cuts over there. And with this, even though on the one or the other area, like I mentioned before, ERP and marketing, where we have clearly severe cuts planned and executing right now, that is not a number that you can put across a company because in R&D and other areas, it's not so easy.And the third point is, we're looking, of course, into structural measures. Is this the time right now to restructure the one or the other subsidiary? Or maybe our global footprint in terms of optimizing it? And if I have a bloody quarter or super bloody quarter next -- in Q2, it doesn't really matter, as long as I have the cash flows and I do the right programs to come out. So this is the way that we're thinking and that we are acting in accordance.So you put in that revenue, profits and cash flow are not fine in Q2 and that in Q3, it will be better. Sorry, that was a very long answer. And now I give to René about the momentum in Audio.

[René Svendsen-Tune]

I'll try to do it a bit shorter. So the question was, what do we see in China? And as Marcus said, China is slowly reopening. There are people back in the street. Our people are back in the offices and so on. Stores are open. But the traffic in off-line, in brick-and-mortar retail is very limited. With -- so also in China, more is shifting online, I think, as we speak. But we do actually see slowly, slowly, that China is recovering. People are starting to spend again. And there is a -- this is early signal, but I think in April, it's been a -- it's been better than February and March, for sure.

[Veronika Dubajova, Equity Analyst]

And can I just ask, I don't know if you're comfortable, but quantifying -- I mean are we looking at China being down in April, 20%, 40%, 60% versus what you would have normally expected?

[René Svendsen-Tune]

We have not given any number on the changes in -- but you can say the pattern -- if I look at the consumer basis, the pattern around the world has been very much the same in the sense that now, of course, we do -- let's be clear, we do expect negative growth in -- or flat to negative growth in Q2 on the consumer side. But the pattern has been quite the same that when off-line retail shuts down, we can see it in our numbers. And then it comes back, some of it, as online starts to take over. And of course, we now need to see as we go through the coming months here, how the rebalancing is happening. But it's an abrupt down. I think that goes for many other categories as well and slow come back.

[Veronika Dubajova, Equity Analyst]

Understood. Marcus, can you make the similar comment on Hearing, on where China is in April?

[Marcus Desimoni, Chief Financial Officer]

Twice as good, at least as it was in March.

[Veronika Dubajova, Equity Analyst]

Okay. Understood. And March was down 80%?

[Marcus Desimoni, Chief Financial Officer]

March was really bad.

[Operator]

Our next question comes from the line of Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

Yes. I have a couple of questions with regards to Hearing. If I look at the ReSound Assist Live or even your new in-situ hearing test that you're -- started to promote this month. I'm trying to understand, how is the marketing process happening. Is it the audiologist who is reaching out to completely new contacts with the -- with this in-situ hearing test?Second of all, you've -- looking at your comments, it implies that you anticipate the online route to Hearing to establish itself at least in 2020 and then to stay and not to revert to the very traditional model anymore in 100%. Now I'm trying to understand, as undoubtedly that your competitors will follow your route, what do you anticipate this will do to the pricing environment? Right now, with the audiologists offering that service, I guess, there's no difference in pricing for a customer. But why wouldn't a first-time user go and choose Lively that is selling hearing aids -- your hearing aids and save significant money?And then the last question is, how are you pricing this in-situ hearing? Is there an additional price on top that you're -- that is coming for the software side or anything?

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Thank you. I am certainly happy to speak about that. I think first of all, the solution we provide with ReSound Assist Live and the hearing test done with in-situ. Actually, that means that the hearing test is done using the hearing aid. And it is -- everything is done remotely. And then that also means the subsequent fitting of the hearing aid to the audiogram is done remotely. But it is done remotely by the audiologist. So the way the solution is promoted, if you like, is us reaching out to audiologists or the ATPs around the world. And I guess, through virtual meetings right now. But otherwise, if you like, in the manner we would normally do. And then they are, again, reaching out to the end user using different channels, online channels and so on. So that is the way it is handled in terms of the sales process, if you like.You asked whether the software comes with a fee. It doesn't. I mean we provide this service free of charge to our audiologist. Because again, this is an important way, both for us to obviously keep business open and support the elderly people, and maybe the need for hearing is, as I've already alluded to, even stronger now than it was before. And also, it's a way to ensure that our audio -- or the ATPs around the world can keep their business afloat and certainly also other customers. So yes, we are providing this free of charge. And it is -- everything is done through the audiologist, and therefore, it doesn't impact the price level. You're right. We do expect that this is something that is here to stay. First, I mean even when the societies start opening up, as also Marcus alluded to, our customer groups are the ones that are most heavily impacted by COVID-19, and therefore, for good reasons, may either be required to or decide to stay at home for longer than most other parts of society. So therefore, the -- this ability to provide remote service where we can do everything, hearing test, first fitting and follow-up, is really unique. And even when everything is back to normal or maybe a new normal, we do expect this to continue and to stay. And we think it will be reinforced by the fact that telehealth or that way of providing health care will grow or accelerate not only in audiology, but in a number of other disease areas because our whole health care system, coming out of COVID-19 will be facing a significant challenge in meeting the demand. And that, I think, will require new ways of operating also in the health care. So -- and that will rub off on audiologists.So I think it's -- again, as I've alluded to, I think it's a really important solution we've brought into the market. It helps both our ATPs and the end user. And we believe that, that way of providing remote care is here to stay.

[Maja Pataki, Head of Med Tech Devices Sector]

Perfect. Could you just elaborate a bit what do you think will happen with the pricing environment? Because if I look at Lively and the price proposal they have for the ReSound hearing aid, once online is in the mindset of people, why wouldn't I go to Lively rather than through a traditional audiologist? What would that mean on the retail level for pricing? And what do you think would happen to the wholesale pricing level?

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Thank you. Well I think that also in the future, we'll continue to see hearing aids being sold through different channel. And now you point to Lively, but we could also point to Costco and others. So we are providing our hearing aids in different channels at different price levels. It's also maybe the same brand but could be different technology that is provided. It could also be different services provided. And I actually think that's another area you may see different in the future that -- I mean, if you handle everything online, you can actually also add features to your hearing aid for a certain period and pay for that and so on. So I think you can imagine a number of things changing with the online service opportunity. But again, different channels, different services, different prices.

[Operator]

Our next question comes from Annette Lykke from Handelsbanken.

[Annette Lykke, Medtech Analyst]

My first question would be on the gross margin development. If Marcus, you could share with us a little bit more how much of, for example, the 550 basis points dive is for Hearing and how much is the 300 basis point lower gross margin for Audio? How much of this should be seen as one-off related to supply issues, higher freight cost, et cetera? Yes, that would be my first question.

[Marcus Desimoni, Chief Financial Officer]

Yes, Annette. Good to talk to you, and thanks for the question, obviously, with the gross margin decline that is coming. Let me start with Hearing. On Hearing, we stated that we've had onetime costs and they were -- due to the fact that we need to re-ramp production and re-ramp logistics in February into March because of the COVID-19 situation that we faced in China. And that is, of course, going against our gross profitability because was it was higher COGS. The second part was the country mix. So obviously, we've had -- what you've seen from the VA, relatively lower numbers in the VA. And we had an okay-ish quarter in Europe, where we have relatively more revenues in from bigger accounts like Amplifon, for example.And then you have this -- what we normally call country and channel mix. And that is, in particular, here the case. And then the third one is, of course, when you see the revenue run rate that is much lower than what we would have normally expected that we would have had normally. There's also a mix in there in the revenues. And we have a higher portion, in particular, in March, a much higher portion of not hearing instrument revenues from other instruments -- from other revenues. And that is the other parts, and that is a lot of repairs. So a lot of people came back with repairs and exchange units, and that is also going against the gross margin. These are the 3 parts that were driving the gross margin down. And therefore, you can expect that the mix between hearing instrument and non-hearing instruments and the channel mix will also continue into the second quarter.In Audio, we had a different picture, and that was also stated by René. It's 1/3, 1/3, 1/3 is FX. It is the tariffs that we have highlighting since many, many quarters, of course, and it's also the production topic. But I guess that René would like to shed a little bit more light on that.

[René Svendsen-Tune]

I can do that. I think the -- of course, the bigger effect comes from the COVID situation as such. As I tried to say in the introduction, we had positive effects as the strength of the enterprise business was more prominent than that of the consumer side despite both growing. But the reality is that as specialty logistics broke down, I mean, as many of you know, the commercial airlines came out of function, a lot of goods is actually transported through commercial airlines. So there was a shortage of flight traffic. We need to deliver goods in very short time frame in this situation. And therefore, even the transport cost alone was a very significant part of this. But also, I can say, handling all the component issues and internal logistics and other stuff around this had negative impact on the production cost. And on top of this comes FX negative, some headwind here and then the tariffs that we have been speaking to many times. But you can say, from a one-off perspective, of course, the -- this COVID-related matter, of course, had the bigger impact.

[Annette Lykke, Medtech Analyst]

Okay. So just to follow-up, Marcus, on this. Will this mean that we will, on a gross margin perspective, be even lower in the second quarter than the 64% in first quarter? For the second quarter then maybe a little bit of an uptick in the third and the fourth quarter depending on the situation. So all in all, we should sort of expect, for the year as such, a significantly lower gross margin on par with the Q1 level for GN Hearing?

[Marcus Desimoni, Chief Financial Officer]

Well I think it's not a speculation that in 2020, the gross margin will be low 2019 based off of the run rate, the revenue composition and this. So absolutely, second quarter will be below first quarter also, just because from the pure run rate. And if you see the predicted revenue slide for the different scenarios that we've been putting in, you just can't down-ramp or downscale your fixed costs so fast. And you have a very different composition of the revenue now that also the second quarter will have -- be a lower gross margin than the first quarter, absolutely.

[Annette Lykke, Medtech Analyst]

Okay. But then -- if we then look at the EBITA margin, in fact, that is down 14.5%. So you had a 4.2%. Would you be able to compensate on other things? Or should we expect that a single-digit EBITA margin for GN Hearing for the full year and such? Or will you then, by lowering marketing cost and others, be able to compensate a little bit? I understand that Q2 will be worse, but what about second half and then the full year?

[Marcus Desimoni, Chief Financial Officer]

So you got the second quarter and then the rest is depending on the different trigger points that we see in the markets. And therefore, then we trigger different activities on our side. And therefore, there's a wide range in terms of where it could end up.

[Annette Lykke, Medtech Analyst]

Okay. And just a question back to...

[Morten P. Toft, Vice President of Investor Relations & Treasury]

No, go. Annette, I'll let you finish your question, but just with an eye on the clock, and we can see there's a lot of people in the queue. So I'd just ask you kindly -- you can obviously finish your question now, but the rest of you in the queue, maybe limit it to 1 or 2 questions, please.

[Annette Lykke, Medtech Analyst]

It's no problem. I'll jump back in the queue.

[Operator]

Our next question comes from Michael Jungling from Morgan Stanley.

[Morten P. Toft, Vice President of Investor Relations & Treasury]

Michael, can you repeat? We just heard a little bit of that question. Operator, maybe we move on.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Hello?

[Morten P. Toft, Vice President of Investor Relations & Treasury]

Yes, okay. Michael, sorry, we lost you.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Can you hear me?

[Morten P. Toft, Vice President of Investor Relations & Treasury]

Yes, now we can.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Okay. Okay. So the 2 questions are as follows: so on Hearing, how would you assess the financial strength of your Beltone franchise operations? Is there a need to come up with a rescue plan if things don't materially improve and your franchisees run losses for many, many months?Question number two is on Hearing, what would you need to see with respect to revenues and timing before you would need to resize the business? What are you looking for that would prompt such a resizing? Is it a quarter of revenues? Is it 2 quarters? Or would you even wait well beyond a year?

[Marcus Desimoni, Chief Financial Officer]

Michael, let me start with the second question. No. We're looking on weekly datas and we have weekly decision points. So as I said, we laid out internal plan and discussed it also with the Board. Got it signed off that we're implementing different stages of activities on different trigger points and discretionary spending and all these things, just take it for granted. But the structural changes, we can't wait for 2 quarters. If we have to see something, and if you need to do something, then we need to act right now. And one of the trigger points, for example, is, as you guys have asked before, China revenue. So if you have seen that there was a outbreak in China and they acted in China extremely quickly. And as I mentioned that the March revenues have been most likely lowest point, and they are better now in April from what we see from the run rate. What is coming next? Is the country recovering? Is it reopening? But also, is the behavior of the people in the country beneficial towards our business model or not? And this is where we have weekly and monthly data points and say, okay, it goes in the right direction. Oh, or no, it changes something and then we trigger something, of course.We're also obviously looking into geopolitical topics. Is the behavior between the different regions and countries, I don't want to put any name out right now, changing due to the fact that how have they been reacting in regards to the outbreak? And we see in the EU that every country is doing their own things and even states and countries are doing their own thing. So there's nothing coordinated, 0. And that has obviously impacts into us, how do we want to manage the company. And where and how do you want to put up our facilities? And where and how do we want to serve our people who need to get served by us? And these are things where I'm saying we have monthly trigger points where we're executing on that based on the weekly datas. And we just can't wait 2 months -- 2 quarters and just put the head in the sand.The first question you've had in regards to Beltone. Well, there are 2 parts on that. And I've seen your prenote this morning where you are speculating that there's a cash burn rate of $10,000 month on a hearing shop. Obviously, it is that when you don't have revenues, you have the fixed cost, you are cash burning. And I'm not generating free cash flow in my Beltone retail assets in transition right now. But of course, we are ramping them down, and we are much, much further along this line compared to where we have been 12 months ago. So that is helping us. The other part is the franchise network. These are independent partners, and they run their own things. But of course, they there is different pockets in there and some of them is running it super, super good. They have a very high -- still a very high revenue run rate because they are flexible how they serve their customers. This is something where we can learn a lot of things. There are others who are just mingling through, and there's others who most likely will get out of business. And then we need to decide what should we do with this. We just close it and hand it over to someone else? Or is there anything to pick up? And that is an ongoing evaluation. And therefore, I'm away from to give a number right now, but just describing the situation there.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Okay. So Marcus, with respect to a rightsizing of the organization. So if you see perhaps in 2 months that the revenue response, even to a social loosening of how we can act in society, 2 months would be enough perhaps to say, "this is going to take a long time to get back to a normal run rate." And that's when you would consider a more meaningful restructuring. Is that the right perception of what you said?

[Marcus Desimoni, Chief Financial Officer]

Pretty much, yes. As I said, you put in whatever you think about the second quarter. I can have 2 out of these quarters, but not more. And therefore, if I see that by June, the situation is not getting better, then we are responsible to act prior to waiting too long.

[Operator]

Our next question comes from the line of David Adlington from JPMorgan.

[David James Adlington]

Just one quick one, a follow-up on Audio. So just on the Hearing side, just wondered if you are able to quantify the extraordinary costs in the first quarter that you said impacted gross margins. And then secondly, just in terms of Audio. Just wondering, it might be a bit earlier but just in terms of how you're thinking and how your customers are thinking about the impact of potentially going to a more U-shaped recovery, potential recession through the rest of this year. Just wondered how we should be thinking about how you're planning for your business in response to that. Or are you expecting -- are you planning for your business -- do you expect the continued decent growth?

[Marcus Desimoni, Chief Financial Officer]

David, on the gross margin, as René and I said, it was, in Audio, roughly 1/3 per pocket, and that gives you also an indication for Hearing. And in regards to the second question for how is the business looking like, I'll give it to René and Gitte.

[René Svendsen-Tune]

So René here. So obviously, we are trying -- as I said a little bit early, we are trying to understand from our customers across the world what do they think about the second half. And I guess, I also said that they -- there's a general sort of feedback that we would like to do more of this and we -- I mean, they can see that this is -- these kind of measures they're taking are working. They can keep their companies running and so forth, but they don't know where they are as -- if this is a longer situation and a U-shaped dip that we are going to have here. Of course, you can say, our strategy has been for a long time to build products and team up with service providers that would provide flexible working. I mean work is something you do, and that's a place to go. And you can say, at this point of time, of course, the fact that these services are out there and actually, the fact that they were able to scale with the demand that has been unprecedented, the Microsoft and the Zooms of -- other services of this world, some has document, I think, not only us, but of course to enterprise that this makes sense.So if you ask my stomach, I think people -- corporates will try to still somehow do what is necessary to sort of sustain the machinery and be as flexible as they can, and in that sense, they will need this kind of equipment. There will be significant productivity measure gains to get from not only from audio conferencing, but also for video conference in the quarters to come. And that somehow, you can say, all plays into the fact that it's -- I think it's very likely that businesses will become more digital and this is one element of that. Does it mean that we will not suffer in second half? I don't know, frankly. I mean this is what we have been saying several times. If we run into a situation where we are -- we see, you can say, challenging environment and we cannot sustain revenues and growth and so on, we will have to take measures as well, but we are not there at this point of time. We are sort of driving the innovation machinery. We are putting -- we're not driving a lot of marketing efforts right now because we don't need it because the demand is out there. But of course, we run the machine at a very high pace and fully resourced at this point of time. So we are trying to push through the situation with momentum and by being the best to deal with this demand out there. Will we be fully successful in the near term? I have to see. But of course, longer-term or medium-term, I'm totally convinced that this market will be intact, and you can say the strategy and the propositions we -- strategy we are driving and the propositions we are taking out there will hit the market well. We have to adjust here and there. But in broad, we are on the right way.

[Operator]

So our next question comes from Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

In the interest of time, I'll just keep it to one. What is the risk that -- partly for liquidity, a bunch of the independent hearing aid manufacturers -- sorry, retailers go under and their volumes end up shifting towards, say, one of your competitors' retail networks? How are you guys thinking about that risk?

[Marcus Desimoni, Chief Financial Officer]

Patrick, so in the first quarter, I slightly increased my normal provision level in absolute and in relative terms for the risk that you, and also Michael before described. I've had, in the -- now almost 4 months in the year, 1 customer who basically went bankrupt. So the ratio in the current environment, I think, is still very healthy. But as you said, there might be a risk going forward.The risk assessment in terms of if someone else would pick up the assets if independents are running out of cash, I'll leave it to my friendly competitors if they have the money to pick them up. I think right now, it's tough for everybody to stay in the business and to run the business. And as Gitte described, we're looking in terms of how do we want to do the business to more slightly differently.

[Operator]

Our next question comes from the line of Martin Parkhoi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Yes Martin Parkhoi, Danske Bank. Two questions, and I actually will just pick up on the last answer, Marcus, because I think that you have one of the strongest financial positions among the manufacturers. So with the last answer, it sounds like that you actually ruled out that you could use this financial position aggressively to secure long-term unit commitment from some hearing care practices and are not thinking buying them, but maybe loaning them the money with a long-term unit commitment. Is it something that you think you could do on a case-by-case basis? Because I think that some of the other competitors with very, very high gearing maybe will have difficulties in helping such clients.And then second question, just -- this is just for the entire industry. With the scenarios that you think play -- potentially play out in the hearing aid market throughout the remainder of 2020, does it make sense for any manufacturers to come out with a new product launch during the second half?

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Well, if I start with commenting on the different scenarios. I think what is really important to keep in mind is that the underlying need is still there, the need to hear. And if anything, it's probably reinforced these days because of the social isolation that many elderly people find themselves in. So you actually need to be able to hear in order to communicate with your close ones.So I think from that perspective, there is certainly still room for new technology. I think in the broader trends, I would echo what Marcus said earlier that it is probably likely that you will see an overall market volume in '21, even below the level in '19. But I still think there's room for companies that are really smart and deliver the right solutions into the markets to gain share. And I think in that regard, it's really important to keep in mind that GN Hearing, for a very long time, have had the strategy of not going into retail. And I think, in a market where we may see significant shifts or an acceleration of a shift into new channels like online, I think that positions us very strong for going into a new normal. And having said that, I certainly also expect that you will see companies launching new technologies or new hearing aids in that market.

[Martin Parkhøi, Senior Equity Analyst]

But do you need to rethink your marketing message? Because I don't think I've seen hearing aid launch for the past 20 years where the message is always "Now you can listen better in cocktail parties or cocktail situations or whatever." And now we are in a situation where everybody is set to be isolated so you have to reconsider your entire marketing strategy and maybe also the features of the product.

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Well, I think that this speaks very much to the whole strategy we have in GN Hearing where we want to take a point of departure in our strong technology base and combine that with a profound understanding of our end user. And I think quite frankly, and I hope I'm not offending anybody in the industry, that elderly people going to cocktail parties, I mean it happens, obviously, but it's maybe not the main use case. I think the main use case is even before COVID-19, staying at home or being with a few family members. So obviously, this is where we should position our products. And I think what we are able to do now, do everything, hearing test, fitting, follow up remotely, I think that should be a corner in our marketing messaging in the coming months.

[Marcus Desimoni, Chief Financial Officer]

Martin, on the question of FSAs. And besides, of course, I might have to think about my picture that I used with the cocktail parties on the slide deck. But we have -- if you see that on the balance sheet, we had a slight increase in the balance that was FX-driven, so net-net, it was the same like the quarter before, and that means we had some cash inflows, but also some cash outflows.Yes, we are still signing the one or the other FSA, but the amount goes down and we're extremely restrictive because even though there might be opportunities, the big question is, is there a market? And can the partners still make a business as you and others have asked also before. So it's extremely restrictive how we go ahead with this right now.

[Operator]

Our next question comes from Christian Ryom from Nordea Markets.

[Christian Sørup Ryom, Senior Analyst]

I have 2 quick ones, please. So first, René, on GN Audio. Can you clarify where you are in your ability to satisfy demand here by the end of April? You alluded that by March, you were not able to fully meet demand. Are you able to do that now?And then my second question is to GN Hearing. Whether you can provide some very early anecdotal evidence or insights into the reopening in some western markets? For instance, here in Denmark, as I understand, you've started reopening your retail stores. Are you seeing appointments being filled? Or what is the status here?

[René Svendsen-Tune]

Thanks for the question. I think it's -- to be very precise, we will have a backlog also when we go out of April into May. We are working with the high speed through it as we go through the second quarter here. And I mean -- and it comes from the fact we are able to now sort of -- we have been able to increase capacity throughout the supply chain. Also logistic chains are actually easing up. It is easier to get the stuff around now and actually, I -- maybe I should have said that when we talked about the gross margin. Some of these effects that we saw extraordinary costs in Q1 will not be -- necessarily be repeated in the second and third quarter if the world keeps opening as we see right now. But yes, we are having a -- the demand is still stronger than we can supply in April, but it's getting better.

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

So in terms of the marketing opening up and anecdotes, I mean obviously, we do have our stores opened again or the hearing clinics opened again in Denmark. But I mean we have rarely any elderly people coming there, and that's obviously not because they can't go. But I guess it's because a lot of elderly people still fear to go out because they are the main risk group, if you like, for the COVID-19 and that's again why these remote solutions are so important, not only in the immediate crisis, but also in the long term.In terms of anecdote, I mean, I can maybe share a few anecdotes from the U.S. market. Now as I'm sure you all know, U.S., I guess, have a special preference for drive-through services in all kinds of formats. And we actually also see that now in the hearing aid space. So we see a health care audiologist using our solution to provide curb services. So people can actually come in their car and do the hearing test and have the hearing aid fitted. So that's, again, another way to provide the service where you are doing it remotely.So I think those -- that's probably the anecdote we have from -- not from Denmark, but from U.S.

[Operator]

Our next question comes from Lisa Clive from Bernstein.

[Elisabeth Decou Bedell Clive, Senior Analyst]

I have a very provocative question. If we don't see a vaccine for 18 months, and thus, elderly people need to really sort of shelter in place, social distance, et cetera, for an extended period of time, this really could be a pretty revolutionary moment for the hearing aid market. And obviously, as you've commented, the shift to a sort of telehealth version of sales could be very accelerated and could be sort of here to stay. But as we look back into OTC in 2017, it was interesting to discover, and I'm just focused on the U.S. market here, that there already were numerous online sales channels in the U.S. iHEAR Medical, Audicus, Hearing Central, Buyhear. They exist, and there hasn't been much uptake of them up until now.So if all of a sudden, this is going to be the new way of selling things, then a 3x markup from wholesale to retail really seems unnecessary. And you as one of the single biggest retailers in the U.S. through the Beltone network have a unique position to sort of reshape how this industry operates. Have you thought about going on the offensive and basically creating a new online platform where there really is a good amount of service, but you don't need a physical presence? Because whether you like it or not, that may be forced upon you in the next 12 to 18 months anyhow.

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Well, thank you for that question. Again, as we do our scenario planning and are planning to bounce back into the market very strongly, we are definitely looking into an -- one of our hypothesis is to see a strong acceleration of online as a channel to provide the hearing aids. Whether that is then done through a separate unique platform or whether it's done via the existing audiologist taking up online to a much larger extent, I won't be the judge of that. Obviously, we can, if you like, encourage some of the change or drive some of the change or influence it through Beltone.But again, I think what we want to do is take point of departure and the end users' needs, and there's a huge need for people to be able to hear, especially in times with social isolation. And given the fact that we, for a very long time, have had the strategy not to own retail, I think we are in a very strong position to be flexible and adapt to a stronger online channel, which is definitely one of our strong beliefs we will see in the future.

[Elisabeth Decou Bedell Clive, Senior Analyst]

Just as a follow-up. One way in which you could make the online channel work is cut the prices significantly. Because if you don't have the physical stores, you don't need to charge a 3x markup. And could Beltone be charging prices that are in line with Costco, is that one way to significantly shift volumes during this unprecedented period of time?

[Gitte Pugholm Aabo, Chief Executive Officer of GN Hearing]

Well, I think it's -- coming back to what I spoke about earlier, I think we'll continue to see also in the new future that we see different channels with different services. So I'm sure there's a place for a channel like Beltone, there's a place for a channel like Costco and so on. It is different services. It's different features that you're buying, and therefore, there -- it's also different customer segments that we are -- or end user segments that we are serving. And I expect that to continue to be the case. And with the only caveat that we will probably see the online channel as such gaining much more strength and really accelerating.

[Operator]

Question comes from Kit Lee from Jefferies.

[Nyeok Lee, Equity Analyst]

Just one from me today. Just coming back to your comment on 2Q for Audio. You mentioned high demand to continue. Is that mostly because of the backlog, which you couldn't meet back in Q1? Or are you still expecting some underlying acceleration of demand in Q2?

[Marcus Desimoni, Chief Financial Officer]

Then I have not expressed myself clearly. So we have backlog from Q1 into Q2, and we also have seen a very strong demand in Q2. So it is the 2 of those.

[Nyeok Lee, Equity Analyst]

Okay. And is that demand still mostly driven by working from home?

[Marcus Desimoni, Chief Financial Officer]

No, I mean you can say, of course, the phenomenon that is extraordinary right now is that enterprises have sent people home in millions, actually, and that is still going on. But of course, the underlying business, the run rate business and the projects out there that we have is still going. So I mean this business has been growing with 2-digit numbers for many quarters now. So of course, there is strong momentum in this underlying phenomenon of driving UC penetration and exploiting UC services across small and large enterprise. That's still going on. But it's clear that what has taken all action and attention, and to a large extent, the budgets in the very near term is the fact that the enterprises like ourselves had to send people home and get them back to be productive fast.

[Operator]

The next question comes from Markus Gola from MainFirst Bank. Okay, well as there seems to be no response, that was the final question, so I will turn the conference to the speakers for any closing remarks.

[Morten P. Toft, Vice President of Investor Relations & Treasury]

Thank you very much, operator, and thank you everybody on the call. We appreciate your time today, even though we ran a little bit over the 1 hour. And on behalf of Gitte, René, Marcus and myself, we'll see you on our virtual roadshow.Thank you very much.