GN Store Nord A/S

CSE:GN

Earnings Call Transcript 2020-Q2

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

Hello. Welcome all to GN's Q2 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; and René Svendsen-Tune, CEO of GN Audio; Marcus Desimoni, CFO of GN Store Nord; and myself, Morten Toft, Head of IR and Treasury. Today's conference call is expected to last about an hour, where we will 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 will then provide an update on GN Audio; after which, we'll go back to Marcus for a financial update. After that, we'll hand over to Q&A with questions from the queue. And with that very brief introduction, I'll hand over to Marcus.

[Marcus Desimoni, Chief Financial Officer]

Thank you, Morten. Good morning, everyone, on the call, and thanks for joining us today. I'm very flattered that you have time to joining us because the biggest competitor on the hearing market just launched a hearing aid compared to what we have done yesterday. So it's nice that you have time for us.Let me run through the GN numbers. GN is demonstrating to serve our customers in the best way across the businesses and translating it into a very decent financials despite the current macro challenges. In the second quarter 2020, we have experienced a continued severe impact from COVID-19 affecting us in 2 ways. First, the ripple effects from the production shutdown in Q1; and second, various impacts on the demand side. Both businesses have been impacted in very different ways as the 2 CEOs will get back to in a second. GN Group delivered minus 13% organic growth and an EBITDA of plus DKK 25 million in Q2 2020, translating into a positive EPS contribution in such a challenging quarter. Free cash flow increased by 45% year-over-year to DKK 517 million, driven by a very prudent cost approach, strong cash collection and working capital management. Our leverage ratio of 2.7x is reflecting the results of our disciplined approach and swift actions. Our balance sheet remains sound, and we continue to have ample sources of liquidity available for us. As such, we continue to have a solid foundation to face the potential challenges ahead of us. And with this, I'd like to hand over to Gitte.

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

Thank you, Marcus. Starting on Slide 6 and on our Q2 financial highlights. Clearly, Q2 was a very challenging quarter for the hearing aid industry and GN Hearing due to COVID-19. This is also evident in our numbers. During the quarter, we've seen sequential improvements from the low point in April, and that has resulted in a negative organic growth of 54% for the quarter. The gross margin in the quarter was also severely impacted by COVID-19 due to the fixed part of production costs, mix effects and onetime costs impacting the gross margin. As a result, our EBITDA was minus DKK 336 million in Q2 as the decline in revenue and the gross margin effects more than offset our OpEx reductions. Finally, I think it's important to highlight that the free cash flow from -- excluding M&A, ended at minus DKK 117 million, reflecting the lower revenue, a positive working capital development and prudent cost control. On Slide 7, I would like to give you more details on the cost management initiatives we've delivered on in the quarter. The first item I would like to call out is the gross margin, which is significantly down compared to normal levels. In addition to the effects already mentioned, gross margin in the quarter was also impacted by onetime costs related to streamlining our supply chain setup. In the quarter, we've booked onetime costs of around DKK 80 million in production costs. The second item I would like to highlight is the SG&A line, where we've saved roughly DKK 160 million in the quarter as a result of less spending on marketing and travel, et cetera, and as a result of temporary salary reductions and receiving payment from different government schemes. And regarding the government schemes, I just want to point out that we received in the magnitude of DKK 25 million for GN Hearing. In the quarter, roughly DKK 70 million is included as onetime costs, mainly related to the consequences of COVID-19. Disregarding the onetime costs, we have been able to take out almost 30% of our SG&A costs. In total, across production expenses and OpEx, around DKK 150 million have been booked as onetime costs, where roughly 2/3 are related to restructuring and process alignment and 1/3 is related to provisions. The third item that I would like to highlight is that we, through the initiatives we've talked to as part of the Q1 reporting, we will deliver sustainable cost savings of around DKK 50 million on a quarterly basis going forward. And on top of that, we've gotten a more flexible supply chain with our initiatives. I would also like to emphasize that the restructuring and process alignment projects we've done during the quarter are not a consequence of COVID-19. These projects were part of our 2020 and beyond strategy, and it's -- but it's clear that these initiatives have been accelerated due to COVID-19. And let's move to Slide 8, where I'd like to give you an update on the latest developments we see in the markets. After the low point in April at a run rate in the 20s of percentage to last year, we've seen a sequential improvement leading to July being at around 90 to last year on a relatively easy comparison base. This is actually a stronger recovery than what we expected back in April. North America was significantly impacted during Q2, but we've seen quite strong improvements, especially within the independent channel. Both Europe and Rest of World were, in July, back at a positive revenue growth run rate compared to last year.And with that, I'm excited to introduce our new product, ReSound ONE, which we announced yesterday and which will start shipping from August 27. I'm sure you've all heard me talk about that a person's hearing is as unique as a fingerprint. What is good sound quality for you is different from what is good sound quality for me. That has to do with the shape of our outer ears. The pinna plays a major role in how each of us perceive sound and is 1 of the reasons why hearing is as individual as your fingerprint. How to cope with the difference in ear anatomy has been a massive challenge for the hearing aid manufacturers for years. We finally solved that challenge with ReSound ONE. As you know, almost 80% of hearing aids sold today are receiver in-ear and behind-the-ear models as these are great for a number of reasons, but they do have the challenge that sound is picked up in microphones behind the ear and sent into the ear canal, which means that the unique shape of the user's outer ear are not factored into the sound processing. This lowers the sound quality significantly. With ReSound ONE, we put an extra microphone on the hearing aid placed in the ear just next to the speaker. This makes the sound individualized to the user. We call this solution Microphone & Receiver-In-Ear or in short M&RIE. To do this, we've made a new chip and a new software in addition to designing and developing the M&RIE. This is truly groundbreaking from a technology and audiology perspective and something we believe will set the standard for the future of the hearing aid industry. Now let's turn to Slide 10. I'd like to give you more details on ReSound ONE. Using artificial intelligence, ReSound ONE selects the best settings for every listening environment using different audiology strategies. In the spatial cue preservation strategy, M&RIE is used to provide spatial perception that improves localization, depth, direction and speech clarity in normal levels of noise by making hearing aid users here with their own ears. The traditional approach to improve sound in this environment has been centered around making the best possible algorithms for the average ear. The challenge is, however, that no one has an average ear. By utilizing M&RIE, we use each user's individual ear anatomy exactly as nature intended it. Based on data from our existing hearing aids in the market, we know that users will be in this type of environment for approximately 70% of the time. When there's significant noise in the background, we use our binaural listening strategy where we use All Access Directionality. In this setting, directionality is improved using our 4-microphone beamformer, which increases speech understanding with 20% compared to ReSound LiNX Quattro. Finally, in our speech understanding strategy, the Ultra Focus program lets hearing aid users decide to hear and understand speech in very noisy environments. This powerful setting improves speech understanding with up to 30% compared to ReSound LiNX Quattro. And this leads me to Slide 11. Now these groundbreaking end user benefits of ReSound ONE that I just talked to could not have been provided without our new hardware and software. ReSound ONE is built on a completely new chipset using a 28-nanometer digital sound processor, which provides among other, 220% more memory. We are the first in the hearing aid industry to launch a 28-nanometer chip. The chipset includes new input for the third microphone and a magnetic induction radio to allow for very low latency ear-to-ear audio transmission communication for the new 4-microphone beamformer. With ReSound ONE, we are, by the way, also prepared for the new Low Energy audio Bluetooth rollout once the rest of the ecosystem is ready. The completely new software package has enhanced artificial intelligence solutions and a new digital feedback suppression system for the third microphone. We are doing what previously was considered impossible by placing a microphone next to the receiver in the ear, in an open fitting. And finally, let me stress that we've never done more in-field testing of the durability and quality of this new launch. For those of you that would like to know more about the launch, we'll host a virtual meeting targeted investors and analysts on August 27 at 1:00 p.m. Danish time, where we also have some of our technology and audiology colleagues present and answer questions. And let's turn to Slide 12. Here, we've included an overview of key parts of our strategy execution. And the only thing I'll mention here is that during Q2, we're happy to see how well ReSound Assist Live was received in the market by our customers. And with that, I would like to hand over to René and an update on GN Audio.

[René Svendsen-Tune]

Thank you, Gitte, and hello to all of you. So I'm now pleased to take you through GN Audio's results for second quarter of 2020. So let's move to Slide 14. So overall, second quarter 2020 was, again, a very strong quarter for GN Audio, and we delivered 32% organic growth. This is on top of the 26% organic growth we achieved in second quarter of 2019. The growth was driven by continued strong enterprise demand for office and home office products. Demand was obviously positively impacted as corporates are investing in the employees working from home due to the COVID-19 situation. While this acceleration was initially triggered by people working from home, we have actually recently seen demand being impacted as employees return to the office. So after having used UC platforms for many months at home, they abandoned the landline phones and requested a UC connection and a headset when they come back to the office. And it is important for me also to stress that while the significant growth in this quarter is obviously affected by the work from home phenomenon, this successful outcome is fundamentally reflecting the strength of GN Audio's product portfolio, including the recent launch of Evolve2. On top of the product strength comes very strong execution in both commercial and supply chain terms. And given our strong commercial execution and market leading portfolio, we were again able to take advantage of the opportunity in front of us. And in summary, across all regions, North America, Europe and our Rest of World regions, we delivered strong double-digit organic growth rates everywhere. And this resulted in continued market share gains in the global market for enterprise assets.If you look at our consumer business, things were a bit different. And here in the quarter, we saw the situation be negatively impacted as consumers for a large part of the quarter were not able to purchase headsets in retail shop stores due to retailers being closed in many markets. And this was in the beginning of the quarter, a continuation of the impact we saw at the end of Q1. As we now stand here in the middle of Q3, I'm happy to report that the consumer demand now seems to be improving in line with the countries and thereby, retailers gradually opening for business.So enough about revenue, let me talk a bit about gross margin. Gross margin was up 1.1 percentage points compared to second quarter 2019. This was driven by positive mix effects, which more than offset increased freight and production costs related to COVID-19, U.S. tariffs and foreign exchange impacts. Turning to EBITDA. EBITDA increased by 52%. The EBITDA margin for second quarter 2020 was 2.7 percentage points higher than the second quarter a year ago as a result of the mentioned gross margin increase and continued leverage in the business. Free cash flow was at DKK 579 million in the second quarter. This was, again, driven by a strong growth in earnings and positive development in the working capital. So all in all, I think a very strong financial performance yet again in GN Audio in the quarter, and I am actually pleased to see that the momentum is holding up very nicely into Q3. Let's turn to Slide 15, where I am excited, happy to put some words to Jabra Evolve2. Evolve2 is our recently launched range of office headsets, which serves to provide the ultimate productivity boost in the office or from home. As you may recall, the first generation Evolve product family was our best-selling family ever in the history of GN Audio. The initial feedback we have received from the launch is very encouraging. We have customers and partners highlighting the superior product technologies and features as well as the appealing consumerized design. And for us, this is a good example of the product synergies between our enterprise business and our consumer business. And even though it is still early days, the initial sales exceeds our own expectations, and we are actually currently ramping up production capacity for this product line.Turning to Slide 16. Let me focus a little bit on some of the key changing working trends that we see from our customers or hear from our customers through a post COVID-19 situation. First, among the amount of people using UC platforms like Microsoft Teams or Zoom in their daily work and life has exploded. Second, over a few months, the use of video has become the norm rather than the exception. And third, as people work from home with the need for privacy and removing local noise, the dog barking, the dish washer, whatever, people do acknowledge the benefits of professional sound equipment. And last, we hear from our large enterprise customers across the world that they do prepare for more permanent work from home initiatives to support their employees also after things have started to normalize from the first ongoing wave of COVID-19. I just want to say here that GN Audio is very well positioned to capture these accelerating trends, and we, fundamentally, as a consequence, believe that our end markets are fully intact in the midterm. Finally, let me give a quick update on GN Audio's strategy execution for 2020 and beyond. And in Q2, we have largely unaffected, continued the execution of our strategy with focus on individualized customer experiences, as we have talked about. And during the quarter, we have sustained investments into innovation at a high level. It is our aim to keep our cadence of launching world-leading products and experience intact or in line with what we have done recently. These continued investments also reflect the accelerating trends I just spoke to. And we will continue to make the needed investments to sustain our market-leading position also in an adjusted environment. Second, in GN Audio, we continue to search for ways to drive growth through what we call sustainable commercial and operational excellence. And one important example here is the recent change to the supply chain setup, which we have implemented throughout this year. With this setup, we get a more scalable and flexible model. One key benefit of this model is that final product assembly and packaging now takes place very close to customers, which drive up flexibility and reduces carbon footprint of logistics. Another benefit we can take advantage of later is we have a, you can say, less geographically-focused manufacturing setup, which we can exploit as we move on. With that, I will hand back to Marcus for a financial summary. Thank you.

[Marcus Desimoni, Chief Financial Officer]

Thanks, René. Let's dig a bit deeper into the free cash flow development. In GN Audio, we achieved a very strong generation of operation -- operating profit, reflecting the strong revenue growth and the stringent cash collection. While continuing investments to drive future growth, the strong demand resulted in a positive development in working capital in the quarter. All in all, we have delivered a very strong free cash flow in GN Audio in Q2. In GN Hearing's free cash flow, it was reflected that we've had lower revenues -- significantly lower revenues compared to second quarter 2019, and therefore, also lower profit despite a very strict cost management. The decisive working capital management resulted into a positive cash contribution. Our focus on prudent management of cash naturally continues. Let's take a look on Page 20. The strong cash flow generation in the quarter drove DKK 500 million decrease in our net interest-bearing debt. I'm very happy to see this development despite the severe situation with COVID-19. Due to the strong cash flow generation, our leverage only increased to 2.7x as a result of the significant decrease in the rolling 12 months EBITDA compared to last year. We are still fully committed to our leverage ratio target of 1 to 2x. But honestly, I'm not concerned at all to temporarily overrun this, in this situation where we are. While debt, looking at our debt maturity profile, we don't have any larger debt repayments for the remainder of the year. And we only have limited debt repayments in the coming couple of years. Q2 ended with cash and cash equivalents of almost DKK 1 billion. Our diversified funding profile allows us to tap into multiple sources of liquidity and we continue to have immediate access to an undrawn RCF of DKK 2 billion. During August 2020, we have been able to establish a new 5-year loan with the EIB in the magnitude of EUR 50 million. In order to protect cash and our balance sheet, we have postponed any new share buybacks for the time being and we will sustain further flexibility by not canceling the treasury shares as earlier intended. Over the past years, we have been proactively been managing our debt side carefully, and the results are shown. Financial guidance. Let me take a breath. Since 1 month, all listed Danish companies are required by law to issue a guidance. Please see and read our guidance under this slide. Two more comments. First, the outlook continues to be very uncertain as COVID-19 pandemic have had and will have an unpredictable impact for the time being. COVID-19 situation has and will not only strongly impact GN's operational performance in 2020, but it will also impact predictability, visibility across all GN's markets, channels, the supply chain and our customer base. Second, what's important. Let's focus on our business drivers, our actions and our performance as just discussed and elaborated by the 2 business CEOs.And with this, I'm handing over to Morten and looking forward to the Q&A session.

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

Thank you, Gitte, René, and Marcus, for the updates. And as I now hand it over to the operator for Q&A. [Operator Instructions]Operator, over to you.

[Operator]

[Operator Instructions] Our first question is from Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

I'll keep it to 2. And so the first 1 would be around the new product launch and in general, the OpEx going behind hearing aids overall. How are you thinking about OpEx deployment relative to top line recovery? Because there's kind of a chicken and an egg thing of spending this product and generate demand versus whether people are willing to go in-store. So just maybe some color on how you're feeling about investment behind the product launch and more generally. So that's the first question. And then the second question, within Audio, I'm just curious because, obviously, you guys deal with a lot of work with distributors. And with a lot of consumers potentially -- and workers moving at home and work from home, does this change like market access within Audio in any meaningful way? Do you become more or less reliant on distributors? Or is there any effect there of any kind?

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

Well thank you for the question. It's Gitte speaking. And let me comment on the question regarding OpEx and the bounce back of the markets in Hearing. I am -- obviously, we monitor the development in the markets closely and are ready to bounce back and invest in the markets as they open up. That is obviously pivotal in order to maintain our competitive stand in the market, but certainly also as we are about launch ReSound ONE, that we are doing that with the maximum effort.And now, preparing the launch activities ReSound ONE does, however, look a little bit different than they would normally. As an example, we are hosting a big virtual launch event on September 1, appropriate for ReSound ONE, I guess. And we have prepared that, obviously, and are here, able to invite many more audiologists, if you like, than we would be for physical events. So it, in a sense, it gives us even more impact probably at a lower cost than a physical event would have. But that, I think, is just taking advantage of the market conditions as they are and ensure that we are actually in line and acting on that. But I want to leave you with the perception that we clearly are prepared to invest and put our people back into the markets as they open up. That is important.

[René Svendsen-Tune]

René here. So on the distribution, I think, 2 points to that. One is that, of course, for the quarter, we just left and where we are today, the majority of these extra headsets are actually acquired by enterprise. So they're social, professional channels through the existing distribution and resellers of different nature around the world. So in that sense, we have a very strong enterprise channel and you can say have a very good reach to enterprise of all size, both through our sales force but also majority through the channel. I think when it comes to -- I think to your -- maybe to your point also, when it comes to consumers buying into this themselves, all small and medium enterprise who would sort of purchase through more consumerized channels, so obviously, some of these channels have been closed because off-line retail have been reduced significantly. So you had to move online. We are, both through our enterprise products and also consumer products, present in both off-line retail and online retail. We have invested more money, it's no secret this summer and spring actually, into online because that's where the volumes were shifting to make sure that at least we have the presence we needed. But it's clear that for now, the -- I mean, the professional channel has helped us a lot.

[Operator]

And our next question is from Annette Lykke from Handelsbanken.

[Annette Lykke, Research Analyst]

Let me take the first one on GN Hearing. I appreciate that your guidance are open-ended. But behind better than 20% compared to what you show or also showed at Slide 8, where you see July not far from normal business, I just wonder how much you have included in terms of, one, in your estimate, in particular, of course, in Q4. Then also a similar question to you, René, on GN Audio. Why do you see a drop in top line momentum in Q4? I would also expect that, as you just alluded to in your presentation, that we saw consumer improving. You had Christmas there. So why would we see a material growth in Q4? That is my 2 questions.

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

Well thank you. Regarding our outlook in GN Hearing, I probably want to reemphasize what Marcus already said, that we are obviously looking at a market with a very high uncertainty and where we still must expect to see various impacts of COVID-19 also in the coming months. So obviously, that gives great uncertainty. Nevertheless, we are required to give a guidance, and therefore, we give that. So probably what I'd like to focus on is the underlying business drivers, and that's why we shared with you how we saw the market perform in July. As I said, in July, we see overall our market being back at 90 versus July last year. But bear in mind that July last year probably is a soft comparison. So we see a little softer performance going now into August. Nevertheless, we have seen over the months that the markets return more and more to normal. And that is our main assumption, that, that will continue to happen as we move into the coming months, but again, still a lot of uncertainty.

[René Svendsen-Tune]

So René here. Thanks for the question.

[Annette Lykke, Research Analyst]

You really did...

[René Svendsen-Tune]

Sorry.

[Annette Lykke, Research Analyst]

Can I just follow up on Gitte's answer because she didn't really say anything, what should we expect of ONE? How much additional sales? You highlighted a lot of qualities of the product. What should we expect? Is it a major assumption behind growth or not?

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

Obviously, ReSound ONE is a groundbreaking technology that really, I think, combines the best technology tempering can bring to giving a great, individualized user experience. So this is exactly down our strategy. So obviously, we have very high expectations to ReSound ONE. And I think actually, it positions GN in a strong position to continue to grow stronger than the market, which is also part of our midterm guidance.

[René Svendsen-Tune]

So René here. So I mean, thanks for the question. I actually think that guiding more than 25% revenue growth for the year is pretty okay. We have sort of called out in the guidance also that the unpredictable part, of course, really relates to the supply. It is a supply-driven market to some extent right now, and we are doing our best to raise the volumes and deal with the logistics and so forth.But things are going well. We had a strong Q2, we have a good Q3 coming. And assuming the world doesn't fall apart, I also see the year as a full come in well. But still, I think, 25% more than that is a good growth.

[Operator]

And our next question is from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

Gitte, just to come back on your comments on the market. I mean, you've shown the slide, you've seen -- you said that July is at 90%. We're seeing a bit more softness. Yet when you talk about the recovery, it doesn't seem to be too negative, which is a bit in contrast to what you've been quoted on Bloomberg, where you say that you believe COVID-19 is going to have an impact going way into 2021 and potentially even longer term. Can you help me put those statements together to really understand how you believe -- how you think the market is going to develop over the next 6 months? And I know there's a lot of uncertainty, but you have put out 2 statements, and I'd like to know how this fits together. And then, René, we're seeing outstanding growth in Audio and momentum seems to continue to be very strong. Now it might be a bit too early to ask you, but going into 2021, we've now seen an uptake in penetration rates. Do you believe there is risk that 2021 as a market could see a significant softness, and therefore, you with Audio, would face this softness as well?

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

So thank you very much for that question. I think when I reflect back on where we were in April, I actually think we see the markets bounce back faster than what we anticipated at the time. But I think what we also have realized, not -- I guess, not only in GN, but in the world as such is that COVID-19 is not a short-term phenomenon. It's something that we have to learn to live with, and at least until we have a vaccine. So that's why I believe it will also be part of our world and the markets we operate in, in 2021. Now when we look at July, where we are back at index 90 compared to July last year, we actually see differences in the geographies. So we see some markets being above July last year, where others are below or absolutely no sales at all. So it's a very mixed picture. And I actually expect that kind of situation to continue also as we move forward. As you also know, U.S. is really important to us. It's half of our sales. And U.S. is certainly also bouncing back, but a little less strong than the rest of the market. And also across U.S., we see significant differences between the different channels. So the independent commercial channel is bouncing back stronger than, for instance, the VA channel. So therefore, I -- that's the reason why I state that although we are moving more and more towards normalization, we will continue to see this impacting the market also in '21. And I guess it's part of what we have to live with in a little bit longer than probably we have all wished for.

[René Svendsen-Tune]

So René here. So I mean, it is an obvious question, of course, what will happen in '21. Let me start to say that what I tried to speak to is that for the midterm, we are very confident, actually, with the market development we have talked to and also our ability to beat that. We don't have a guidance for '21 at this point of time. It's not going to come until early February or something like that so I cannot speak to that. But I can say that, that as I tried to say, the population working with these tools is expanding. We have customers who are, somehow as we go through this, taking the fixed phones out, the UC market and the headsets and the cameras and so forth are sponsored by a, you can say, a telephony industry that used to carry a lot of investments. This is going backwards. A lot of this money is being put into the UC environment, where we are operating. So with a broader base, with a sort of trend shift in exploiting these Internet-based tools, the chances for this industry to keep growing is, in my terms, very strong. But of course, I also get the fact that we added 25% to the business in Q4 of last year. And Q2 of last year, we added 1/3 of the business on top. Q2 of this year, it may not go on exactly like that, but the growth opportunities out there is intact.

[Maja Pataki, Head of Med Tech Devices Sector]

Brilliant. Just quickly a follow-up for you, Gitte. Does that mean that you are reiterating or confirming your view that the 2021 hearing aid market is expected to remain below the 2019 level?

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

Well I think, first of all, we're not giving guidance for '21 yet. But -- and obviously, we work with different scenarios on how our business will develop. So 1 scenario is '21, below '19, but certainly, we will force scenarios where we see the market above '19 in '21.

[Operator]

[Operator Instructions] Our next question is from Michael Jungling from Morgan Stanley.

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

Can you hear me?

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

Yes, we can.

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

Can you hear me? Great. I have 2 questions. Firstly, one on Hearing and the second on Audio. On Hearing, for ReSound ONE, can you comment on how long and how extensive the beta testing has been to prevent the issue that we end up with some sort of feedback loop that plagues the product cycle. I mean, given the closeness of the transducers now, I suspect that was a major challenge for you to overcome.And then question #2 is on Audio. For the second half guidance of more than 25% growth, what are you assuming with respect to your enterprise growth and also on the consumer side. So if you could give some color on how the growth rate will look like in that guidance of 25% between those 2 segments?

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

So thank you for that question. And it's a really relevant point that you point out because, obviously, ensuring that we are actually able to suppress the feedback is the key innovation here with putting the receiver and the microphone next to each other in the ear canal. So obviously, this has required extensive testing, and it has been going on for months. So -- and we have done more extensive testing than we've ever done on the hearing aid, sending it into the market for that reason. And also, obviously, to ensure that since it's a new chipset, it's new hardware, it's actually also a new design, if you like, of our hearing aids. So everything is new, that we have profoundly tested it to ensure that what we bring to the market is reliable quality. So we have tested -- we've done beta testing for more than 80,000 hours on ReSound ONE. So maybe it doesn't -- maybe that number is not meaningful, but I can say it's substantially more than what we've ever done on a hearing aid.

[René Svendsen-Tune]

So René here. On the consumer versus enterprise mix, I mean, our competitors are very interested to understand exactly how we do with these different categories, so we have not told that for quite some time. But I think what I implicitly said here earlier in Q2, as the -- we had some pressure on the retail. The consumer share fell back relative to the enterprise. We are now seeing mainly in APAC and Europe that the consumer business is coming slowly back -- actually not slowly, but along with the retail opening and society is normalizing, whereas North America is still a challenge for us, like in many other places, because of the various kinds of lockdown there. But I think we have to assume that if the world is normalized, we will see a relatively -- a little bit higher share of consumer business come back as where we came from. And I have to say, for Q4, it's hard to see the mix because it has a lot to do with what the world will look like at that time. But consumer share, a little bit down in Q2, a little bit up in Q3.

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

So if I may follow-up on the Audio side then. If I look at the implied enterprise number for your guidance of 25%, it sounds to me that you are not assuming a sort of weakening of that business, i.e., no slowdown in the installation of larger projects for UC amongst corporates. Is that a fair comment?

[René Svendsen-Tune]

Assuming the world isn't -- is as it is today, that's a fair comment.

[Operator]

And our next question is from Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Yes. Martin Parkhøi, Danske Bank. And also 2 for -- 1 for each division. Let's start with René. Because when you make your prepared remarks, you talked about a different situation also post COVID-19. But at the same time, you say that you believe your end markets is fully intact. But should we actually look at another end market because you've always been around with this penetration rate of 15% in office environments. But now you have the home base. Is this -- on a medium-term perspective, isn't this a net positive for the end market and not just an unchanged situation? And in the same context, on the product mix, because we talk a lot about the product mix between enterprise and consumer. Can you talk a little bit about the product mix in the enterprise segment on a stand-alone? And then just back to Gitte on the ReSound ONE. Michael asked about the feedback, but can you also address some of other -- are there any kind of limitations that you have -- that has been needed to be done to make this microphone in the year possible? I also think about occlusion effects. Are there anything on the size of the dome in the ear? Are there anything on the pricing, on the cost of goods sold, anything which changed the picture?

[René Svendsen-Tune]

So René here. On the end markets, I mean -- how can I say this? Because it's for us, too early in the whole sort of allusion to start saying a lot about the end markets, midterm. When we have a better picture on that, we, for sure, we'll come back to you all and talk about that. What is right, what you said, though, is that there is a -- you can say, a significant amount of headsets, extra that has come to the market -- how many millions extra headsets, I don't have or at least I don't want to give a number at this point of time, which has expanded the base. There are a couple of questions, will people have 1 or 2? How many will have 1 that didn't have 1 before? And so on, and so all these questions, of course, there are very different views out there. But our view is that it starts with these platforms, and these platforms are very scalable and are being easily adopted by people, and they have helped organizations and individuals through this situation. So people actually could go home and work and be productive. It's unlikely all that will roll back to where we came from in February of this year. So there is a bigger platform to work from, which, of course, also speaks into the absolutes. I mean, so the absolutes, the need to drive high growth on a bigger platform are bigger. So we have to come back to this, but it's clear that the phenomena has grown and we need to figure out then -- we will play hard in this space. We need to figure out the size and the growth rates and so on later. But what we just can say now that everything points to the phenomena and the midterm being absolutely intact. Then on the product mix, you can say the -- how can I say this best way? I mean, we are in many different businesses. So we sell headsets to call centers. Also, these people were sent home, but they still use that kind of professional equipment. We sell headsets to offices, large and small, of different price points. And so far, we sell now headsets more and more to home office, also at different price points. And we sell consumer headsets. And of course, what has accelerated in this space is mainly the office headset category at different price points. As this will progress and as headsets evolve, you may see all categories actually somehow play into this phenomenon, I would say.

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

So on ReSound ONE, I think 1 of the big innovations here is actually the fact that you can have a receiver and mic in the ear and at the same time, have an open fit. So it does not have occlusion, which is, I think, also the reason why this form factor with RIC or BTE is a preferred form factor and actually, it's 80% of the market. So -- and then, obviously, I guess, built into your question, Martin, is that this is the key innovation here, again, that we've been able to overcome this. Are there any limits? Well if you have a profound hearing loss and would typically use our superpower, then the amplification can't be high enough in this setting. But again, here, we have a special hearing aid for that category with the superpower. So it is, I was going to say, basically, without limits. Now with that kind of technology, there is a slight impact on the COGS. So it is slightly more expensive than our existing hearing aids. But again, I just want to underline that this is obviously a technology that we've been working on for more than 10 years or for almost 10 years in the company. So it is really groundbreaking. I know that the other players in the industry have tried to do this, but have given up. It is really, truly a remarkable innovation that we here, bring to markets.

[Operator]

And our next question is from Niels Leth from Carnegie.

[Niels Granholm-Leth]

So you say that you have made sustainable cost savings of DKK 50 million per quarter. Does it mean that you have included DKK 100 million of cost savings in your EBITDA margin guidance for the second half of this year in GN Hearing? And my second question is what exactly is contained in the DKK 80 million onetime costs in the second quarter included in COGS?

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

So thank you for that question. The sustainable cost savings amounting for approximately DKK 50 million per quarter is something we will see going forward, and they are roughly impacting, obviously, also our second half. And when we look forward, obviously, it gives us freedom also in -- should we decide to invest further in R&D, as an example. So it's, I think, actually something that is really important for the company going forward. In addition to that, you asked about the DKK 80 million that are included in the COGS as one-off. I think what we experienced during Q1, that -- where we had to temporarily suspend manufacturing at our supply or at our manufacturing site in Xiamen was, if you like, the impact -- the benefit of having a flexible supply chain because at the time, we were able to quite quickly move a significant part of manufacturer to our site in Malaysia. And I think, also when you think about this in a geopolitical context, it is important to have that kind of flexibility built into your supply chain in order to make it future-proof.So therefore, we have made restructuring and also optimized our flow or processes in the supply chain in order to cater for the geopolitical development and further enhance our flexibility as we move forward.

[Operator]

And our next question is from Christian Ryom from Nordea Markets.

[Christian Sørup Ryom, Senior Analyst]

I have a couple for René, and maybe a quick 1 for Gitte as well. So René, firstly, on the consumer sales in the second quarter. Can you help us a little bit with how significant the decline you saw here? Are we talking about a double-digit decline for the quarter? And then, secondly, maybe somewhat related to Patrick's question earlier. Can you talk about to what extent the growth that we saw in enterprise sales for the quarter was driven by price or mix? Or whether the enterprise growth was entirely driven by volume? And then my quick question for Gitte is your comments regarding the new ReSound ONE being ready for future connectivity standards. Does that include the forthcoming Bluetooth 5.2 Low Energy audio standard?

[René Svendsen-Tune]

So René here. On the consumer not meeting expectations, actually, we have not said and we will not say exactly what were the differences. But the reality is just that it was under pressure, it didn't meet our expectations and it's slowly coming back. I think that's all I can say about that. On the enterprise mix, I think the -- it was, to some extent, supply-driven, actually. So it was mainly volume. There's a little bit of ASP up, but more on supply capability than on-demand activity. Otherwise than that, we would have been mixed as usual. So you can say the mix effect as such was between regions, supply capability and the enterprise consumer. We did not raise prices, just to be very clear. So we are not trying to take advantage of this situation anyway. So everything happened according to normal business terms, so it was really a supply matter.

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

So my short answer is, yes, ReSound ONE is prepared for the new Bluetooth Low Energy standard.

[Operator]

And our next question is from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I'll also keep it 2, please. One is just on the M&RIE technology. Gitte, I was hoping you could talk a little bit about what patent protection you have on it, on the placement of the microphone or the functionality. Just how easy you think it would be for competitors to copy it. And if you can comment briefly on pricing and where ReSound ONE is going to be priced? And maybe what price categories you're launching at the outset? That would be helpful. And then my second question is a financial one for Marcus. Can you give us a sense for what the OpEx run rate was either in June or July? Obviously, I suspect the sort of savings you've delivered in Hearing in the quarter, you didn't exit with June cost being down 30%. So if you can give us some sense for that, that would be helpful as we think about Q3 and Q4.

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

Thank you. So the first question being on M&RIE and patents. Now M&RIE is obviously a combination of software chipsets and the hardware, so the receiver and microphone in the ear. And we have patented and have a number of patents surrounding all of that. So I think it will be -- or I know it will be very difficult for anyone to copy our innovation. This is a breakthrough innovation. We've worked on it for years. And therefore, obviously, we've done our utmost to protect our know-how here. And it is a combination of the hardware, the software and the chipset and it all has to play together. In terms of pricing, we are in most markets launching in 3 price points and we do expect to see a minor price increase compared to our current levels on quarter. But obviously, since we are not owning retail, I mean, we don't set the retail price. But again, I think we're bringing strong technology to the market, and therefore, obviously, also deserves price increase.

[Marcus Desimoni, Chief Financial Officer]

On the OpEx, let's drill deeper into only SG&A. In SG&A, we have seen from underlying run rate, the best performance means in June, while the markets started to open up again. And therefore, of course, then we also started to lift our activities. And therefore, the cost base in July was also higher underlying compared to June. What it means going forward is, of course, that taking all the one-offs out, that underlying, we would see that with the savings that Gitte, described, Q3 is the lowest OpEx quarter for us in this year. And in Q4, the OpEx will increase back to normalized level, but I don't think that we will reach Q1 level.

[Veronika Dubajova, Equity Analyst]

That's helpful. So that comment on the 4Q OpEx is the combination of activity and the savings, you would think 4Q OpEx is lower than Q1, using those?

[René Svendsen-Tune]

Yes.

[Veronika Dubajova, Equity Analyst]

Perfect. Excellent. And Gitte, can I just follow up quickly on your patent comment? So am I understanding it correctly, you don't specifically have a patent on the placement of the microphone, but obviously, you have lots of other patents around the broader technology?

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

Oh, yes, we do. We have a patent on the hardware and the placement of the microphone. We have patents on the software and we have patents on the chipset. And it's the entire combination because I think 1 thing is placing the mic next to the ear from a hardware perspective. But obviously, the big challenge here, the innovation, if you like, is to have the digital feedback suppression, and that is -- has been the big challenge, doing that so that you can get the sound in the -- I guess we all know that if you go to a concert and you hear a mic next to the loud speaker and how that sounds. So obviously, the feedback suppression here has been key in order to achieve this feature.

[Operator]

And our next question is from Carsten Lønborg Madsen from SEB.

[Carsten Lønborg Madsen, Research Analyst]

Yes. First, I just want to hear about a name that seems to have been removed completely from your presentation here, the PanaCast. Are we at a point in time where people begin to come back into the offices and therefore, also will need some sort of more sophisticated video conferencing? I know we have been a little bit downbeat for the first part of the year as people are working from home, but how about now? Is there any contribution from PanaCast in Q2? And maybe also, do you expect something from Q3 and Q4 going forward? And the second question is actually, also to René. It's just on the gross margin you print here in Q2. On the back of 32% organic growth and that product mix, that's mainly enterprise to get to 51.9%. I know there are a lot of one-off shipping costs, et cetera, that you don't plan on for the future. But still, is this a sign of sort of maximum potential for you in a quarter where everything plays out perfectly? Or how should we look at this going forward?

[René Svendsen-Tune]

Thanks for the question, and I appreciate actually that you bring PanaCast back into the loop because we have somehow not talked about it all. And you're right that when this all happened in spring, and we had focused our PanaCast video venture to the small meeting rooms in enterprise, this was not very well positioned then. Now people are coming back. And sort of, in many ways, both private and public institutions are preparing themselves for operating on the corona times. What we have actually done is that because we have this 180-degree field of view, which was important in small meeting rooms, it is equally important in corona compliance situations. We don't sit as close as we used to do. And therefore, we actually have a perfect technology to deal with that. So we can cover people sitting, corona compliant, at a table and taking more space nicely with this camera. And this is actually sought for by enterprise. What we have also seen recently, actually is that as public sector markets now, namely education, is finding other teaching from home or hybrid models or sort of partly students at home and partly in the room and so forth. They need good, flexible UC-based technology to deal with that. And this is a market clearly opening for us. And of course, we are now -- we will be looking at the -- at this in a broader way. So the summary is that PanaCast is coming back to glory. And you can say our video venture as such is fully intact. We have talked about the need for more products and our commitment to bring that and that commitment is absolutely intact. So on the gross...

[Carsten Lønborg Madsen, Research Analyst]

Are you thinking about a full year impact?

[René Svendsen-Tune]

We don't have any specific PanaCast guidance out. It's sitting here in between all the rest. But let's just say that after a disappointing spring, we may be somehow close to our expectations actually for the year. On the gross margin, this is, of course, a composition of -- we have a positive effect as we write and say, of -- from the product mix and category mix. And then we have negative effects from tariffs and U.S. from ForEx exchange -- foreign exchange, a little bit less than in earlier quarters. And then we have a meaningful effect also from -- especially logistic costs. I mean, I guess you have heard from other categories also, other businesses, that logistics is still expensive. And it is -- because it is in the margin now and it is in our forecast for the rest of the year. So many components, 1, the right way; and 3, the wrong way.

[Operator]

And our next question is from David Adlington from JPMorgan.

[David James Adlington]

Just 1 left, and it's on Hearing, please. So the H2 guidance of minus 20%, sounds like July was not far being back to growth, almost maybe a little bit worse. But I'm really -- I suppose just trying to understand why it points to down 20 rather than, say, down 15, down 10, I suppose. It sounds like you preferred not to give guidance, but you might have been bounced into it by the regulators. So really sort of, why again so conservative?

[Marcus Desimoni, Chief Financial Officer]

Hi, it's me Marcus. Well I think you've heard and read my comment very right. It's a law that we comply to and therefore, revised the guidance. And I think you are much better off focusing on the business drivers and understanding the business that you all do extremely well. And therefore, looking into your models, I think I feel comfortable with that one. I would just like to leave it then, okay?

[Operator]

And our next question is from Oliver Metzger from Commerzbank.

[Oliver Metzger, Equity Analyst of Life Sciences]

Two questions from my side. First is on Hearing. So on your ReSound ONE slide, you mentioned the magnetic induction chip for ear-to-ear communication. Does this mean near-field magnetic induction? And of yes, how to think about this change in paradigm? So over the last years, you commented that 2.4 gigahertz is capable for an adequate ear-to-ear communication. So could you share with us your view about the right approach in the future? My second question is a quick 1 on Audio, on the consumer business. So you already mentioned it is improving. So it's basically sequentially month-over-month, I assume. Would you also say that now we are again, in the positive territory? Or it still within minus?

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

So in terms of ReSound ONE and the fact that we've introduced a magnetic induction radio, that is actually to ensure that we can communicate not only data, but also sound ear-to-ear with very low latency. And this is really important for our All Access Directionality feature. In that regards, we need the magnetic induction radio. And I realize that so far, we've been able to do with our 2.4 gigahertz, which was a major innovation and really changed the industry when we came with that. But I think it's important that you always keep an open mind towards technology and obviously, put in place the best possible technology in order to bring the best features for the end user. And it is only used in the All Access Directionality mode, where we are above sound levels in the surrounding, above 65 dB.

[René Svendsen-Tune]

So René here. I can just confirm that the consumer business is currently in the positive terrain. It's growing.

[Operator]

[Operator Instructions] Our next question is from Kit Lee from Jefferies.

[Nyeok Lee, Equity Analyst]

Just 1 last for me, please. I just wanted to clarify the comment on the sustainable cost savings. What would be the full term amount for full year '21? Is it going to be DKK 200 million in yearly run rate? Or is it not the case?

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

Well I think that's a fair assumption given that we say that it's -- has a positive or we have cost savings on a quarterly basis of DKK 50 million. Then that will be around DKK 200 million on an annual basis.

[Operator]

And our next question is from Markus Gola from MainFirst.

[Markus Gola, Vice President]

Yes. Just one left, and it's on your thoughts into Hearing in 2021. So which actually are the channels that are concerning you the most if the economy does not recover well with the pandemic? Is it purely the U.S. independent market? Or are there other channels which are worrying you?

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

Well thank you for that question. I think when we look to the impact of the pandemic, it is different across different markets. And as I already alluded to, when we saw our overall sales in July being back around index 90 compared to July last year, that covered markets outgrowing July last year but also markets with no sales; India and also part of Latin America, where we had very low or no sales. But certainly, also in July, U.S. was not yet back at index 90. And U.S. is, as you know, a very important market to us. And in the U.S., we also see differences between the different states. So you have states like Florida, Texas and California where you see continued big spread of COVID-19. And elderly people simply afraid to go out, and that is obviously our target customer group. So you see these different pictures. So that is probably what makes us a little bit on certain or makes it hard for us to predict exactly what '21 will look like as we still see mixed impacts of the pandemic across our markets. But again...

[Markus Gola, Vice President]

So your concerns are mostly just to the effects of the pandemic and not necessarily to the economy, right? So you're not concerned that markets with little reimbursements like the U.S. might not come back to historic levels compared to Europe where reimbursement rates are much higher for you, right?

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

Yes. No, I'm -- we are less -- I mean, we are actually not as concerned about the financials because when we look back to the financial crisis in '7, '8, you actually saw hardly any impact on demand of hearing aids, that demand or the growth in market continued unchanged. So I don't think that the financial situation, as such, will have a major impact on our market. It's more the pandemic. You also start to see trends in other parts that people care even more about the health following the pandemic. So I think also that should speak in favor of us continuing to have no impact in the financial regards.

[Operator]

And our next question is from Michael Jungling from Morgan Stanley.

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

Great. I have 2 more. Firstly, when it comes to the EBITA margin for the second half. Can you comment on what you think the transactional EBIT margin development may be given the movements in the currency? And then question #2 is on Hearing. If I look at your comments around patents, I wanted to ask 2 things. Have you filed the patent? And has it been granted for the microphone in the RIC unit? And secondly, to this patent question is, was this technology not initially covered by the [ CBO ] tech patent which was, I guess, the forebearer to the whole RIC revolution?

[Marcus Desimoni, Chief Financial Officer]

Michael, it's me Marcus. Yes, the FX impact for Audio and Hearing, basically, that's what you're asking. On Audio, it's roughly a natural hedge. There's a minor -- very minor positive impact, it's on the decimal. And on the Hearing, it depends, of course, a little bit on the volume that we have with the cost coverage from the U.S. So it could look like a little bit, a slightly negative impact. But on the group level, that's plus/minus 0 then.

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

On the patents, just let me be absolutely clear. The patents are filed, both in terms of hardware, software and chipset. And I believe we've built a very strong patent protection around our technology. And I actually think it will be impossible for anyone to copy exactly our innovation. The specific question you had on a former patent I'm actually unable to answer right now, but we can come back on that.

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

Okay. I guess when you say you've filed it, the patents have not been granted yet, is that correct? On the microphone in the RIC unit. So you filed but...

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

Yes. Michael, it's Morten here. I think this is a little bit more detail on the patent side. We will make sure that we are able to answer this question on our session on the 27th of August, and then we will take it then.

[Operator]

And our next question is from Jannick Denholt from ABG.

[Jannick Lindegaard Denholt, Research Analyst]

I'm very conscious that we are running over time, so I'll do it swift. To the hearing aid side, please. Is it fair to assume that the added COGS to the ReSound ONE, is that basically offsetting the price premium you're going to go for, so net-net sort of neutral? Or a bit of benefit from that? And secondly, also to your remarks around the economy. Gitte, I appreciate that the -- in the financial crisis, you didn't see a demand decline. But given you can say we are seeing increased unemployment in the U.S., are there any thoughts, concerns, indicators that you might see a mix shift where some might not be able to go for the higher price? And now even higher premium products that might shift to other channels instead?

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

Thank you for that question. Well in terms of the overall margin and the impact of ReSound ONE, I think if we look at the margin, I think what will impact the margin maybe slightly negatively in the coming months is probably more that the U.S. market is lagging a little bit behind the rest of the world. And as you know, we have higher prices in the U.S. and the rest of the world, and that will impact our margin. So I think that is what you should think about. In terms of ReSound ONE, that will be positive for our margin. In terms of U.S. unemployment and maybe a shift in the product mix. Again, I think when you look at the financial crisis, you also obviously saw back then, unemployment. And in our population, which is mainly 65 and above, it has a minor impact, to be honest. And also, what we do see is a tendency that people value their health even more, which would speak in favor for also being prepared to really buy premium solution in hearing aids.

[Operator]

And at the moment, there are no further questions, so I will hand the floor back to the speakers for any final comments.

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

Thank you very much, operator, and thank you, everybody, on the call for a lot of very good questions. We appreciate your time today and your questions and interest. And on behalf of Gitte, René, Marcus and myself, we'll see you on the virtual road. Thank you very much.