GN Store Nord A/S

CSE:GN

Earnings Call Transcript 2022-Q2

[Henriette Wennicke, executive]

Hello. Welcome all to GN's Q2 2022 Conference Call following our release last night. 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; Rene Svendsen-Tune, CEO of GN Audio; Peter Gormsen, CFO of GN Store Nord; and myself, Henriette Wennicke, Head of IR and Treasury.

Today's presentation, which you can find on gn.com, is expected to last about 20 minutes, after this will turn to the Q&A session. The agenda for the presentation itself is that Peter will start off with group highlights, then Gitte will provide an update on GN Hearing, Rene will provide an update on GN Audio; after this, we'll go back to Peter for financial update and financial guidance. After that, we hand over to Q&A with questions from the queue. And with that very brief introduction, I'm happy to hand over to Peter.

[Peter La Cour Gormsen, executive]

Thank you, Henriette. Good morning, everybody, and thanks for joining our Q2 call today. Starting on Slide 4 and a snapshot of the performance in the quarter. In the quarter, we delivered revenue of DKK 4.9 billion, which is a sequential improvement of DKK 1 billion compared to Q1. This translated into an organic growth of 8%.

Adjusted EBITA ended at DKK 610 million, equal to an EBITA margin of 12.6%. As a result of the recent M&A activities, the adjusted leverage ended at 5.7x in the quarter. A few days ago, we announced a new and exciting hearing aid platform, ReSound OMNIA which, combined with an improving global supply chain situation, bodes well for the second half of the year for our hearing and enterprise business.

However, due to the lower consumer sentiment and the recent buying patterns from leading consumer retailers, we now expect the consumer and gaming gear markets to decrease around 25% in '22. Even though we are performing strongly on a relative basis, these market conditions impact GN Audio.

As a result, we are adjusting our growth outlook for SteelSeries and for our Consumer business. Furthermore, we have also seen a significant appreciating U.S. dollar. And due to our FX exposure, this also has a negative impact on our EBITA margin. Yesterday, we also confirmed the lower end of the range in GN Hearing organic revenue guidance to reflect the lower-than-expected market growth. Let me come back to the guidance later in the presentation. And with this quick snapshot, I'm happy to hand over to Gitte for an update on GN Hearing.

[Gitte Aabo, executive]

Thank you, Peter, and hello to all of you. The key messages I want to leave you with are: our financial performance in Q2 was as planned, both in the Core and Emerging business if we disregard the lockdowns in China. We've now delivered 5 exciting product launches this year in line with our plan and we are following our plan with regards to improving profitability.

But let's start by looking at GN Hearing's Q2 2022 financial performance. GN Hearing delivered 4% organic revenue growth in the Core business and 79% organic growth in the emerging business. Total revenue increased with 16%, reflecting the organic growth the consolidation of Lively and a tailwind from exchange rates.

The gross margin was slightly down compared to last year, which was driven by the elevated freight market the increasing material costs as well as the development in the VA and Costco. The EBITA margin in the Core business ended at 7%. This is a reflection of the revenue growth and the gross margin impact investment in launch activities and a negative impact of more than 2 percentage points from foreign exchange rates.

The EBITA in the Emerging business was negative DKK 49 million. Nonrecurring items of minus DKK 43 million was booked in the quarter related to targeted redundancies. Free cash flow reflects investment into financial support arrangements related to expansion of share of wallet with selected ReSound Partners and expansion of the Beltone network.

In the quarter, we also invested in a European retailer, which we currently have in transition, similar to what we've done for years in Beltone. Our strategy related to hearing aid retail is unchanged, and GN refrains from forward integration. But occasionally, we will acquire retail when extraordinary circumstances exist, but it is with the aim of finding new owners in the short to medium term. As Peter mentioned, we confirmed the lower end of the guidance range to reflect softer market condition in especially the U.S. We confirmed the guidance for the EBITA margin.

With an adjusted EBITA margin of 4.5% in the first half of 2022, we will naturally need a stronger performance in the second half. Let me give you some building blocks for this. While we have an FX headwind of almost 2 percentage points in the first half, this will, everything else equal, turn to a positive impact of around 2 percentage points in the second half, which is equal to a total swing factor of 4 percentage points.

We have been rightsizing the organization during the first 6 months, which will have a positive impact on OpEx in the second half. Finally, but important, we will see an even higher absolute revenue in the second half driven by the launch of our new products, not least ReSound OMNIA. This will also improve product mix, ASP and thereby our gross margin.

Beginning with -- let's move to Slide 7 and some more color on the regional development in the quarter. Now beginning with North America, we delivered negative 9% organic revenue growth in the quarter in a market that was soft due to consumer sentiment. We experienced solid performance in the independent market, but offset by the development in the VA and the negative ASP development in Costco.

Moving on to Europe. We delivered an organic revenue growth of 25% in the quarter. We saw, among other, a strong performance in Germany and Southern Europe. Furthermore, the growth was positively impacted by larger than normal revenue from our key partner, Cochlear. In our Rest of World region, the organic revenue growth ended at 9% compared to Q2 2021, despite COVID-19-related lockdowns in both China and Korea.

Moving to Slide 8 and an update on our supply chain initiatives. To drive the EBITA margin above 20% in 2024, we have a dedicated focus to digitalize, simplify and automate our supply chain. In Q2, we booked DKK 43 million in nonrecurring costs related to targeted layoffs. We have streamlined our global, regional and local organizational setup, especially in the Rest of World region.

We've also taken the decision to outsource our U.K. distribution side. Going forward, this will be served by a third party out of the Netherlands just like the setup we have in GN Audio. The transition has already been initiated, and we expect operations to be fully in place by year-end. In order to further streamline the European setup, we've also consolidated the customer production from 2 GN sites into one.

I'm very happy with the progress we are doing on the supply chain, and we'll continue to report as detailed as possible on these initiatives as we move forward. Let's turn to Slide 9 and the exciting new platform launch, ReSound OMNIA, which we announced on August 16 and will roll out globally from August 25.

As we had a separate session on this the other day, let me just briefly summarize the key messages on Slide 10. ReSound Omnia sounds natural, feels natural and connects you to the world naturally. With ReSound OMNIA, we bring an almost unbelievable 150% improvement to speech understanding in noisy environments compared to current hearing aids. And it introduces natural own voice perception, meaning that users are not distracted by how their own voice sounds with a design for optimal comfort and the first of its kind, Check My Fit functionality, the user can forget they are wearing hearing aids and just hear.

And whether users choose to stream phone calls or music, they can connect naturally and here at all with the highest quality through ReSound OMNIA'S connectivity solution. In GN we know that beyond providing high-quality products and solutions, we also need to be the preferred partner to the hearing care professionals.

This is why ReSound OMNIA is not only the best hearing aid, it also comes with an improved feeding software in order for the HCPs to fit faster and more accurately. All in all, ReSound OMNIA sets a new standard in hearing technology and improve how people interact with the world around them.

Let's move to Slide 11 and our newly launched Customs made by ReSound. Launched in June Customs by ReSound brings our first rechargeable in-the-ear hearing aid. And this is the most advanced medical grade technology in a smart stylish design to the markets.

It is molded to fit the individual's unique ear canal, and these hearing aids provide all-day comfort and streaming with outstanding sound quality even in the toughest listening environments. With this important launch, we continue to combine expertise from the Hearing and Audio business to provide a best-in-class customer experience. And I'm happy to say that the customer feedback is very encouraging.

This leads me to Slide 12 and an overview of our refreshed product portfolio. This year, our R&D team has performed strongly and delivered a completely new lineup across all form factors. With the launch of ReSound OMNIA, our portfolio now offers industry-leading solutions for all users, whether you want uncompromised hearings, a reliable and robust hearing aids and earbud experience, preferred discrete above all or a solution for occasional use.

I'm very proud that we've been able to bring this many industry-leading products to market this year, and I'm certain that this will fuel our growth in the coming quarters.

This leads me to Slide 13 and the newly released OTC legislation. A few days ago, FDA finalized the long-awaited OTC legislation, which essentially means that the market will open by mid-October. We have been preparing for this for many years. Jabra Enhance Plus has been developed with the OTC in mind and looking at the final regulations, this means that we would need to reduce output sound levels with just 1 DB. This is to be done via a simple software update. In other words, we are ready. We have some time discussed the product and the new category with selected retailers, including Best Buy, who are ready to take on the product.

During the coming weeks, we will formally seek to register the Jabra Enhance Plus technology as an OTC product. And with that, I would like to hand over to Rene and an update on GN Audio.

[René Svendsen-Tune, executive]

Thank you, Gitte, and hello to all of you. So it's now my pleasure to take you through GN Audio's results for the second quarter of 2022. And let's move to Slide 15. So Q2 of 2022 was the quarter when we returned to double-digit organic revenue growth in GN Audio, despite a challenging global supply chain situation.

GN Audio delivered 10% organic revenue growth as a result of 18% organic growth in Enterprise. The growth is still constrained by global supply chain situation, which continues to be challenging, however, steadily improving. The underlying demand for our Enterprise products, which now accounts for more than 80% of the GN Audio organic business, continues to be strong.

And we are very happy with the inflow of orders across Enterprise category. The consumer organic business delivered a negative 25% organic revenue growth, while SteelSeries delivered negative organic growth of 30%. This was partly driven by supply chain challenges, particularly in the premium side of SteelSeries, but very much driven by lower consumer sentiment towards the end of the quarter.

Adjusted gross margin ended at 46.8%, which was almost 5 percentage points below Q2 of 2021 and can mainly be explained by 3 factors: the elevated freight market and material costs in general, the development in foreign exchange, especially the U.S. dollar, and the consolidation effect from SteelSeries.

As earlier discussed, we have put in place pricing initiatives in the beginning of this year, but they had limited impact in the quarter due to the backlog situation. However, due to a strict focus on operational costs, the adjusted EBITA margin ended at 18%. Nonrecurring costs amounted to DKK 68 million following the SteelSeries acquisition and integration. The free cash flow reflects a continued inventory buildup of critical components and timing of trade receivables.

Let's move to Slide 16 and the regional performance. In North America, we delivered a negative organic growth of 5%. In Europe, we delivered strong organic revenue growth of 22% and in the Rest of the World, the growth was flat year-over-year. All of this comes on a high comparison base of 32% growth in second quarter of last year.

Now let's move to Slide 17 and the current supply situation. We've now showed this slide a few times. And here we illustrate the current status of the supply chain by splitting into 3 elements: components, manufacturing capacity and logistics. Let's start with the component situation.

We have seen a gradual step-up in deliveries throughout Q2. Currently, as we are seeing more and more volumes coming in. However, volumes are still running below demand, and we continue to experience an elevated order backlog.

On the manufacturing side, we are not constrained by capacity, in general. However, logistics remains volatile, unpredictable, and it comes with high cost. So all in all, the global supply chain situation is steadily improving, but we don't expect it to be resolved in Q3. It will likely remain a challenge for the rest of the year.

And with that, let's move to Slide 18 and the current environment in the consumer and gaming gear space. Beginning with the supply side, especially for our premium gaming product supply, it's still a significant challenge. We expect this to gradually improve in the coming quarters, but we don't expect it to be fully resolved this year.

On the demand side, I think we have all seen the news flow around inflation, lower consumer sentiment and related spending. This has also impacted the sales of our consumer and gaming gear products late Q2. Retailers have generally been reducing their channel inventories to adapt to this new environment. And in fact, we started to experience cancellation of orders by late Q2. This has resulted in a limited sell-in growth for manufacturers by the end of the quarter, and we expect this trend to continue until channel inventories have been reset.

To reflect the current supply-and-demand environment, we have updated our market growth expectations for our addressable gaming gear and consumer markets in 2022. We now expect these markets to decrease around 25% compared to last year. Consequently, we have lowered our internal expectations on SteelSeries and our consumer business to reflect these new market assumptions.

We now expect SteelSeries organic growth to be better than negative 25%, while continuing to gain market share. For the consumer business, we now -- which now accounts for less than 20% of the GN Audio organic business, we now expect it to decline significantly.

We still believe that the medium-term market growth is intact, driven by several attractive megatrends, including structural growth in the number of -- numbers of gamers, the premiumization of the market and further category expansions.

Let's move to Slide 19 and an update on SteelSeries. I can say that the integration of SteelSeries is proceeding very well. Despite the challenging macro environment, SteelSeries continue to capitalize on its portfolio strength with new exciting product introductions, which paved the way for significant market share gains in Q2.

In the quarter, SteelSeries launched a number of exciting products: The Arctics Nova Pro headsets and the APEX Pro Mini keyboards. And we are on track with further category expansion in the months to come. These innovative new products have landed very well in the market. and they have received outstanding reviews. We have sold everything we have had on stock.

And with that, I'm happy to hand over to Peter.

[Peter La Cour Gormsen, executive]

Thank you, Rene. Moving to Slide 21 and the group financial highlights. At group level, GN delivered 8% organic revenue growth and an adjusted EBITA margin of 12.6%. Total nonrecurring items were [ minus ] DKK 111 million, driven by the SteelSeries integration as well as the supply chain initiatives in GN Hearing. Adjusted leverage ended at 5.7x.

Let's move to Slide 22 and our cash flow for Q2 '22. GN Hearing's negative cash flow was driven by FSA investments and growth opportunities. Excluding the FSA's free cash flow, excluding M&A, was negative DKK 98 million due to Lively and launch activities.

In GN Audio, we saw a strong development in operating profits, while the working capital was negatively impacted by deliberate inventory buildup of certain critical components and timing of trade receivables due to sequential revenue growth within the quarter.

Let's move to Slide 23 and the capital structure. As mentioned, the adjusted leverage ended at 5.7x in Q2, which is slightly higher than Q1. The increase was driven by the recent M&A and FSA investments as well as I mentioned, negative development in working capital.

The net interest bearing debt ended at DKK 15 billion, while we had cash and cash equivalents of around DKK 0.6 billion. Our long-term leverage target of between 1x and 2x net interest-bearing debt-to-EBITA is confirmed. However, to reflect the lower consumer sentiment and current uncertainty, we now expect to deleverage and be back within our long-term target by end of '24.

Let's move to Slide 24 and an overview of our current debt maturity profile. Yesterday, we signed mandate documents with our commercial banking group for a 3-year EUR 520 million loan. This will cover the short-term funding requirements. GN continued to have ample sources of financing at the fully undrawn RCF of EUR 350 million.

Let's turn to Slide 25 and the financial guidance for '22. As mentioned earlier, we have revised our financial guidance for '22 to reflect our updated assumptions to the market growth for gaming gear and the Consumer business in '22 as well as updated foreign exchange rate assumptions.

Consequently, we are now guiding for an organic growth in GN Audio to be between 0% and 5%. This adjustment reflects a confirmation of the strong performance and outlook in enterprise and a significantly lower expectation for our Consumer business.

Furthermore, we are now expecting an organic growth in SteelSeries that will be better than negative 25% for the year, reflecting continued market share gains for the year in a strongly declining market. The significant appreciating U.S. dollar and the missing revenue from SteelSeries and our Consumer business have led to an adjusted EBITA margin of 17% to 18%.

Please bear in mind that we are currently expecting an FX headwind for the year of around 3 percentage point in GN Audio on the EBITA margin. So on a constant currency basis, we are continuing to see strong underlying margins. For GN Hearing, we are confirming the lower end of the organic growth guidance to 5% to 8% for the year.

Moreover, we are making a minor adjustment to the EBITA of the emerging business due to the significantly appreciated U.S. dollar. As a consequence of the adjustments, we are now expecting an EPS growth to be between negative 10% and 0% compared to last year.

And with this, I'm happy to hand back to Henriette.

[Henriette Wennicke, executive]

Thank you, Peter, Rene and Peter for the update. Just a few practical remarks before we move to Q&A. We will be hosting an investor and analyst meeting at [indiscernible] on the 13 October where we'll provide even more data and details on our exciting new platform, ReSound OMNIA. We hope to see many of you there. And with that, I'm handing over to the operator for Q&A. [Operator Instructions]

[Operator]

[Operator Instructions] Our first question comes from Martin Parkhøi from SEB.

[Martin Parkhøi, analyst]

Yes, Martin Parkhøi, SEB. Firstly, I think, maybe a question for Peter. I'm just curious on the assumptions behind the lower gearing that you expect by the end of 2024 within the range of 1 to 2. What assumption have you done on this? Because we can see that your debt is increasing in -- from Q1 to Q2, solely because you find growth opportunities within Hearing. Have you also included such initiatives in the gearing guidance that you offer from the -- for late 2024.

And then just to Rene. On the Enterprise segment, 18% in the first quarter -- 2 questions on that. What assumption have you made for the Enterprise segment to deliver the 12% to 18% applied in the second half for GN Audio including SteelSeries? And what have you seen on inventory changes on a channel level for the Enterprise business in the second quarter?

[Peter La Cour Gormsen, executive]

Martin, this is Peter. So assumptions behind the leverage development, we have assumed that there will be M&A activities going on, not transformational significant large ones, but that it will be FSA investments as we've seen historically also.

[René Svendsen-Tune, executive]

So, Rene here, on the enterprise side and the assumptions. I think 3 pieces to it, 3 or 4. One is that everything we see is that demand in general is intact. The hybrid we are working and the deployment of these UC tools and so forth, is very much active out there and large and small companies are adopting these technologies on the back of whatever happened through the pandemic. So that's one.

I think the second is that we do assume that we have a stable ability to supply. We have reengineered quite a lot of products. So we now have -- if you can't get the original components, we can supply with alternative components that started to have effect late second quarter and more and more is coming in.

So that has been, I would say, very successful execution by our engineering team. So that's a second matter, so supply should be more predictable, but we are not saying that we could supply fully to demand in the second half.

Third, of course, is that we have price increases in the making. So -- and they are starting to kick in. So we should see some effect of that, more so in the second half than in the first half. And I guess these are the main building blocks for the set of assumptions. And as always, we assume we take share. And -- but that's been the case quarter after quarter for a long time.

[Martin Parkhøi, analyst]

And the inventory levels in the channel?

[René Svendsen-Tune, executive]

I'm sorry, I forgot that. So the inventories -- so the reality is that the way the mix is now so that our SKUs that we now have in stock where we also have, to some extent, filled the channel. But the -- on a broad scale, we are still behind normal channel inventory levels. We have built some but not a lot. We are not assuming we will recover all that in the second half.

[Operator]

Our next question comes from Oliver Metzger from ODDO BHF.

[Oliver Metzger, analyst]

Yes. The first one is on GN Hearing. I was a little bit surprised by the positive performance, particularly in the second quarter in Europe, where you named the 25% organic growth. It would be great if you can go more deeper into this regional performance?

You mentioned this extra demand coming from Cochlear, but it'd be great just to see a little bit more details, in particular, as you are at the end of your platform cycle?

The second question is on Audio. So in the second quarter at Enterprise, there was also characterized by some pent-up demand from Q1? And also how did your order book develop during the second quarter?

[Gitte Aabo, executive]

So thank you for that question. So when we look at Europe our performance and the 25% organic growth, we do see strong performance, especially in Germany, in Spain, in Italy that really drive significant growth.

In addition to that, we also have extraordinary high income from Cochlear that impacts both Europe and APAC. And actually maybe to give a feel for the size of that. We also mentioned negative impact from COVID lockdowns in China. And actually, when we look at it at a global level, the extra income we get from Cochlear is leveled out by the negative impact in China. So overall, if you were to take a step back and look at the end, we would be delivering solid positive organic growth in the second quarter.

[Oliver Metzger, analyst]

Yes. One quick follow-up. So would it be fair to say 2% to 3% was a tailwind coming from Cochlear roughly?

[Gitte Aabo, executive]

I think it's roughly in that size, when you look at the numbers globally. And then equally, we have headwind in that size from the lockdowns in China.

[René Svendsen-Tune, executive]

Rene here. On the order backlog and order book, it's -- I think you can say that both Q1 were -- and Q2 were sort of enabled by supply, meaning that the supply was dictating the revenues more than anything else. The demand is strong. So the -- in that sense, of course, there was a pent-up demand from Q1 into Q2, as there is from Q2 into Q3 as we are started carrying over an order backlog.

We have reduced the order backlog some not exactly as much as we want because the reality is that if we can supply if the all in all, more will go through the whole machinery, so we sell more, but yes, there was -- we did carry pent-up demand into Q2, and we are carrying some forward into Q3 in terms of a significant order backlog, but we have taken the backlog down a bit.

[Operator]

Our next question comes from Martin Brenoe from Nordea.

[Martin Brenoe, analyst]

I have 2 questions for starter. First of all, on SteelSeries, I would like to understand which signals you see that should suggest a sequential improvement in second half compared to first half, which is implied by your guidance? That would be very helpful.

The second question is in terms of sort of the inventory levels that you're having. Is there any -- first of all, is there any inventory that you might have to buy back from retailers out in the channel from the Consumer business? And is there any risk that you have to write down some of your inventory on the Consumer products? That would also be very helpful.

[René Svendsen-Tune, executive]

Thanks for that question. I guess on SteelSeries and the second half outlook, I think there are 2 things that will help us there. One is that we believe the supply will improve but not be as strong as we want, but it'd be better.

Second is that all in all, our competitive position is stronger, where we have new headsets, best class in the market. We have new keyboards best in the market. And maybe soon something else may happen. So there is some category expansion to be expected.

So I think -- so you can say all I'm saying is that there is an assumption that in a down market, we will gain market share and we have everything ready to do that. And we feel very confident on that side.

On the Consumer inventory, no, we have no ideas that we would buy back any inventory from the channel. It's not overstocked in any way. What I said happened -- and especially on the gaming side, but a little bit also on the Consumer side, is that orders got canceled as retailers late in the second half of June or June or second half of June, started really aggressively taking down inventory.

So the sell-out was stronger in Q2 than the sell-in for sure. But no ideas that we will buy anything back and it's not like we have inventories that we would have to write down. The inventories that we are building up are subsystems or components because we are buying in ahead of the situation, so to speak. So when we get the critical components, we are ready to build the product and ship it right away. So that has elevated component inventories.

[Operator]

Our next question comes from Maja Pataki from Kepler.

[Maja Pataki, analyst]

I'll start with Hearing. Gitte, we've seen yesterday the announcement from Best Buy that they're going to be selling hearing aids in 300 of their 1,000 stores of some -- plus the online channel. But they've also stated that there are going to be 10 devices sold through the channel.

So it looks like you have a great product, but you're going to be competing quite harshly in the new channel. What makes you comfortable or confident that you can actually successfully compete in that channel?

And then my second question to Audio. When we look at the indication on what you expect market growth to be for Consumer and gaming. Could you please just talk a bit to it why you've chosen the minus 25%? I mean it could be anything because we're standing there with a dart and just throw it somewhere, it could be minus 30%, minus 50%, minus 20%, so are there any steps behind it that gets you to that number or is it just a best guess?

[Gitte Aabo, executive]

Thank you, Maja, for the question on OTC and competition. I mean, obviously, we are delighted to see the OTC regulation come out and the market opening up mid-end October, and we are ready to launch Jabra Enhance Plus into that market, and we actually believe that we have a very strong product offering also from external reviews of Jabra Enhance Plus. So I feel quite confident that we are ready to compete because we really offer something unique with Jabra Enhance Plus.

[René Svendsen-Tune, executive]

So Rene here, thanks for that question. It, of course, it's a very good question. And how do we know that the market will decline by 25%? And the honest answer is, of course, no one knows, right? We have picked what we think is a conservative number. We have been looking into what's going on right now. We have been looking to what other players have said we are talking to the channel and so forth. So in that sense, we think 25% down is a conservative number, which we can work with.

Could it be worse? I don't know. Maybe so. Could it be better? I hope so, and at least we will try to beat this best we can. Of course, for us, most important is actually that we sent a signal to ourselves and to our partners and the investors that we understand the situation. We are acting on it. And so if we're giving you somehow at least the framework that we operate in.

So -- but I think personally, if 25% is with everything we can read and listen to from -- is a good conservative number, and we are working from that.

[Operator]

Our next question comes from Christian Ryom from Danske Bank.

[Christian Ryom, analyst]

I have 2 as well. And first one, actually, continuing on this theme on the downgrade for your expectations in Consumer and SteelSeries. Can you sort of give us a rough understanding of how much of this downgrade can be attributed to, say, channel clearing. So this fact that we've seen sell-in being significantly lower than sell-out. How big do you expect that effect to be on a full year basis or have you assumed it to be on a full year basis?

And then the second question is to the gross margin development in GN Audio as we look into the second half of the year. How should we think about that compared to the around 47% underlying gross margin that you reported here in Q2? And maybe if I can just squeeze quickly in a quick question on the outlook for SteelSeries EBITA margin for the full year, how should we expect that to develop relative to the roughly 13.5% you -- SteelSeries achieved last year?

[René Svendsen-Tune, executive]

Thanks for these questions. I think first, on the channel clearing, of course, this is something that will not continue. I mean it will set itself up at a new level at some point of time. If the sell-out continues sooner or later, channel will have to start buying again and you will get a new sort of sell-in/sell-out balance.

So I would assume that a lot of that has happened. But exactly how long it goes on, we have not guided for that, and we have not sort of any -- because there's, of course, also a competitive matter here on how you play this whole channel, but there has been channel clearing going on, how much more we have to see, but we have a view on that, basically. So it's inside-out perspective.

On the gross margin, I mean I think Peter talked to the U.S. dollar effect of that, which is significant. And of course, if this doesn't change, it's something we have to repair over time. But for now, it is significant. I think in the other direction.

If you look at Q2 and we had negative impact from the U.S. dollar, from transport and negatively. And then you can say we had a positive mix effect. So we had these drivers took us down. And then we had a product-driven gross margin improvement effect in that.

In the second half, of course, we have a certain impact from pricing. And we also will have effect on the mix. So you can say the mix is not optimal as with the supply we have been able to deliver in Q2 and Q1, and it is expected to improve.

I guess, I cannot give you sort of a lot more than that. But prices mix will offset, to some extent, the effects we have just talked about from a lower business.

[Christian Ryom, analyst]

Great. And just on SteelSeries, should we expect sort of similar margin decline for -- at the EBITA level for that as for the overall GN Audio business? Is that a fair assumption?

[René Svendsen-Tune, executive]

I think SteelSeries, of course, as we are investing in this business and we are moving it forward with all the ecosystem investments and so on and so forth, of course, it has a lot to do with the volume, but we are somehow now managing this in a way where we get a meaningful result out.

I don't have a guidance for SteelSeries EBITA as such. But you have to assume that this is becoming as we own it and as we somehow consolidate, we have already consolidated the whole backend. It is becoming a more profitable business. And of course, the more volume we can drive even more so.

[Operator]

Our next question comes from Chris Gretler from Crédit Suisse.

[Christoph Gretler, analyst]

I have 2 questions. First on this new EUR 500 million loan, you secured EUR 520 million term loan. Could you actually disclose what are the terms of that, particularly relative to what is going to be refinanced against, so that we get a sense about your -- the impact -- the likely impact on financial expenses?

And then the second question is -- sorry, it was a bit crowded day on Tuesday, but maybe I missed it on this OMNIA, could you actually discuss the pricing strategy relative to the ReSound ONE before?

[Peter La Cour Gormsen, executive]

This is Peter. So it's -- the loan is a standardized commercial banking loan. It's a 3-year loan. No covenant. So I think under the current circumstances that we are quite pleased with the loan. And I think that has certainly improved the short-term profile quite significantly. And then, of course, we still have our convertible bond. We have the RCF has also set available unused. And so I think we have, as we have talked about, a fairly strong funding profile overall. So -- and the terms, I don't think we disclosed the exact details, but of course, we're in low single-digit range.

[Christoph Gretler, analyst]

In terms of interest rates, low single digit.

[Peter La Cour Gormsen, executive]

Correct.

[Christoph Gretler, analyst]

Yes.

[Gitte Aabo, executive]

Thank you. And you asked about our pricing strategy on ReSound OMNIA. And maybe first off, I just want to underline that as we've done in previous launches, we launched in the higher price points first. And obviously, in our core markets starting out in the U.S. and Canada.

In addition to that, we take the opportunity, as we have also done with previous launches, to take a price increase compared to -- in this case, compared to ReSound ONE, so that's also why I earlier talked about how the launch will both help drive more sales, but also improve our mix and ASP.

[Christoph Gretler, analyst]

There is no quantification done by... I understand.

[Gitte Aabo, executive]

No.

[Operator]

Our next question comes from Mattias Häggblom from Handlesbanken.

[Mattias Häggblom, analyst]

Yes. Mattias Häggblom from Handelsbanken. So questions, please. Firstly, for Gitte. I would be interested to hear maybe an expansion of your thoughts about launching a new innovative platform into a market that is currently showing the weakness, in particular driven by consumer in the U.S. but also in certain pockets of Asia Pacific as well driven by the pandemic?

And then secondly, for Rene, what I'm not much for regrets, I'd still be interested to go back and expand on your reflections on the SteelSeries acquisition in terms of timing? How do you feel about the integration process? But perhaps, in particular, talk about combined product development between the GN Audio and SteelSeries team?

[Gitte Aabo, executive]

So I think that with ReSound OMNIA, we bring a new strong platform into the market that, on many parameters, is competitive to other offerings in the market. And therefore, I clearly expect that with this new product, we will take a share. That applies also in a softer U.S. market.

And obviously, with the competitive offering and our ability to take share, that is an attractive place to be launching into. In Asia Pacific and more specific in China, we actually see much less impact of lockdowns right now. So I think the market has normalized in that regard, and we look forward to launching. It will be a while though before ReSound OMNIA reaches China because it's a long homologation process in China. So ReSound OMNIA will not reach the Chinese market in 2022, we will be launching in Japan and the markets are normalized.

[René Svendsen-Tune, executive]

So Rene here, on SteelSeries, thanks for that question. Let me first say that SteelSeries was a strategic investment. We closed the deal in October of last year after a long time of looking for a solution to this. And everything we have seen after confirms that we did the right decision. It's a very solid company, very well positioned in the market, strong capabilities and also the innovation power we have acquired this way is as good or better than we have expected.

On the integration side, we have -- we started on the back end the operations. So we have now combined the sourcing most of the logistics interface to several of contract manufacturers and so on. So the back-end ecosystem is on the integration, and it's proceeding exactly as we had planned it to do, and it is also delivering -- starting to delivering the first savings as we have been looking for.

In a similar way, we are now sort of integrating on the finance, HR and common platforms and so forth will take a little longer because we need to get it right, but also that is progressing exactly as we had hoped for and very solid contribution, I think, from both sides.

And then, of course, there are 2 big tickets left. One is the whole brand and marketing and so forth. Here, we are not -- we are taking no steps to integrate at this point of time. There may be some sourcing later and so on, but we are following the plans on the SteelSeries side and the plants on the Jabra side completely and executing on that side.

On the go-to-market behind that, of course, there are opportunities we can exploit. And we're doing that softly, let me put it like that. No hurry.

And then finally, to your question, of course, on the product creation side and the technology side. I think what we have said all the time is that whatever will come out of SteelSeries now and next year is something that's already ongoing, and therefore, of course there is a limited effect from the technology side from GN Audio and in a similar way, the other way around that GN Audio will need some time to take over technologies from SteelSeries. But the work is in progress, road mapping is happening, opportunities are there. I would say, probably the tech people are more eager than me on the speed here. So there is a lot we can do, but it will take some time because we need to exploit, we need to get the real and the right products out of the technology we have on both sides.

[Operator]

Our next question comes from Niels Leth from Carnegie.

[Niels Granholm-Leth, analyst]

Two questions for GN Hearing. So regarding the acquisition of a European retailer, could you just tell us how -- for how long should we anticipate this retailer to remain in your books just to get our revenue correct? And how much of quarterly revenue would that business contribute?

And then the second question on the Costco contract. So did you tender for the Costco contract? And have you any information if it has been placed with any of the manufacturers?

[Gitte Aabo, executive]

So thank you for those questions. In terms of the financial impact of the acquisition of the retailer, the way to think about that is that in Europe, we have 11% impact from M&A activities in the quarter, and that is due to the retailer.

Now as I also alluded to, this is obviously extraordinary that we acquired this retailer, but we did that because it's a long standing partner with us, and they have -- we have 100% share of wallet, and we obviously want to keep that. And our aim is to find a new owner for that retailer sooner rather than later.

So as soon as we have found a good new owner, we will pass it on. Our strategy on retail is the same. We don't want to own retail. In terms of Costco, I'm sure you'd appreciate that I cannot go into details on our relationship with Costco, but maybe just state that I'm very pleased with our position in the branded segment.

[Niels Granholm-Leth, analyst]

Great. And can you just mention which country this retailer is placed in?

[Gitte Aabo, executive]

Yes. Portugal.

[Operator]

Our next question comes from Martin Parkhøi from SEB.

[Martin Parkhøi, analyst]

Excellent. Martin Parkhøi, SEB. Just Peter or Rene or whoever of you can comment on the -- you blame the reduction of the adjusted EBITA margin by FX. And that is, of course, also clearly a significant headwind. Can you -- 2 things. Can you maybe say what will be the additional spillover effect on 2023 on the margins since I guess you have had some hedging gains this year?

And then secondly, on your aspirations of delivering more than 25% -- sorry, more than 20% EBITDA margin in Audio, is this still intact in the current FX environment?

And then just to Gitte, with respect to your European growth and the market -- you mentioned some of them, of course, this is also a larger Amplifon market. So have you had extraordinary deliveries to Amplifon in the quarter?

[Peter La Cour Gormsen, executive]

Martin, it's Peter. So as Rene said, and you're absolutely right, we have a significant FX impact this year. And of course, no one knows how currency is developed, but an assumption could be between 1% and 2% impact next year. And then on the EBITA margin rolling in, it's certainly still our ambition to be in the 20% range.

[Gitte Aabo, executive]

So on Amplifon, Amplifon is an important partner of ours, but -- and therefore, also important business in the second quarter, but nothing out of the extraordinary. There is nothing out of the ordinary was what I meant, sorry about that. So business as usual.

[Martin Parkhøi, analyst]

Okay. Peter, can I just come back to the margin because let's assume that the downgrade to margin is a 2 percentage point driven by FX this year and maybe additional 1% to 2% next year, then it is a major underlying upgrade to your targets if you still believe 20%. Can you try to explain that?

[Peter La Cour Gormsen, executive]

Yes. I think why we remain confident margin is that, of course, there is a lot of leverage in the business, there will be a mix impact when we talked about SteelSeries synergies and the integration efforts we have in that area. We have raised prices, and we have not ruled out that there might be further to come, but we're not saying anything about that. So that's what gives us the confidence.

[René Svendsen-Tune, executive]

If I may address that, I mean, you can also look back and see when volumes were even -- I mean sort of when we are accelerating the volumes, also the leverage was there, and of course, that phenomenon still exists.

[Operator]

Our last question comes from Maja Pataki from Kepler.

[Maja Pataki, analyst]

Very quickly, Gitte, on Hearing, we had all your peers profit were in this week and cut guidance and some of the outlooks are fairly bearish. I wonder why you didn't take the opportunity to make -- give yourself a bit more room to maneuver in what appears to be once again a challenging market? Can you maybe talk a bit about July and August, whether there is something that makes you feel very comfortable about your guidance -- about the lower end of the guidance? Or what has -- what was the reason why you didn't just give yourself a bit more room to breathe?

And then on Audio, can you talk a bit about your video business? What have the trends been there? The huddle room being doing well, the PanaCast 20? Just some color on that would be very helpful.

[Gitte Aabo, executive]

So thank you for that question, Maja. I think the reason why we feel confident of still delivering organic growth above the market, so in the range 5% to 8% is due to our new product launches. I mean we've brought 5 stellar products to the market now, including a completely new platform, ReSound OMNIA.

We also have brought rechargeable custom products, rechargeable BTE. We have new completely in-the-canal hearing aid, if you want a really discrete solution, and then we also have Jabra Enhance Plus and now we can finally launch it under the OTC regulation.

So I really believe we have an extremely strong product lineup that makes us capable of taking market share in the second half of the market. So that's why we keep the guidance as is. We've taken the top of the guidance. And if you're not precise that we will come in on the lower end of the guidance range, and that's obviously to reflect the market conditions. So we obviously also see what our competitors are talking about.

[Maja Pataki, analyst]

Fair point, but in reality, nobody really knows what's going to happen for the rest of the year. Could you maybe, in that context, talk to what kind of tailwind do you expect from the price cut annualization at Costco and maybe a bit on how you think VA will contribute to growth?

[Gitte Aabo, executive]

So obviously, as you alluded to, our comparison on Costco will change in the second half because we lowered our prices last year in June. So we have a different comparison base as we move forward in Costco.

And in general, we obviously also see an impact from our price increases, but that is in the low single-digit that, that impacts. In terms of VA, we will bring our new products and especially ReSound OMNIA and our rechargeable custom products into the channel as of 1st November.

And again, I think we've seen rechargeable custom actually be quite an interesting product category in the channel, and I believe, and so does external review, confirm that we actually have the strongest offering in that form factor. I also think our new product platform with ReSound OMNIA is extremely strong and competitive, both in terms of the product, but also in terms of [ fitting ] software. So therefore, again, I think that will also be relevant for VA, and I feel we'll be in a strong position.

[René Svendsen-Tune, executive]

So Rene here. And on the video side, thanks for that question, we are very happy to talk about that. I think, first of all, we have 2 products in the market, the PanaCast 50, the plug-and-play room device. We have 2 new products in the market. We have PanaCast 20, a very high-end personal camera. And then, of course, we have the Jabra PanaCast, which we have had for a couple of years now.

I think if we start with the PanaCast 50 and the way we have taken that to market, we have actually now proven that we have a very powerful video/audio bar there. We're building software with especially Microsoft, but also Zoom that we have the so-called gallery view that is being marketed extensively by Microsoft, and we are the first ones in the market who can bring that, and we can that because we have a very powerful AI-driven engine in this camera.

So a lot of things are working with that. The problem we have had is, as you know, is that we have had supply challenges more so in the video space than elsewhere. These are easing. We are selling significant volumes through this quarter and more will come out in Q4.

Yesterday, we actually launched a Room Systems Package together with Lenovo, where we bring out our camera there so-called MTR Microsoft Team Room and the necessary control panel in one package from us. And of course, that's something where we are very confident we'll get more impact in the channel.

This is something that is heavily backed by Microsoft with their team's ambitions and so forth. We are investing heavily in the road map. I cannot tell you exactly what's next and so forth, but it's clear that a lot of investments are going this way. This is our strongest upside really that both in terms of being able to ship in sufficient volumes but, of course, also get more products into the market.

But I think our strategy has -- is working very well. Technology is solid. The acquisition of Altia Systems time back was exactly the right one. So it's still early days in terms of market share because of supply. But I think we have everything lined up to actually be increasingly successful month by month and quarter by quarter.

[Maja Pataki, analyst]

Great. Can you just put us maybe a bit more into perspective compared to the overall Enterprise growth like significantly above and just any wording around that? And what about you talked about now the Room Systems. So what about your -- the uptake or the perception of your personal video Panacast 20 I think?

[René Svendsen-Tune, executive]

So -- sorry, I lost the first part of the question. The growth, yes, now I get it. No, I mean it's clear that we are coming from a small market share. The -- it is probably the highest growth space in the whole accessible market for us, and we are out there to take market share.

So of course, not only are we looking into a high-growth market. But also if we do, as we intend to do, it will be the strongest growth driver from a percentage point of view. But of course, the reality is it will take some time before it matches the volumes we get out of our office headsets with where we are absolutely leading the market. And of course, it's a high volume but with a little bit lower growth in the market.

So anticipated to be a strong growth driver and the percentage wise from a small base, higher than anything else. The P20 is a, you can say, it's a market-making exercise. It is very highly rated now camera, we have out there. It gets fantastic reviews, but it will take time for us to break through and get the volumes that you can get in a little bit lower price points.

But we think there is a clear room in the market for a high-end personal camera for many parts of the market, and that's also the feedback we get from customers. Here, we are sort of -- I can't say you -- tell you what we're shipping. But here we are sort of in a little bit better shape. We are actually now able to ship against the market.

[Operator]

That concludes the Q&A session. I will now turn the program back over to our speakers for any additional or closing remarks.

[Henriette Wennicke, executive]

Thank you very much, operator, and thank you, everybody, on the call. So with that, we appreciate your time today, and we will see you on the road. Thank you very much.