GN Store Nord A/S

CSE:GN

Earnings Call Transcript 2018-Q3

[Peter Justesen, Vice President of Investor Relations & Treasury]

Hello, everyone. Welcome to GN's Q3 2018 Conference Call following our release this morning, Danish time, of GN's Q3 report. Thank you all for dialing in. We are very thrilled to be here today and to have you on the call. Participating on the call is Anders Hedegaard, René Svendsen-Tune, Marcus Desimoni, and myself, Peter Justesen from IR. Today's conference call is totally expected to last about an hour. First, we will go through our presentation, which we have uploaded on gn.com. As always, the agenda for today is, as we normally do, Marcus will take us through the financial highlights, and we will then go to Anders, then René and then back to Marcus for confirmation of financial guidance. After the presentation, we will have Q&A, as always. And with that very short introduction, Marcus, I'm very happy to hand over.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Yes. Thank you, Peter. Good morning, everybody on the call. Pleased to have you on the call again for our Q3 2018 results. As you've seen in what we published this morning 7 a.m. Danish time, we have been able to deliver a double-digit organic growth rate, 12% revenue growth. We have been able to increase gross profit also by 12 percentage. We have been able to increase the EBITA margin to 18% on the Store Nord level. And that is all resulting into an EPS increase to DKK 2.25, or 10% in the quarter year-over-year. It's nice to see that the return on invested capital is also improving in both businesses to 23% in total. And with a strong free cash flow generation, we also have been able to drive and to maintain the net debt position of 1.6x leverage. If you take a look into, deeper, the free cash flow generation, then we see that we have had generated a nice level of almost DKK 350 million in the quarter, driven by GN Audio with a cash conversion rate of above 100% again. That is fantastic, in particular, to see that the business is growing. We have had a very good cash-generation ratio in GN Hearing, with 68%. That is an increase of roughly 80% quarter-over-quarter. And on a year-over-year comparison, you have to bear in mind that we had to build up working capital, in particular, inventories and accounts receivables due to the late launch of ReSound LiNX Quattro and Beltone Amaze. And we would expect also going forward into Q4 a higher cash conversion rate in Hearing.That is concluding the Store Nord section. And then I'll just run quickly through the financial details of GN Hearing. On GN Hearing, we have been able to achieve a 6% organic growth in the quarter, same level like prior year with 6%. That makes a very solid foundation for the fourth quarter for us. We have been able to deliver gross margin expansion, driven by the nice launch of our newest products with the higher ASP, but of course also with a higher utilization of the factories. We have been able to increase the profit level in EBITA and maintain the same EBITA level margin. And as I mentioned before also, the return of invested capital is improving towards 19%. Cash conversion was 68%. I feel very good for the quarter due to the fact that we've had the launch activities. And as I said, with the 80% increase on the quarter-over-quarter base, that is also the direction that we would see towards Q4.With this, I'd like to hand over to Anders, who was in charge of the quarter and can give some more light.

[Anders Hedegaard, Former CEO & President of GN Hearing]

Thank you, Marcus, and thank you all for joining the call today. As you all know, I have decided to resign as CEO of GN Hearing and likely making this my last quarter call for GN. Leaving GN has been a difficult decision, but I simply received an offer I couldn't say no to. I've enjoyed very much working for GN. There is never a good time to leave, but this is not a bad time to leave. GN is in great shape, and I'm proud of the results we have delivered in recent years. And we have also experienced a stronger-than-ever team of leaders to take the company further. And I have full confidence that we will be able to deliver on our promises. But let's get back to the third quarter results. On Slide 8, you can see the traditional slide on the geographical performance. And in North America -- and in general, we had a strong quarter all across all segments and all areas, but in the North American parts, we had a very strong quarter in the important independent market, where we have seen a clear and strong growth, actually a double-digit growth in the U.S. independent market. Although you all know that in Veteran Affairs, we're experiencing a headwind. That was, in particular, in the rechargeable category but I can already now say that we are strong going back now in November, and we'll wait and see but we're off for a good start with the VA and with the new product. In Europe, for the third quarter, we also saw a general very nice development, but in particular in France and Spain but also Italy. Those 3 countries used to be the strong countries in Europe, but in general, we were delivering a broad, well-founded growth all over the place. And in the rest of the world, we saw strong growth all over the place basically, but in particular, in China. We've also, in China, recently launched ReSound LiNX 3D, giving us hopes that we can sustain strong development in Asia Pacific going forward.On Slide 9, I will turn into the new product launch that has given a lot of attention to GN over the last few months. The quarter -- the third quarter only delivered 4 weeks of sales of the new product. The new products is basically our sixth generation 2.4 gigahertz technology that represents a significant upgrade, and in particular because we have added a new chipset that has allowed us to bring a brilliant sound experience with what we call Layers of Sound and a new more advanced rechargeable solution.Turning to Slide 10, the new chipset has allowed the highest input dynamic range available in the industry and with extended high-frequency, the sounds are processed in increased detail in all input levels leading to outstanding sound quality where softer sounds are clear and louder sounds are fuller and distortion-free. A very good test of sound quality is with music. As we also showcased at EUHA in October, we've done a blindfolded test where we have asked 10 people to listen to different kind of music through 3 different premium hearing aids. The results of the test is quite impressive. 95% of users preferred the new product compared to other premium hearing aids. This is a real testimony of our new level of sound quality, which is a new kind in the industry. And we're very proud of this product. And it's also, following the feedback we have received in the market, clearly, one of the key advantages of the new product.If you turn to Slide 11, you will also see that in addition to the brilliant sound quality, ReSound LiNX Quattro offers the longest rechargeable battery life available in the industry. With 25% less power consumption when streaming, ReSound LiNX Quattro is the only hearing aid that offers 24 hours of use when streaming 50% of the time and 30 hours if you do not stream. On top of this, there is a quick charge option where you can get almost 3 hours of additional hearing aid usage if you only charge for 10 minutes. No other hearing aid manufacturer can match these numbers, which is also one of the positive feedback we received in the market already.On Slide 12, we have provided some details on the initial launch phase, which as you know, began in the very last day of August in North America. And as of today, the commercial rollout is practically completed with the product being launched in more than 35 countries worldwide, which has been done faster than we ever have seen before. The feedback we have received is simply amazing. I get daily e-mails from our sales team around the world quoting excited dispensers and users about the new product. On Slide 13, we have provided some more additional color to the ReSound LiNX Quattro launch so far. While it is, of course, important to stress that this has only been on the market from the end of October, so it's still early days, but right now, our KPIs are quite encouraging. Let me first go through the first half of -- part of the slide. In the past, when any hearing aid manufacturer has launched a new hearing aid, there has been a fast and substantial cannibalization of previous hearing aids families. This historical cannibalization pattern has been very consistent. And changing this is not easy. But because it is -- because it would be obvious -- obviously very valuable if we just get a small change in that pattern, it is our ambition, with ReSound LiNX Quattro, to change the cannibalization so the ReSound LiNX Quattro comes on top of our sales of ReSound LiNX 3D. On the left part of the graph, on Slide 13, you can see the notable cannibalization of ReSound LiNX2 when we launched ReSound LiNX 3D. It is our ambition and clear expectation that ReSound LiNX Quattro in the new Premium-Plus price point will cause less-than-normal cannibalization and, thereby, might drive incremental business in parallel with ReSound LiNX 3D family. Our early launch tracking seems clearly to indicate that we're able to drive that and change the old pattern. But it's early numbers and time will, of course, show how well we can manage this. But our ambition is clear.And now with regard to the bottom half of the slide. On top of the strong initial unit uptake, we are experiencing a strong global ASP increase on the like-for-like basis. On top of this, we also see a continued price point up-selling driving even better product mix. And we're experiencing that customers accept the new Premium-Plus category and are willing to pay a premium for the superior technology we offer with ReSound LiNX Quattro. All in all, September was very encouraging. That gives us confidence that we are off for a good start with this new product launch.On Slide 14, I would like to give an update on our remote fine-tuning feature. When we introduced the remote fine-tuning as an industry first around 1 or 1.5 year back, we wanted to drive adoption, which quickly reached 50% of all point-of-sales. Initial focus was on efficiency gain, but now it has turned into a care tool, where users experience an even better sound experience when combining a first fit with a high level of user empowerment and fine-tunings along the way. The data we received from the large amount of fine-tunings being performed goes directly into our cloud-based database and, thereby, into our product development knowledge and gathering all the nice data we can get. User empowerment, as a topic, will be even more important going forward, among others, in the new OTC regulations when that comes through. We have the most comprehensive and flexible remote fine-tuning software in the industry. It is up to the dispenser and the end-user to determine how they want to use the software, either as a live interaction between the user and the dispenser or with the user taking advantage of our app. Our solutions allows for all types of communications, whatever the most relevant for the dispenser and the user.And with that, I would like to hand over to René for an update of the continued strong performance in Audio.

[René Svendsen-Tune]

Thank you, Anders, and thank you all again for dialing in to our call here today. So it's now my pleasure to take you through the GN Audio result of the third quarter of this year. So if you go to Slide 16. In Q3, we continued our strong performance, with 20% organic growth in the quarter and this was driven by exceptional performance across both our CC&O and consumer businesses. Revenue reported growth was 22%, including 1% positive impact from foreign exchange and M&A, respectively. Gross margin decreased by 0.7 percentage points in the quarter, and this was driven by product mix in the quarter with strong growth from both of the consumer and office segments. EBITA increased by 25%, reflecting the revenue growth and continued strong focus on operational expenses. Consequently, the EBITA margin increased by 0.5 percentage points compared to Q3 of 2017. And the free cash flow continues to be very strong, 101 percentage points in the quarter. So if you go to Slide 17, where we dig a bit deeper into the development in the CC&O division. And in Q3 2018, the CC&O business continued to deliver strong organic growth across all 3 regions, and we have again strengthened our position in the CC&O market. In North America, we continued to deliver strong organic growth based on our strong product portfolio and our commercial excellence initiatives, like was the case in the last quarter and the quarter before. In Europe, we saw again very strong organic growth during the quarter and we have strengthened our position throughout most countries, including important Germany and the U.K. And in a similar way, in our rest of world region, we delivered strong organic growth, and the growth was well-balanced across countries in the region but it's worth here mentioning Singapore and Australia, New Zealand countries.Moving to Slide 18, I would like to spend a few minutes on the market and our current focus. This slide is similar to the slide we showed to some of you at the Capital Market Day late 2016. However, it has been updated in certain spots. So let's start with what we named the call-centric part of the headset market. This is for people making calls for a living. This is still the largest segment in the market. We are currently #2 in the world, and we have significantly strengthened our position in this part of the market with the introduction earlier this year of the Jabra Engage family. Next is the office business segment. We call it here task-based. We are the market leader, driven by our very successful Jabra Evolve portfolio. The office market, in our opinion, is still in a fairly early adoption phase enabled by Unified Communications. And we expect this market to increase solidly in the years to come. And finally, we have the consumer segment, a very fragmented market in which we have a small market share. However, if we slice this market a bit and look at the true wireless part, we are currently #3 player in the world, #3 in North America, #3 in Europe and #4 in Asia Pacific. This segment is the fastest-growing part of the consumer headset market just now. I want to remind us also that our consumer business includes the mono Bluetooth products. These products target a market segment in quite rapid decline. However, with the rapid growth in other parts of our consumer business, our relative exposure to the mono Bluetooth market has decreased significantly. And as of Q3, the Jabra Elite family, launched earlier this year, accounts for a majority of the revenue in our consumer business. So all in all, we believe we are exposed to healthy growing markets across our business areas. And in the years to come, we expect that our addressable market would grow with high single-digit numbers.On Slide 19, we have tried to illustrate the evolving requirements in the UC and office market for headsets. Over time, we have seen a growing demand for a variety of form factors supporting the changing needs for our users. We see increasing demand for UC products that allow for high mobility. We see demand from people who work under changing noise environments and we see demand for products that allow for spontaneous use. You will see from the slide that in response to this, we can offer a range of form factors and price points to allow for enterprise, be they small or large, to offer their employees the most attractive and effective solutions. And if you can stay highly relevant this way, we see good opportunity for expanding the market and taking more share of the market.Following this, if you go to Slide 20, we highlight one of these new product categories. With the announcement of the Jabra Evolve 65t, we have launched now the world's first Skype for Business-certified true wireless earbuds for professional users. As I have mentioned, this form factor is the fastest growing in the consumer space as of today. And by bringing it into the professional segment, we can offer professional users best of breed. On our side, at the same time, we can enable a broader leverage of our investments into innovation. The product itself includes strong battery capabilities, and it's based on our third generation of true wireless technology. And in summary, this is a proven concept now targeting professional users as well.And moving to Slide 21, let me talk about something a little bit different and spend a few minutes on our recently announced partnership with Red Bull. Two years ago, Red Bull and Jabra teamed up with the purpose of developing a microphone that could work in very extreme situations. As we know, Red Bull is taking extreme to a new and different level with their efforts in documenting extreme sports. To fully understand the sound picture in these situations, they've earlier lacked a truly reliable wireless system that could record extreme sports so people and their actions, say, whether you are rolling down a mountain on a mountain bike or you're in a race car, you can record these more vibrant and dynamic sound pictures that are created with these exercises. We're very proud to partner with Red Bull in this space, and we take it as another testimony to our leading innovation capabilities and our sound processing capabilities. This partnership has already given us a lot of new knowledge within extreme sound environment, something we can use going forward in our product development, targeting, however, less extreme environments. So with that, I would like to hand back to Marcus for an update on our financial guidance.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Yes. Thank you, René. That is, as you said, bringing us to the last slide of the financial guidance. We have been able to confirm for GN Audio, GN Hearing and GN Store Nord the guidance. In particular, on GN Hearing, I would like to mention that with the current quarter of 6% organic growth, we have a very solid foundation to see the guidance that we can make in the fourth quarter and for the fiscal year. We have a very strong pick-up with ReSound LiNX Quattro in the market. And we also think that the strong momentum in the fourth quarter will be supported by a reversal of the VA, what we have seen in the first days of launching our newest product over there. And with this, I hand over to Peter so that we can run the Q&A, please.

[Peter Justesen, Vice President of Investor Relations & Treasury]

Thanks, Marcus, Anders, René. With that, Q&A. And back to you, operator, for the queue.

[Operator]

[Operator Instructions] And the first question is from Michael Jungling from Morgan Stanley.

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

I would like to ask 3 questions. Firstly, on Hearing. For the fourth quarter, the implied organic sales growth that you need is a significant acceleration. Is the run rate that you are seeing currently already at that rate? Or do you need to see a further acceleration in organic growth for the rest of the fourth quarter? Question number 2 is on the fiscal year 2019 EBIT margin. Can you confirm that the foreign exchange benefit for the top line will have a negative impact on your 2019 margins as a result of your hedging contracts? And question number 3 is on Audio. For gross margin, I'm not sure I fully understood the drivers of negative mix. Could you perhaps provide some clarity on what precisely is happening in the product portfolio that is driving the negative mix? And as far as I understood, the classical Bluetooth headset that was virtually not profitable is no longer a real driver for that negative mix.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Michael, it's me, Marcus. Thanks for your questions. So first question on Q4 2018, Hearing. Yes, we're going to have to see a pick-up in Q4 over Q3. Mathematically, we need to make roughly 8%, and we're on very well track to make this number so that we can make the full year guidance. And the momentum, I don't want to go into monthly slice or other slices. But the momentum, of course, as we hinted, is coming from ReSound LiNX Quattro, Beltone Amaze, the product that we have launched in September that was a nice, very nice driver in September and we see this momentum continuing into the quarter. So that's why I can say I'm very confident that we make the guidance for Q4 in Hearing. In regards to your fiscal '19 FX question, well normally, we are looking on 2 parameters. One is, of course, that we're rolling the FX contracts 12 to 15 months so that we always have a minimum hedge at least 75% going forward. Secondly, we're going to measure this always against our budget. As we have not finalized, not confirmed with the board our budget, the question is what is the benchmark. But if you look purely on year-over-year, yes, with the current FX ratios, we would expect a headwind and not a tailwind next year from FX translation.

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

Great. And then the question on Audio, please.

[René Svendsen-Tune]

Yes. So René here. So thanks for that question. So on the gross margin, it's driven by 3 different components. One is the regional mix, one is the mix in the professional segment and one is the mix between professional and consumer segment. The reality is that the consumer products, also the next generation, have lower margins than our professional products. So with the, you can say for this quarter, the main driver is, you can say, normalizing between our professional and the consumer business. The consumer business is no longer declining, so that has a majority of this slight drop in GN. And then there is some country and product mix inside the professional part as well but that's more of a, you can say, a random timing matter.

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

Okay. And if I look at the regional mix, given that your sort of organic growth for Audio has been pretty stable throughout the previous 3 quarters, which country or which countries in the third quarter drove the negative mix? Because Q3 is the first quarter we've actually seen a gross margin contraction in Audio.

[René Svendsen-Tune]

I think the -- back to -- I think back to my -- what I just said here is that the dominant part of this is the normalizing of the consumer business in the sense that it is no longer sort of detracting the top line but, of course, adding to margin mix. Inside the professional side, I think we have called out here that Europe is growing faster but that has no negative impact on margins. On the consumer side, North America is very strong, and that has as well impact on margins.

[Operator]

Next question is from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 3, please. Starting with Audio, I'm just curious to see that the guidance is still at 16% to 19%, given that you've delivered 19% organic revenue growth at this stage. So if you can comment on what are some of the headwinds that you are anticipating as we move into the fourth quarter, that would be helpful if there are any. My second question is also on Audio, and just thinking beyond 2018 and more looking at 2019, René, I wonder if you can comment a little bit on the sustainability of the -- current run rate that you see in the business, both on the consumer and the professional side. And given the recovery in consumer, how one should be thinking about margins when it comes to 2019. And my last question is on Hearing, the Cochlear partnership markets, Anders, can you discuss what that means for you?

[René Svendsen-Tune]

So René here. We understand the question. I mean, it's -- the reality, of course, is that with the first 3 quarters performance, we're at the top end of the guidance for the full year. We have the biggest quarter in hand right now. We don't see any sort of major headwinds out there. I think it's realistic to believe that we'll be at the upper half of the guidance we have provided, but that hasn't triggered us to change the guidance. So we think we have a healthy guidance out there and -- but it's looking good. So I think with that, for 2019, I don't have much to say. We'll give our guidance for 2019 next year. But I just spoke to the market. I think we see as, across the board, we are looking into a market with a growth of up to, I mean, high single-digit numbers, a little bit dependent on the mix. We have a strong portfolio out there. I think the commercial machinery is executing very well. And of course, we think we have a pipeline of stuff coming. So we should have a chance of doing well also in -- very well, actually, in 2019. But I think from a real guidance point of view, we need to wait.

[Anders Hedegaard, Former CEO & President of GN Hearing]

And Veronika, to your question on Cochlear, we are actually very happy and very pleased with the relationship with Cochlear. It has taken -- we've basically taken that to a new level. As you know, several years ago, we started the technology relationship with Cochlear. And that was then in 2015 extended -- or '16 extended to a partnership on the commercial angle. And that has allowed us to establish a much stronger foothold in the super power segment and, to some extent, the pediatric as well and really delivered on its promise since we launched that. That has increased the appetite for getting an even tighter collaboration. And with our technology steps and with our sixth generation of 2.4-gigahertz technology, it has been pretty clear that if we extend and broaden that technology relationship with Cochlear, we could bring even more value to the 2 parts. So it is, to a large extent, technology what it's about, but it's also to make an even stronger commercial relationship. Still remaining 2 strong independent focused companies but collaborating where we can benefit. So this is -- there's a technology arm which clearly will be strengthened to the benefit of both parts and there is a commercial part that will secure that we take advantage of the strong position both companies have. And over the last few years, it has brought us in the super power from an almost nonexisting player with a market share far below 5%, up to a market share in that segment now that is comparable with our global market share. We're very proud of that. And we want to take that even further, knowing that Cochlear is the absolute leader in implants yesterday, today and also tomorrow. So we have selected the right partner, and we're happy for that. I hope that describes what we're doing.

[Veronika Dubajova, Equity Analyst]

And in terms of the P&L impact, would you expect this to drive a change in the shape of the P&L or in the revenue base that you're consolidating?

[Anders Hedegaard, Former CEO & President of GN Hearing]

We're not going into further guidance on those specifics, but this is something that will strengthen. It will remain having the 2 companies being focused on what we're good at and really strengthen the whole strategy of GN, where we are doing what we're good at and we leave the rest to others. And -- but what it has of direct financial impact, we're not going into in our guidance.

[Operator]

Next question is from the line of Christian Ryom from Nordea Markets.

[Christian Sørup Ryom, Senior Analyst]

This is Christian Ryom from Nordea. I have 3 questions. My first question is to the Audio business and also trying to take it a little bit more of a stab at the outlook for '19 because when I look at your presentation today, on Page #18, you quote that you expect the relevant market for audio to be growing at close to 10%, and I would assume that you also expect to continue to gain market share. So would that not lead us to expect a growth rate of above 10% also for next year? And then my second question is to the quarter, also to GN Audio, there's a quite significant dip in the G&A costs here in Q3. What is the explanation behind that? And my third question is to Hearing and the gross margin development that we're seeing there. The expansion that we are seeing year-over-year, is that the increased sales to U.S. independents that's driving that? And how is increased sales in the APAC and the emerging markets region impacting your gross margin?

[René Svendsen-Tune]

So René here. So I mean, we have no guidance for next year. But the reality is that we are operating in a market, as I said, with close to 10% or high single-digit growth. We are positioned well, and we see a good chance of further good development in this business. But I don't have a guidance. But of course, the reality is also that it's not only about the percentage, it's also about the absolute numbers. The base has gone up significantly, and that, of course, will matter for the percentage, the relative growth we can achieve. But it looks good. We are well positioned. The momentum is strong. And we'll do everything we can to sustain that into next year. But there is an absolute and a relative matter, of course, that plays in here and the market. And on the G&A, yes, it is a little bit low here. It was -- this is a timing matter. We had some legal costs and a few other things last year that played in, and some timings have shifted back and forth this year. So there's no anomaly here that we should take into account.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Hey, Christian. It's me, Marcus. Regarding to the gross margin of GN Hearing, where we've had a nicely uptick in the third quarter, that is due to the fact, as I tried to elaborate, on nice utilization of the factories, and then therefore you can generate scale effects and have positive variances over there. So in regards to the mix effect from the markets, what normally everyone would always quote, we have seen a relatively stable momentum in Q3. Of course, we have, with the higher ASP from ReSound LiNX Quattro, a nice pick-up. But then at the same time, you also have had a very strong momentum in terms of revenue growth in distributor sales in Asia, in particular China that has normally a little bit of lower gross margin. And then, of course, as you mentioned already, the strong independents in the U.S. So all this mix is for me plus/minus in the quarter. And the momentum came really from the utilization from the factories.

[Operator]

Next question is from Carsten Lønborg Madsen from SEB.

[Carsten Lønborg Madsen, Research Analyst]

First, a question for René. So by October, you have launched these 2 new Jabra headsets, the Evolve 65t and Engage 50. Both of them sound very appealing, but how do you actually characterize those from a growth perspective for the coming quarter? I think the Engage 50, it sounds like a product you have been needing in the call center for quite some time, so do you expect an additional impact from this one? And also from a margin perspective, I'm curious to hear a little bit about Evolve 65t because it sounds a little bit like Audio, in general, is being pressured by the Elite 65t production economy. I don't know whether you can confirm this or not. And then finally, on Hearing, FalCom, do you expect anything from this franchise in 2018?

[René Svendsen-Tune]

So René here. So well, on the 2 new products, I think they have different nature. The Engage 50 is a new, you can say, profile of a product but, to some extent, they are replacing older products that are in our portfolio. But of course, supposed to make us more competitive in the space. And it is a route into a more digital environment that we are preparing for. On the 65t -- Evolve 65t, obviously, this is now, you can say, it's not a test because, of course, we have researched this, but product just launched. We don't have any commercial experience so we have to see how this plays in the professional segment. And you're right in the sense that there is some penetration into the professional segment from these true wireless products. You're right also that the 65t is a consumer product with consumer margins. And of course, if this is doing very, very well, then it has a certain effect on our gross margins. And that's what I spoke to earlier, is this tweak is mainly driven via this product. You're right on.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Hey, Carsten. It's me, Marcus. Regarding FalCom, unfortunately, we will not see any revenues in 2018. As we previously mentioned in one of the calls that there are 2 U.S. tenders that we are looking forward. One, we have not been in and the other one was pushed out into 2019. So all we have done was placing some test units, and the product is received very well. But we will not see any revenues in the fourth quarter.

[René Svendsen-Tune]

Maybe just -- René here, just to clarify this 65 point. When it comes to the enterprise, it is a different price point and a different product, so in that sense it has a margin level [ that fits just perfect. ] Just to make that clear. So we are not...

[Operator]

Our next question is from the line of Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Martin Parkhøi at Danske Bank. Just a first question on Hearing. Just, Marcus, with respect that you feel quite confident that the growth will increase in the fourth quarter to around 8% organic growth, how much will that be driven by the fact that you're now selling a rechargeable version, which we know carries prices which are substantially higher than products with the disposable batteries? How much do you actually think that will increase your ASP in the fourth quarter and, in that way, drive organic growth? And on the same notion is that, how much pressure could that actually put on your margins in the fourth quarter, assuming that there could be higher sales on the rechargeable but potentially lower margins? Then secondly, on GN Audio business, just to understand again, coming back to the mix because you can see, René, in the slide presentation for this quarter and Q2, you have taken down the tone a bit on the organic growth statements in all 3 regions. And now you're mentioning the split between 80% and 20%, 80% and 20% for consumer and business. How do you think that will develop going into next year? Will we see faster growth in consumer? Will that impact margin? And in that context also, you've invested a lot of your organic growth this year in the business. Should we expect you to tone that down in '19? Or should we expect to continue to see significant investments?

[Anders Hedegaard, Former CEO & President of GN Hearing]

Marcus, you go first.

[René Svendsen-Tune]

Okay. So René here, should we take the -- I think I lost the first question, actually, sorry. So the -- sorry, what was your first -- question number one?

[Martin Parkhøi, Senior Equity Analyst]

The first question is that in your Q2 statement, you stated solid organic growth in North America in Q3 and Q2, a solid double-digit organic growth in all 3 regions in CC&O. You've taken down the wording being less positive than it was in the second quarter, so that...

[René Svendsen-Tune]

I get it. There's no intention. I think we're getting used to it, so let's make sure we somehow reiterate with the right wording. I mean, we are out here with 20% organic growth for the total unit and 22% reported, so it's very strong. As regard the mix between consumer and professional, I think the 80-20 was under pressure because the consumer business was going down and, therefore of course, relatively the enterprise business was going up. I think this is a good mix. This should give us enough that we can be very relevant on the consumer side. It's enough that we can drive common platforms and innovation across the 2. And it is solid enough on the enterprise side that we can sustain the profile we have. So this is, you can say, the -- it's a good mix for me. Can we quarter-by-quarter sustain it exactly like that? We don't know. But it's not the ambition that we would now start outgrowing our professional business with consumer products. That's not where we intend to go. And I mean, it's -- even with a 20% -- if you just look at the numbers, with a 20% growth and 20% of that being consumer, you would have had to have hyper, hyper growth on the consumer side to deliver that if we had a problem on the other side.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Martin, in regards to the question on Hearing for Q4, so yes the rechargeable version of ReSound LiNX Quattro and Beltone Amaze, we clearly see a pick-up in revenue due to the fact that it's a fantastic product in terms of sound quality, the feeling around it as well as from the rechargeability feature set where we are best-in-class, I believe, in the market. So this is where we see clearly a strong revenue pick-up, and that is driving something into this market for us as well as top line. How much is it percentage-wise? I don't want to go into that. Of course, it's also depending a little bit what else is coming in. you would clearly see that, that is a driver for us in Q4 for the revenue as well as for the organic growth rate. On top of that, it's not only the product, it's also the access then to different customers, markets and channels. And we would expect, as I mentioned before, a reversal in the VA that will help us but we will also see a broader pick-up in the key accounts that will help us. But then if you see different channels and different customer groups coming in, that should be then also offsetting partly the top of the ASP. But then I see an impact in the ASP from the mix from the different channels. And therefore, yes, I would see the growth rate coming up from the rechargeability of products but not necessarily then the ASP. In terms of cannibalization, was also part of your question, we have not seen it or experienced it yet. But of course, at one point of time, that will smoothen in as people also will go further into that category and think instead of a ReSound LiNX 3D, buying a ReSound LiNX Quattro. But I would not expect it or I have not seen it in the first 2 months. That comes a little bit later in the stage.

[Martin Parkhøi, Senior Equity Analyst]

Two questions. On average, if we look at the U.S. market, on average, what are the selling price difference between LiNX Quattro rechargeable and LiNX Quattro disposable to understand the price difference and the impact on ASP. And the second question, the chart that you show on the presentation, whether you expect less cannibalization or maybe even expansion, is this based on volume or based on value?

[Anders Hedegaard, Former CEO & President of GN Hearing]

The graph that we have shown is based on volume, so clearly. And at the same time, you can also say in the first months of the launch, it should be 1:1 also to value. So the cannibalization is not really there because we place it on top. And that goes back to your first question, yes, you have a list price where you're increasing it, of course, but then you have also contractual agreements that you'll not always be able to enforce it. And I just would like to leave it, our price strategy, with this comment.

[Martin Parkhøi, Senior Equity Analyst]

But if you look at VA, you can see that one of your competitors from Denmark, their ASP is up, on average, 13% since April just because they've entered the rechargeable class. So I guess that you will also see a similar impact?

[Anders Hedegaard, Former CEO & President of GN Hearing]

Well, we are not blind and, of course, we learn from good customers and good competitors as well.

[Operator]

Next question is from the line of Lisa Clive from Bernstein.

[Elisabeth Decou Bedell Clive, Senior Analyst]

Three questions. First, given the Quattro Premium-Plus launch, you clearly are quite bullish on the potential for customers to pay up for higher-end technology, but how much higher do you think ASPs can go across the industry? It's been pretty remarkable watching how much mix has improved across all the players in the last 2 years. I think, in particular, your largest Danish competitor has gone from a long-term ASP trend of negative 4 to plus 8 in H1, driven largely by product and rechargeable has been quite helpful. So how much runway is left here? And then second question, somewhat related. Given that you have a very diversified customer base split between independents and large chains, is there a difference in your ability to drive mix in those different channels? And then the third question, a follow-up on FalCom. Are there other opportunities outside of the U.S. tender process? I think you had originally mentioned you would also target other NATO countries, but I guess that will be a secondary priority, perhaps 2020 and beyond. And can you just remind us as and when those -- the FalCom business does start selling units, this does come within the GN Hearing business, correct?

[Anders Hedegaard, Former CEO & President of GN Hearing]

Yes, Lisa, it's Anders answering your questions. I'll try to walk through. And part of the final questions with where the business goes, I will leave to Marcus. But on pricing, I think that there is one distinctive difference in how we have been driving pricing compared to competition. In all our product launches over the last 4 to 5 years, we have added premium prices to new product launches. So on a like-to-like product, we have increased pricing on every launch. On top of that, you get product mix improvements. And that's what we have seen with competitors, more driving product mix improvement rather than like-to-like pricing. When we did our market research for ReSound LiNX Quattro, we clearly saw that if you can add on product feature benefits that are significant, and here I'm really talking about significant, and that was the case in the way customers perceived ReSound LiNX Quattro, you have room for better pricing. And that was why we took the stand of bringing in a Premium-Plus. This was new for us because we're adding it on and we're adding it on an otherwise high-priced product. So will there be more room? It's clearly our strategy to reflect the premium benefits in pricing as well. So going forward -- this is likely our strategy going forward, but I will leave that to the rest of the team, but I think it's very much into our DNA to make sure that product features' benefits are reflected in our pricing policy. When you come with new products, you drive product mix, and that's what you've seen with competitors. I think that has been also historically what we have shown. When it comes to the channel mix discussion, we have seen basically in all our channels that we can drive upwards mix in our channels. And of course, there are certain channels where they are, by nature, going down in lower-priced segments. But in the bulk of our channels, we have actually seen that we can drive an ASP upward going trend in our mix. Down to the FalCom. The -- so one of the tenders, in particular, has been somewhat delayed, but we have supplied products for testing and all those testings are going very well. This is by the case also the biggest and most important of the tenders, and we will, of course, have to wait and see when that go through and whether we play a role in that tender. We are, on top of that, meeting customers in a number of other military units, in particular in U.S. but also abroad, and we get very positive traction to the products, to the FalCom product. It's too early for us to specify. What is very important in this segment is you need to get a proven track record. We have a proven track record of supplying to U.S. and supplying high-quality headsets and hearing aids, but we have no proven track record in supplying to the military. So getting into one of the tenders that is open now is very, very important for us. And for that reason, we're very happy and proud that we have passed through the initial test and we are in the run for getting a stand. When we get that, it is likely that we can expand from that position. So the strategy remain as it has been. We see positive traction and that's where we are now. But of course, with tenders, there's always a risk that you drop out.

[Elisabeth Decou Bedell Clive, Senior Analyst]

Okay. And then just in terms of reporting, it is within GN Hearing, is that correct?

[Anders Hedegaard, Former CEO & President of GN Hearing]

Lisa, yes, it's within GN Hearing.

[Operator]

Next question is from the line of Ian Douglas-Pennant from UBS.

[Ian Douglas-Pennant]

The first is on the new Hearing CEO. Could you give us an idea of the criteria that you're looking at there and also time lines, please? And secondly, could you talk about emerging markets, and China in particular? It feels like we're at something of an inflection point here with growth rates picking up. Obviously, we've had some news from Amplifon recently. I mean, maybe if you can just talk about whether your strategy in your markets, and especially China, is shifting?

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Ian, it's me, Marcus. Look, the CEO is a question to the board and the board is running a professional process. And that's all I can say to this and I want to say to that. Thanks.

[Anders Hedegaard, Former CEO & President of GN Hearing]

Ian, when it comes to China, we have had actually, for now, 2 to 3 years had a pretty positive development in China. I've said it before but we, back in 2015, changed our General Manager out there and we have subsequently changed the entire management team, changing also our strategy to more and more go towards the private market in China. That has shown to be actually very, very positive for us. We are growing in China far beyond the overall growth of the Chinese market. And we're also growing in the Chinese market, all in all, at lower ASPs but we are grabbing share in the higher ASP part of the market. And last year, we also announced the broad partnership with EarWay that is clearly also delivering on its promise. The launch of our new products always take longer time in China. And we've been waiting for a while until we got ReSound LiNX 3D approved. We got that recently and we've launched the product, and we have, of course, high expectations. And as we said, China is delivering strong double-digit growth once again and so it's looking pretty good. I hope that answered your question. Otherwise, come back.

[Operator]

Next question is from the line of Yi-Dan Wang from Deutsche Bank.

[Yi-Dan Wang]

I have 4 questions. The first question is on the headset business. You've done incredibly well in that business. Can you comment on the action of your key competitors and how that has changed in response to your successes, both in terms of the product portfolio and in terms of whether you're on distribution? And then secondly, just on the overall outlook for the headset market, what you are seeing from the Microsoft Team launch, whether that's causing some delays in deployment that would be similar to what we saw when they last had a major software launch in the space. And then thirdly, can you comment on how synergies between the audio business and hearing aids have changed and how that would change going forward? And then lastly, on the hearing aid business. If China and U.S. are doing incredibly well, you must be doing -- or there must be other regions where there need to be significant improvement. So if you could comment on the regional dynamics, that would be great.

[René Svendsen-Tune]

Thanks for these questions. René here. So first, on the -- on competition. I think I cannot say too much about competition. We know that Plantronics and Polycom has -- have come together. They are bigger companies than us. Of course, we are trying to do what we can to plan around as they are finding their ways forward. I think the thing that has evolved for us now is that while a time back we were a challenger of the industry leaders here, in many respects, we are now setting the scene and we are able to somehow drive direction ourselves here around expanding the market and try market making in the -- especially in the UC user domain. So for us, that goes also for the channel. We are trying to make our own route to the market, and that has proven successful. And we see, of course, in some extent that competition is trying to match us in that segment. So you can say the steps we have taken are sort of, we try to behave as a market leader, and in that sense, not necessarily respond to competition but to set our own agenda. On the outlook and Teams, at least, we have not seen -- I've heard these rumors also, but we have not seen any effect at this point of time from the transition to Teams. We think that's a good opportunity for us. And that's a lot of stuff that you can innovate around. And we see this as a -- I mean, growth and price stability takes innovation and there's innovation out there we can play into and that, we think, this is a good movement for us. But sort of any immediate slowdown, we haven't seen it at least.On the synergies, I mean, we have talked about it earlier. I think that we have these technology synergies we are playing today. I mean, it comes down to antenna black magic. It can be miniaturization efforts and so forth. As we go forward, I'm sure we will find other areas where we can collaborate, mainly on the technology side. Whereas, you can say right now, at this point of time, with the business models, the 2 machineries we have, we are quite different in our go-to-market and market-making approaches and so forth. But there are synergies on the technology side. And then of course, on the G&A side when it comes to IT and IT development and so forth, of course, we see opportunities there as well.

[Anders Hedegaard, Former CEO & President of GN Hearing]

In regards to the Hearing growth rate, yes, as we mentioned, that China was extremely strong and the U.S. independents have been extremely strong. And mathematically, something must not be so strong, and that was the VA and the whole basket of the key accounts together who have not been participating in the growth of our overall numbers.

[Yi-Dan Wang]

Okay. If I could add a follow-on for the headset business, would you say the distance between or the gap between you and your competitors are widening? Or would you say they're relatively stable, based on the gaps that you've established so far?

[René Svendsen-Tune]

I mean, if you look at the growth rates, of course that are out there, it's clear we have been outgrowing competition with different rates at different quarters. Market is good right now, but we are still outgrowing competition significantly, if you are on a sort of like-for-like. Of course, it's clear that if you look at the new entity with the main competitor, they have more categories than we have. And in that sense, you can say our performance is relatively stronger but that takes into account more categories. I think like-for-like, we are still outgrowing competition significantly and we'll try to do that also going forward.

[Yi-Dan Wang]

When you say more categories, you mean more headset categories or more other nonheadset type of categories?

[René Svendsen-Tune]

Nonheadset categories.

[Operator]

And next question is from Craig McDowell from JPMorgan.

[Craig Mcdowell, Analyst]

Just one for me, please. Could you quantify the currency impact to group EBITA margin year-to-date and specifically in this quarter, Q3? And how should we think about that in Q4 and going forward?

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

It's me, Marcus. Straightforward question. In Q3, we've had headwind from the FX translation, it was roughly 1 percentage point in Hearing, and it was slightly, a bit slightly negative in Audio. And in Q4 -- in Q4, it will be a little bit more headwind in Audio, but it's still in the decimals. And in Hearing, it's roughly also 1 percentage point.

[Operator]

Next question is from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

First of all, on Hearing, please. You mentioned that you've seen a strong ASP development, which is great news after Q2. Could you give us a bit more color? Is the ASP development linked to the launch of Quattro, which would then be basically in the second half of the quarter? If you say strong ASP increase, shall we think about it as adding more than 1 percentage point to growth? And for Q4, would you expect the ASP contribution to total growth to increase on Q3? Whether that makes sense. And the second question is for Audio. Thanks for providing the market data and also the rough split. But René, could you just give us an indication, has mobile been growing single digit or has it actually entered double-digit growth? Just to get a bit of a feeling of how we think about the growth differential between the 2 businesses.

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Yes. In regards to ASP, yes, Quattro has been providing an uptick in the ASP and this is why the overall ASP for hearing in Q3 came up. And that is, of course, helping and driving. Secondly, it's also the mix effect in Q3. As I mentioned that, in particular, the U.S. independents have been growing very nicely with double digit. Going into Q4, I would expect that ReSound LiNX Quattro and Beltone Amaze is helping in terms of the overall ASP to support. However, then we have the mix effect and we would expect that the key accounts are coming back in Q4, which has a different ASP, and therefore then, that is impacting the overall ASP. Like-for-like, you would see an uptick.

[René Svendsen-Tune]

And René here. To the question on the consumer growth, we haven't -- we are not giving details on growth rates. But they are double digits, and I would say they're comparable to what the growth rate we see on the enterprise right now.

[Maja Pataki, Head of Med Tech Devices Sector]

That's great. Marcus, just to double check. I mean, when you talk about strong ASP increase of contribution, is that more than 1%?

[Marcus Desimoni, CFO & Interim CEO of GN Hearing]

Yes.

[Operator]

Next question is from Oliver Metzger from Commerzbank.

[Oliver Metzger, Analyst]

Yes. Three questions from my side. The first one is on Hearing. Could you comment on the magnitude of EBIT from Nord's sales to the bigger private distribution channels compared to previous quarters? My second question is on GN Audio. You mentioned also some cost savings and operating expenses that had hit the margin expansion. Could you give us more detail about the magnitude of those savings as a percentage of sales? And my third question is also on GN Audio. So 2 years after the acquisition of VXi, can you comment on the underlying performance of VXi in general and also in detail how the international expansion performed?

[Anders Hedegaard, Former CEO & President of GN Hearing]

Yes, let me take -- it's Anders here. Let me try to see whether I can try to answer your question on the growth, what you said -- and I'm not 100% sure I got your question. But we have seen a strong growth all over the year in the commercial markets all over the place in U.S. and other countries. That is part of our strategy where we have invested in commercial excellence, more salespeople, more focused sales calls and a much more strengthened approach to the independent market. We have previously, this year, communicated that we saw a lower growth with some of our larger accounts where we historically had high growth. And the larger accounts were driving the growth of GN in the past, and we have seen a switch of that. Q3 is the same, but we do see some of the larger account delivering better growth. But the bulk of our growth is coming from the independent market in U.S. and abroad, all over the place basically. I hope that answered it, otherwise, you have to come back.

[René Svendsen-Tune]

René here. I apologize if I somehow didn't express myself well. So I was not trying to talk about cost savings. We are investing in products. We're investing in market and market-making, et cetera. What I try to say is that while we see this very strong growth, we still have a very prudent and focused view to cost. And in that sense, we can drive operational leverage. We have, earlier in this call, talked about the fact that we have reserved the right to make investments to drive growth and, therefore, have not indicated an increase in the margin, EBITA margin level. We saw a good leverage in the quarter here. We were able to drive that. But of course, we still have that view that, can we spend extra to drive growth? We do that, but it's an ever balance. On VXi, VXi is fully integrated as an entity with 2 product lines. The VXi call center headsets, which is a smaller business, now operating inside our call-centric machinery. And then the BlueParrott transport and logistic headsets, this business is growing very nicely and in line with the rest and has been a very solid contribution to the overall business line and well above, you can say, the expectations on the business case we created 2 years back when we acquired this company.

[Operator]

And today's final question is a follow-up from Yi-Dan Wang from Deutsche Bank.

[Yi-Dan Wang]

Just a quick one. Very interested to hear about -- you mentioned that you actually don't compete in all of the headset categories. So are you able to give us some sense of what proportion of the headset market that you do compete in and whether it makes sense for you to fill those gaps? And if so, the time line for that.

[René Svendsen-Tune]

René here. So I mean, in the professional space, which is our main business, we're competing in all segments. Where we are not competing today is mainly in the gaming space, where we have not engaged at this point of time. We have no immediate plans. I know you can say if we would go there, it likely would be through an acquisition and that would happen when it happens. So we have no direction to give on whether we will enter gaming headsets or not and if we ever would, at what time it would be. But that's, you can say, the most prominent space where we are not operating today. Where we are increasingly operating is in the space of sort of specialized headset for logistic purposes, transport, warehousing and all that. And that is a segment we can cover with our BlueParrott investment and we're increasingly doing that.

[Operator]

And that was our final question for today. So I'll hand the call back to the speakers for any closing comments. Please go ahead.

[Peter Justesen, Vice President of Investor Relations & Treasury]

Perfect. Thank you, everybody on the call. Thank you for very good questions, and thank you again Anders, Marcus and René for the call today. See you on the road. Bye.