GN Store Nord A/S

CSE:GN

Earnings Call Transcript 2020-Q3

[Morten Toft; Vice President of Investor Relations & Treasury]

Hello. Welcome all to GN's Q3 2020 Conference Call following our release this morning, Danish Time. Thank you all for dialing in. It's great to have you on the call. Participating on the call is: Gitte Aabo, CEO of GN Hearing; RenESvendsen-Tune, CEO of GN Audio; Marcus Desimoni, CFO of GN Store Nord; Peter Gormsen, CFO of GN Audio; and myself, Morten Toft, Head of IR and Treasury. Today's conference call is expected to last about an hour, where we will go through the presentation uploaded on our website, gn.com. The agenda for the presentation itself is that Marcus will start off with financial highlights, then Gitte will provide an update on GN Hearing. RenEwill then provide an update on GN Audio, after which we go back to Marcus for our financial guidance update. 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 Marcus.

[Marcus Desimoni; Chief Financial Officer]

Thank you, Morten. Good morning, everybody, and thanks for joining our call today. I'm very pleased to see the company performing so well, especially during these challenging times. Once again, we are demonstrating the clear benefits of having GN Hearing and GN Audio under the same roof. During the quarter, GN was affected in two very different ways of COVID-19. GN Audio experienced a very strong demand as enterprises continued to invest in employees working from home while GN Hearing experienced emerging recovery, however, still impacted by COVID-19 restrictions around the world. We have once again launched fantastic products across our 2 businesses and the CEOs will get back to you in a second. And we have seen a very strong market in GN Audio and a market recovery in GN Hearing. The combination of our strong products, the receptiveness of the market and our focused execution have led to 29% organic growth. 29% organic growth, it's fantastic. The growth, combined with continuous prudent cost focus and a one-time gain of DKK 114 million from legal settlements and litigation, led to a reported growth of EBITA of 48% for the group. Reported EPS grew 84%. While excluding the one-time gain, EPS still grew very strong by 58%. We were also able to generate a significant positive cash flow of more than DKK 600 million and thereby decreased our net interest-bearing debt. This resulted in a leverage of 2.2x, including the gain from legal settlements and litigations. I'm very happy to see this development despite COVID-19. Our balance sheet remains sound and we have ample sources of liquidity. As such, we continue to have a solid foundation to face the financial challenges ahead of us. Turning to Slide 5 and the cash flow development of the businesses. GN Hearing's lower free cash flow compared to Q3 2019 reflects the lower revenue level. Prudent cost control and the positive development in working capital countered that effect. We also continued to work very closely with our customers and have prudent investment into the channel during the quarter, fully in line with our strategy. In GN Audio, we saw a strong development in operation profits, reflecting the very strong revenue and the one-time gain from legal settlements and litigation. While we continue to increase our investment activities to drive further revenue growth, the strong top line growth led naturally to a buildup in working capital. All in all, we delivered a very strong cash flow generation in Q3 and our focus on prudent management of cash naturally continues. With this, I'd like to hand over to Gitte.

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

Thank you, Marcus. Starting on Slide 7 and our Q3 financial highlights. In Q3, I've been very pleased to see an emerging hearing market recovery, of course, with great variations across regions, countries, states and channels. The emerging recovery has led to an organic growth of minus 11% compared to a minus 54% we saw in Q2 2020. The gross margin in the quarter was down compared to Q3 2019 due to the fixed part of our production costs and mix effects. As a result of the emerging market recovery, our superior product portfolio as well as our strong commercial execution and our continued focus on costs, we realized a positive EBITA of DKK 169 million. I would like to stress that we continue to be prudent on the cost side, and our operating expenses are down 10% compared to Q3 2019. While we clearly take a prudent approach to the cost side, we remain agile and can quickly adapt to the changing market dynamics. Finally, I think it's important to highlight that we've generated a positive free cash flow, excluding M&A, of DKK 47 million. That leads me to Slide 8 and the emerging market recovery that we are seeing. After the low point in April with a run rate in the 20s of percentages to last year, we've seen emerging improvements. In July, sales were at around index 90 versus last year on a relatively easy comparison base. August was impacted by our announcement of ReSound ONE in the middle of the month, driving some normal delay in sales. This resulted in a strong September and October, driven by the launch of ReSound ONE. October sales were at around index 90 to last year. In the latter part of the month, the momentum softened. As mentioned, the market recovery continues to vary across regions, countries and channels, depending on local restrictions. In North America, the recovery has been slower than in Europe and Rest of World. The commercial market in U.S. has recovered faster than VA but with large differences across states. All in all, that has resulted in a negative organic growth in North America in Q3 2020. In Europe, we saw strong recovery in especially Germany and Southern Europe in Q3 2020 while the U.K. remained heavily impacted by continued restrictions. In our Rest of World region, the picture continues to be scattered. We saw growth in, among other, Australia, China and South Korea, in Q3 2020 while we are still negatively impacted in countries like India and Brazil due to COVID-19 restrictions. With that regional commentary, I'm thrilled to give you some color on the initial sales performance of ReSound ONE, which started shipping on August 27, and I'm now on Slide 9. Although it is still very early days, the initial feedback from ReSound ONE is very encouraging. To give you some flavor, we have compared the ReSound ONE share of the total revenue for the first 45 days to prior launches. The share of revenue is up 3 percentage points compared to the launch of ReSound LiNX Quattro, which clearly shows that the product is off to a good start. On the slide, we also focus on 3 of the larger hearing aid markets in the world and the early unit uptake of ReSound ONE. To illustrate the initial performance, we here compare the unit uptake for the first 45 days of ReSound ONE with ReSound LiNX Quattro, which was launched in Q3 2018. Starting in the U.S. commercial market, we, despite the current challenging market conditions, experienced a unit uptake of ReSound ONE at least on par with ReSound LiNX Quattro. As U.S. is our most important markets, I'm naturally very happy to see the initial uptake, and we are certain that ReSound ONE will contribute strongly to our performance in the U.S. going forward. As you know, we also started to sell ReSound ONE into the important VA channel as of November 1. In Germany, the uptake has been fantastic and significantly above the unit uptake seen from ReSound LiNX Quattro a couple of years back. The same goes for Japan, where the uptake of ReSound ONE has continued to outperform the uptake of ReSound LiNX Quattro despite the fluctuating market conditions in Japan. So all in all, I'm very encouraged by the initial performance of ReSound ONE. And combined with the feedback we receive from our customers, I do believe that ReSound ONE is a breakthrough in the hearing aid industry, which leads me on to Slide 10. I would like to highlight two things which we continue to get questions on from the investor community. First, ReSound ONE can be fitted just as broadly as any other RIC product. In fact, 80% of our users choose a ReSound ONE with M&RIE, which illustrates a wide-fitting range for this solution. Second, we are very proud of the M&RIE solutions. And with ReSound ONE, the users also get the benefits from the All Access Directionality and the Ultra Focus functionalities, which truly makes a difference, especially in a noisy environment. All in all, ReSound ONE gives significant benefits to users compared with ReSound LiNX Quattro and competitors. And the feedback we receive from our customers around the world is just great. These are all key reasons for our strong initial unit uptake. And with that, I would like to turn to Slide 11, where we've included an overview of key parts of our strategy execution. What I would like to mention here is our ability to bring new technology into the market with flawless commercial execution, as described on the earlier slides. Q3 has been all about execution, and we were positively surprised and proud that our ReSound ONE global launch event had 10,000 participants enrolled. And with that, I would like to hand over to RenEand an update on GN Audio.

[René Svendsen-Tune]

Thank you, Gitte, and hello to all of you. So it's now my pleasure to take you through GN Audio's result of the third quarter of 2020. So let's move to Slide 13. And Q3 of 2020 was, again, a very strong quarter for GN Audio and we delivered an outstanding 72% organic growth. This is on top of the 20% organic growth we achieved in third quarter of 2019. The growth was driven by continued strong enterprise demand for office and home office products across regions. Demand was positively impacted by enterprises who continue to invest into supporting their employees as they are still working fully or partly from home due to the COVID-19 situation. But let me just underline here that while the significant growth in the quarter is obviously very much affected by the work-from-home phenomena, the successful outcome is, first and foremost, reflecting the strength of GN Audio's innovative and world-leading product portfolio, which now includes the recent launch of Evolve2. And this product has been very well received in the market. Also in the quarter, we have seen a very robust execution in the supply chain, where we have been able to ramp up our production significantly. And this is partly due to the investment decisions made earlier this year and before and partly due to excellent implementation. All the work done in the supply chain over the last years is now paying off, and it has been crucial for our very strong performance. So in summary, across all regions, North America, Europe and our Rest of World region, we delivered again strong organic growth, driven by our strong commercial execution and market-leading product portfolio. And this has again resulted in market share gains in the global enterprise market. Having mainly spoken about enterprise revenue, I want to say also that in the quarter, we saw our consumer business returning to strong growth as offline retailers again opened for business after they had been locked down during the spring. So let me move from revenue to gross margin. The gross margin was down 1.8 percentage points compared to third quarter 2019 but roughly in line with the second quarter of this year. The decline was driven by increased freight and production cost due to COVID-19 and tariffs related to the U.S.-China situation. EBITA increased by 129%, which is, as Marcus mentioned, including gain from legal settlements and litigation. Excluding the DKK 114 million gain, EBITA grew 90% compared to third quarter of 2019. This corresponds to an EBITA margin expansion of 2.9 percentage points, which does reflect the continued leverage in our business. Free cash flow, including the gain from legal settlements and litigation, was at an impressive level of DKK 592 million in the third quarter of 2020. All in all, we think a very strong financial performance yet again in GN Audio. So let's go to Slide 14, where I am excited to put some words to our recently announced Jabra Elite 85t. And 85t is the latest addition to our strong-performing Jabra Elite true wireless family. We are now introducing our advanced Active Noise Cancellation into our true wireless portfolio. And we do that without compromising the size nor the signature design. The new earbuds come with a semiopen design and thereby remove the potential occlusion effect. On top of the Elite 85t announcement, we are now also building in Active Noise Cancelling into our existing Elite 75t series. This essentially means that current users today can update their firmware using our app and, with this, have Active Noise Cancellation available. The initial feedback we have received after this update is very encouraging. And it does illustrate our efforts to always continuously improve the customer experience. And with the recent announcement, we have now expanded our strong portfolio to wireless earbuds across price points and technology, ranging from Elite 65t to Elite 85t. And for the sake of good order, I shall say that the Elite 85t is now shipping. So let's go into Slide 15. And here, I would like to return to some of the commentary on the changes in behavior that we talked about also when we were here 3 months back. And first, the amount of people using UC platforms, like Microsoft Teams or Zoom, in their daily work and life has dramatically increased over recent 9 months during the pandemic. And the use of video is becoming the norm rather than the exception as people now really value this virtual interaction. Second, we hear from our customers and partners that more and more enterprise customers across the world consider or prepare for flexible work-from-home initiatives to support their business and their employees also after COVID-19. And we see a coexistence of flexible living and working in a new normalized world. And last, as people are working in more flexible ways, the need for privacy and removing local noise is increasing. And people do acknowledge the benefits of high-quality professional headsets, speakers and video equipment. We have received over recent days questions related to our outlook after the positive news about the COVID-19 vaccine. And seen from here is the fact that flexible living and work has accelerated rapidly during the pandemic and around the world, people have adopted ways of working and engaging that we believe are here to stay. As I mentioned, the amount of people using UC services every day has dramatically increased and, with that, has increased also the amount of target customers for us. The number of endpoint devices, like headset, has grown but far from the level as we have seen the growth in UC users. And consequently, we believe that we're operating in a sustainable larger market with significant room for growth. And we will continue to invest into our business to capture the present -- this present and future growth. Let's go to Slide 16. So here, let me give a quick update on Audio's strategy execution for 2020 and beyond. And in Q3, we continued to execute on our strategy with focus on individualized customer experiences. We have sustained investments into innovation at a high level. It is our aim to keep our cadence of launching world-leading products and experiences high, which is also evidenced by our announcement of Elite 85t and the upgrade of Elite 75t. These continued investments also reflect the market opportunities I shared on the prior slide. We will continue to make the needed investments, innovation, supply chain and commercial execution to sustain our market-leading position. And with that, I'll hand back to Marcus for financial update. Thank you all.

[Marcus Desimoni; Chief Financial Officer]

Thank you, RenE Let's turn to Slide 18 and the financial guidance. It is important for me to stress that our guidance for 2020 still comes with much greater uncertainty than usual due to the continued COVID-19 pandemic impact. The COVID-19 situation has and will not only strongly impact GN's operational performance in 2020, but it will also impact predictability, visibility across all GN's markets, channels and supply chain. Please also bear in mind that this financial guidance is contingent on no further retightening of COVID-19-related lockdown restrictions or new supply chain constraints. The guidance upgrade, which we issued on October 9, where the financial guidance for GN Audio was upgraded and all other perimeters were unchanged, is confirmed today. We expect an organic revenue growth for GN Hearing to be better than negative 30% and an EBITA margin that is better than 0% for the full 2020. GN Audio expects organic revenue growth of more than 35% and an EBITA margin of more than 21% for full year 2020. The EBITA margin expectation for GN Audio is before any extraordinary items related to the legal settlements and litigation. EBITA in Other is expected to be around negative DKK 180 million for full year 2020. Based on the expectations for GN Hearing and GN Audio, GN Store Nord expects to deliver a positive EPS for the full year. This positive EPS expectation is before any extraordinary items related to legal settlements and litigations.With that, I would like to take the opportunity to thank all of you for your and my close cooperation with you over the last 5 years. As you know, I have decided to step down by the year-end. So this will be my last call with GN. Before I hand over for the Q&A session, let me use the opportunity to shortly introduce Peter Gormsen, the new CFO of GN Store Nord as of January 1. I have been working very closely with Peter for the last 5 years, and I can ensure you that he is a great and fantastic guy. Peter has been instrumental in the turnaround and growth journey, which GN Audio has been performed over the last 5 years, including the significant and successful supply chain expansion. Congratulations, Peter. You are with us on the call today, and you will be available for Q&A. Thank you all. And with this, I would like to thank Morten for his loyalty and outstanding performance over the last 5 years, as we have been also working extremely close together. And with this, happy birthday, because it's also the birthday of Morten today. And now finally, we can go to the Q&A session.

[Morten Toft; Vice President of Investor Relations & Treasury]

Thank you, Gitte, RenEand Marcus, for the updates and the kind words, Marcus. And with that, I'm handing over to operator for Q&A. [Operator Instructions] Thank you.

[Operator]

[Operator Instructions] First question comes from Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Yes. Martin Parkhøi at Danske Bank. Two questions. First one, maybe it's three, but I'll call it two, it's on -- the first one is on regional growth. But first, regional growth on the GN Hearing side, and that's, of course, for Gitte. If I look at your performance in North America and adjust for VA and also adjust for FX headwind in the third quarter, then we are looking at a decline at the tune of 16% to 17% sales. And according to statistics from here, then growth are basically flat outside these end units. I know you will talk about -- talk a little bit about differences in exposure to states. But it's still a big difference. And I would also, in that context, say that if we actually look back to the last 4 quarters, then it looks like that you have had substantial underperformance compared to the commercial market, which means outside VA in the U.S. market. So maybe you could try to address that. And included in that question is a regional question, which then are for RenEon GN Audio. Again, we saw in the third quarter Europe outperform U.S., not as much as in the second quarter but still outperform. And as I recall it, in the second quarter, you had prioritized Europe with respect to -- on the order backlog. What is your -- what is the difference between the growth rates we are seeing on a regional basis in the third quarter and the comment on the backlog on these? And then I guess that my second question, that's just for Peter then. I guess that on the R&D capitalization in GN Audio in the third quarter, that was a significant headwind isolated for the third quarter, as I calculate a 1.3 percentage point, 1.8 percentage point if we compare with Q3 last year. When I go back to the last 8 years, it's only twice before you have had a headwind in a quarter and that was very small. So why are you seeing this significant R&D headwind -- R&D capitalization headwind in the third quarter?

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

Thank you for that. And let me start out commenting on the regional growth and then I'll deep dive into the U.S. market as you asked about. So in terms of regional growth, we obviously see differences across the 3 regions. And if we look at the U.S. market, we -- official statistics is showing that the U.S. market was down 6% in Q3 but obviously significant variation from one channel to the next. So the VA channel, being down with 34%. Europe has, in general, seen recovery in the quarter. But still there's obviously big variation from country-to-country that I just also spoke to. So as an example, we see strong recovery in Germany and the opposite in the U.K., that has still continued to be quite impacted by COVID-19 restrictions. And in the Rest of World, it's also a blurred picture with the countries like India and Brazil still being significantly down whereas we see other countries with good recoveries, such as China, Australia and South Korea. But let me come back to the U.S. market. As you pointed out, we do see the VA being down with 34%. And in addition, as it's also evident from public statistics, we have lost share in the VA channel. However, what I do want to point out is that in the independent channel, which is our strategic focus, we do see very strong momentum from ReSound ONE, as I've also just shared data on. And that is obviously our key focus. Our U.S. performance is also impacted by exchange rates. It's impacted by the divestment of retail in Beltone, as you pointed out. But again, let me underline that in terms of the independent channel and our performance of ReSound ONE, we are actually seeing really good momentum. And also, we have just launched ReSound ONE into the VA channel on November 1. And obviously, with that, we expect to gain share in that channel again.

[René Svendsen-Tune]

So RenEhere. So thanks for the question and digging deep into the numbers. So on this, in North America, EMEA, you can say EMEA outperforming North America once again. Actually, the rationale is a little bit different than last time, but it's there. So there is -- from our supply capabilities, we have had, you can say, hardest time supplying the lowest price points. And as it has been what we have seen during the pandemic is actually, especially U.S. and, to some extent, Asia Pacific has had a preference for lower price points compared to Europe. And when we then allocate products, then Europe gets more on average. And so that's the simple solution. And it also means that if you look at the backlog, we have the highest backlog on lower price points for now.

[Peter La Cour Gormsen, Chief Financial Officer]

Martin, this is Peter. Thanks for the question. So first of all, of course, we follow IFRS. And that means we capitalize our development costs and then we start amortizing when we launch the new products. And then there will always be some timing of the investments, so you'll see quarterly fluctuations in the cost and the impact in the P&L. So on an ongoing basis, we, of course, look at our development projects and we look at our balance sheet in general and look at areas where we need to clean up a bit. So this time, we have redirected some R&D programs to make sure that the road map is also prepared for the new reality post COVID-19. And that's why you see slightly higher write-downs on the balance sheet this quarter.

[Martin Parkhøi, Senior Equity Analyst]

Thank you. Gitte, I will not let you get off the hook that easy because, as again, my numbers that I said in the beginning was adjusted for FX naturally. So 16% to 17% growth outside VA in the -- decline outside VA in Q3. And as I said that -- and you say you're doing tremendously in independents. But for the last 4 quarters, you have seen a significant lower growth outside VA than what we have seen in the market. And when I say significant and then we talk double-digit and more. And independent are going good, you're saying. I cannot validate that. So what is going on? Are you seeing a significant smackdown in Costco? Or what is actually the reason?

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

Thank you, Martin. I kind of didn't expect you to let me get off the hook. So I'm sure you understand, I won't comment on a specific customer. But I do want to repeat that in the independent channel, which is our strategic focus, we see a strong momentum with ReSound ONE. And obviously, we are thrilled about that. And I'm also pleased that we are now putting ReSound ONE into the VA channel. And we did that 1st of November, so basically last Monday. So that is obviously still early days.

[Operator]

Our next question comes from Michael Jungling from Morgan Stanley.

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

The question I have is as follows. If there was a change in approach by the incoming U.S. President with respect to tariffs between the U.S. and China and we assume that those changes were to take place on the 1st of January 2021, what would be the benefit to your business in totality on EBITA if these tariffs start to fall away? Some sort of quantification of what that number would look like. And then question two is also -- is on Audio. And the question is can you comment on the magnitude of the Christmas orders that are coming through for the consumer products versus where we were roughly last year? Are these orders growing? Or are the orders flat? Or are the orders relatively in decline compared to last year?

[Marcus Desimoni; Chief Financial Officer]

Michael, it's me. On the question with the U.S. and tariffs, on the Hearing, there's obviously no impact at all. And on the Audio side, Peter is giving you the answer.

[Peter La Cour Gormsen, Chief Financial Officer]

Michael, this is Peter. So as Marcus said, we are today impacted by the tariff. And if your hypothesis truly came through, which would be good, then we would see approximately a 1 percentage point favorable impact to our numbers.

[René Svendsen-Tune]

And RenEhere. So I guess, on the Christmas sales, I mean, on the consumer side, while we have to see how the sell-through is going, the -- what we have said is that the Q3 brought our business back to growth. There's nothing that would indicate that we would not be growing in Q4 on the consumer side as well as we had planned to do. So in that sense -- but exactly how much, we haven't said that for quite some time actually where the growth rates are. But we saw solid double-digit growth in the consumer business in Q3. And you can say, the machinery is set up for the same in Q4.

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

Can I just clarify, when you said previously, sorry, on the tariff side, you meant probably 1 percentage point to margin? Is that right? The margin would be 1 percentage point higher if the tariffs would fall away for Audio.

[Peter La Cour Gormsen, Chief Financial Officer]

Yes, that is correct. So that is the GN Audio impact if all tariffs were taken away. Correct.

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

Okay. Okay, great. And maybe I can sneak one last question is, do you have any sense of what the OTC situation is with the FDA? I believe there was meant to be a decision coming out at the end of autumn. And there's not many days left in this month. Do you have an update as to what the FDA is thinking on the OTC side, please?

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

Well, you're absolutely right that we are still waiting for the FDA to share their opinion about OTC in the U.S. They were actually originally supposed to come out with a potential new regulation in August. But that was delayed. And I guess they -- we now assume that they will come out with something in November. Whether that will be a kind of a new deadline or the actual regulation, I guess the verdict is still out on that. And obviously, it can also just be another delay. So yes, we are all still waiting to see what the regulation looks like. And obviously, depending on that, we are -- and assuming it's -- as we think, we actually see this as a big opportunity in the sense that it could potentially open up a new market segment for us if you think about the more sort of occasional use, where you may be in between needs a device to amplify your hearing. And if the regulation turns out like that, we actually believe that GN is really well suited for such a market, given the fact that we have Audio and Hearing under the same roof.

[Operator]

Our next question comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have two, please. My first one is just following on some of the questions around the U.S. and your relative share momentum. Gitte, when I look at the chart that you presented on ReSound ONE, I think the uptake in Germany and Japan looks really impressive. But in the U.S., it seems fairly comparable to what you saw with Quattro, which I think, given that this is a broader product launch in terms of form factors and price points, is a little bit surprising. So is there something going on, you think, in terms of ReSound ONE and how that's being perceived in the market, if it's just a question of time? And I was quite surprised by that chart. And just given how important the U.S. is for you as a market, it's a little bit concerning that you're not seeing stronger momentum with the ReSound ONE in the U.S. So that would be my first question. My second question is for RenE Just looking into 2021, and I appreciate that there's a lot of uncertainty, but just curious how you're thinking about, given the very strong performance that you have seen in 2020, in particular on the enterprise side, how realistic is it to expect double-digit growth for the Audio business as we move into 2021. And I guess, what are the building blocks and your degree of confidence in that? If you can talk to that, that would be great.

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

Well, thank you for that question. On ReSound ONE, I mean, across the board, both from audiologists and users, we are getting really great feedback on the product. And also, as I spoke to, and just to be very clear on that ReSound ONE is as suited for users as any other RIC products. And we actually see the M&RIE, our special solution with the receiver and microphone in the ear, being fitted for more than 80% of the users. So it is a broad usage. It's -- when you look at the uptake in the U.S., I think it's important to compare to markets like Germany and Japan. I think it's important to keep in mind that, here, we are launching a completely new product in a completely new category or in a category of its own, if you like. And the U.S. has probably been a little bit more in a lockdown situation than other markets in the terms that we have not until in October have our reps out in the field. And this is a new fitting experience for the audiologists. And now that we have our reps out in the field, we actually expect that to have the same impact in the U.S. as we've seen in other markets.

[René Svendsen-Tune]

So RenEhere. On the 2021, and as you can say, the next phase for our business, I guess there are three angles to look at this, the way we look at it. I mean one is what I tried to speak to is the number of people using the digital platform. There has been a very significant digital acceleration going on through the COVID-19 and people have said we accelerated about a couple of years. There are many views on that. But the fact is that a lot more people are using these digital platforms today than was the case 9 months ago. And along with that, you can say we have adopted video conferencing. It has been democratized, so to speak, because it's affordable. These platforms are very scalable and people actually use it a lot. So there is this target amount of users out there that forms one dimension to the way we look at this. The second, of course, is the amount of segments we cover now. Until now, we can say a lot of our business and the business of this industry has been around call centers and office workers in private enterprise. What we have seen recently is triggered by the pandemic. And of course, what will stay and what will not, we don't fully know, like education. So if you take our retail business, we ran a bit into a wall when people were sent home from work back in spring because we were trying to sell into small meeting rooms, which was the last place you wanted to be in a corona pandemic. What we have seen in the second half over summer is a massive increase in cameras, video equipment and audio equipment sold into universities, high schools, ordinary schools across the world. So a segment is opening for this digital approach, now forced because a lot of students and kids are working are being lectured remotely. But of course, we have to assume that some of this will stay. Also, we see in the health care sector, remote doctoring and so on and so forth happening. And people find different ways of coming together also in these public sector domains. So that's the second domain for us. And the third, of course, is the categories we operate in. We started with call center headsets. We expanded to UC headsets. We're expanding to video. And for us, it's about covering the market best possible. You can say, we don't have explicit guidance for next year, and we are not going to give it today. We have a mid-term guidance out there that talks about 10% market growth, which was the case before this happened. And I have to say, I don't see any reason why on a higher platform that would not be the case in '21.

[Veronika Dubajova, Equity Analyst]

That's very helpful. And Gitte, can I just ask a follow-up on sort of the U.S. dynamics? I mean when you look at November, are you seeing better share momentum if you look at where you are now that you have sales force out in the field?

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

Well, I think it's really early days in November still. So -- but we do see -- what we do see is a strong momentum with ReSound ONE. And I mean we launched in VA channel 1st of November, but it is still early days. I mean initial feedback, very positive, but I guess that's all I can say for now.

[Veronika Dubajova, Equity Analyst]

Understood. And I would be remiss not to say thank you to Marcus and all the best. It's been a real pleasure.

[Marcus Desimoni; Chief Financial Officer]

Thanks, Veronika. Same here.

[Operator]

Our next question comes from Carsten Lønborg from SEB.

[Carsten Lønborg Madsen, Research Analyst]

Yes. Two questions for Audio. First of all, I'd like to hear a little bit more about the performance of the PanaCast and your expectations for the year and maybe also into 2021. I know it's still a challenging segment to be in the high-end huddle room video collaboration here but still would like to hear what the contribution had been in Q3. And also on the P&L, for R&D costs, so actually reported P&L cost of DKK 181 million in Q3. Will this -- what will the going rate be from here? And is this a function of both sort of, say, the 85t and the new Evolve2 product lines being launched at the same time? Or did you also have some -- I couldn't really hear you, Peter Gormsen, whether there was a write-down in these numbers as well? And then my 2.5 question here is just quickly on Hearing, Gitte. How confident are you that this is the right strategy that you have in the U.S. market to be so focused on the independents? It's the massive underperformance we have seen, it's a little bit odd seen from the outside that you are not able to close on both segments, for example.

[René Svendsen-Tune]

So on the -- thanks for this. So on the first question, as many of you know, we launched into this meeting room segment. And the market was the highest-growing segment out there. And as we also just spoke about, this has not been a great place to be. What we did with the PanaCast earlier this year is we sort of took a step back. We repositioned it up against the COVID situation. So this is about distancing. We have this 180 degrees view. So we went back into enterprise with that positioning. And then also we expanded into other segments and here under education. And the reality is that if you take the PanaCast business as we have it today alone, we will actually exceed our original target after all when the year has gone. So we have -- you can say the technology is strong. We have found ways to come back into the market that our markets opening that we have not really been with so far. On the video business, we are completely committed. I guess many people are expecting us to expand the portfolio. [indiscernible] we are working on that. When and what exactly will happen, I can't say here. But it's clear that we are very committed to this space. It is growing and it will be a growing space also next year and the year after that. We are very convinced about that.

[Peter La Cour Gormsen, Chief Financial Officer]

Carsten, this is Peter. So thanks for the question on the R&D. There's no doubt that the R&D spend is at a higher level if you compare 2 years back. And we do that, of course, by design because it's really important, and we see that's part of the growth that we're able to deliver. If you look specifically at this quarter, we -- every quarter, we review development projects. We review our R&D programs. This quarter, we decided to redirect some of our investments. And that led to a write-down of some of the projects we have on the balance sheet.

[Carsten Lønborg Madsen, Research Analyst]

How much was that? And what type of products are we talking about?

[Peter La Cour Gormsen, Chief Financial Officer]

Well, we closed some projects and then you redirect some of that spend into other projects. And that will be the swings that you can't really put too much effort on in 1 quarter. But we will continue to invest at a higher level. And of course, we follow the market and we also pay very close attention to how the market will look post COVID-19.

[René Svendsen-Tune]

RenEhere, just -- we're not going to tell the competition exactly what we're doing. But trust us, this was not a bad decision, so...

[Operator]

Our next question comes from Kit Lee with Jefferies.

[Nyeok Lee, Equity Analyst]

I have two questions on Audio. Just firstly, on the enterprise side, what's your capacity level today? And would it be enough to meet the demand coming from the backlog in 4Q? And then my second question is around your opening remarks about the number of headsets growth is still far below the number of new UC users. But how realistic would it be to convert the rest of people who use Zoom or Microsoft Teams to start using headsets? Do you need to overcome some barriers? Or is it more of a natural adoption story here?

[René Svendsen-Tune]

Thanks for that. If I -- there was a little bit of a noisy line. If I understood you right, you asked about the backlog end of the year. Was that correct?

[Nyeok Lee, Equity Analyst]

Yes. And just in terms of your capacity today, whether it's enough to meet the demand from the backlog in Q4?

[René Svendsen-Tune]

Yes. Exactly. So we ran into some -- the storyline is we ran into backlog significant after Q2. We reduced it some after Q3. There will be a backlog actually when we end Q4 but less so. And I spoke a little bit to it. We have -- large part of our products are actually in supply today. But we are sort of backlogged on certain categories here under the low-end products. But we are increasing capacity and -- but there will be some backlog. I think on the adoption and the amount of users out there, of course, the fact that we have had so many users pick up these platforms, they are now many of them. Of course, they are using the PC sound and the PC camera or their mobile phone and the smartphone and so on and so forth. Experience is that, as you become sort of a, let's call it, regular user or you use it in a noisy environment and so on, you will, over time, pick up a professional device of some sort to help you get the good quality communication or a leverage of these platforms. So it is, you can say, there are 2 steps here. One is that get the amounts of users. Second is the adoption rate of these kind of devices. So -- and of course, as I spoke to a little bit is that there are new segments in the market that seem to also start adopting these platforms who were not there really here on the public sector to a larger degree. So you can say the user volume is there. Now it's our job to drive the adoption.

[Operator]

Our next question comes from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

First of all, Morten, happy birthday. I hope you're having a fun day despite results. And then I'd like to ask two questions for Hearing. Gitte, If we go back to Slide 9, I'm still not quite entirely sure whether we're really comparing here apple-to-apples. First question is you've been talking about the U.S. market being in some sort of lockdown, so you're not able to have all or you were not able to have all salespeople in the field until more recently. So is it actually fair to compare U.S., Germany and Japan, given that we have the different kind of situations there? And then the second question is if I look at the illustration of the ReSound ONE share of total revenue, LiNX 3D, LiNX Quattro versus ReSound ONE, I mean, given that we had some ASP increases with all those launches, one could argue that there hasn't really been much change because it has been driven by the ASP lift and not by the volume lift. Could you comment on that?

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

Yes. I'm happy to do so. I mean I appreciate that maybe it is difficult under these circumstances with COVID-19 and the different impact it has on the market to compare. I just wanted to be transparent about the performance we see of ReSound ONE compared to ReSound LiNX Quattro in 3 of the major markets in the different regions. And obviously, they are -- the impact of COVID-19 and the restrictions, both in terms of the hearing clinics and, if you like, our workforce is different in the different markets. And maybe that also gives me an opportunity to address the earlier question on whether or not we have the right strategy in the U.S. overall. Well, I really strongly believe that our strategic direction of not owning retail is the right strategy. That has not changed. It is still our focus to win in the independent segment. And I'm convinced it should continue to be so. And again, we see really good momentum with ReSound ONE in the segment. I guess underlying that question is also, if you like, was this the right time to launch ReSound ONE, given that we are still in a market that is impacted by COVID-19? Again, I mean, I know you didn't formulate the question like that, but maybe that was -- so maybe it's me reading between the lines. I really think it was the right time to bring a new technology into the market. I mean the underlying need to hear is obviously still intact. And I think we also have seen, as markets open up, we also see the business come back. In the U.S., the circumstances have been slightly different in the sense that our field force have not been out there in September. They are now out there in October and certainly also now. And maybe to give you a flavor, since everything is new about ReSound ONE, which is make the hearing aid so great, it actually takes, on average, 3 virtual interactions with an audiologist before they are fully ready to -- feel fully ready to fit ReSound ONE, where it's only taking one physical meeting. So obviously having our field force out back in the street in the U.S. market is going to make a difference. Then your last question was about the overall uptake. And again, remind -- please keep in mind that this is out of our total revenue. And I guess the point I wanted to make here again is that when I look at it overall, ReSound ONE has been a very successful launch and actually stronger than our, before ReSound ONE, most successful launch, ReSound LiNX Quattro. We actually see an even stronger momentum of ReSound ONE when we look at our total sales today.

[Maja Pataki, Head of Med Tech Devices Sector]

Okay. It's probably a bit difficult to read the slide, given the different situation. So -- but appreciate your efforts in trying to explain.

[Operator]

Our next question comes from David Adlington from JPMorgan.

[David James Adlington]

One for each business, please. Just on the Hearing business, obviously, Eargo just recently IPO-ed. It would be great to get your thoughts on that business model and how you're thinking about that as an additional competitor, more visible competitor.And then secondly, just on Audio, RenE you sort of cited the additional freight costs. I was wondering if you're anticipating whether they would normalize when we get back into sort of more normal situation post COVID-19 and how we should be thinking about that particular cost line.

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

So obviously, we have also noticed that the IPO of Eargo. And I mean when you look at the overall market, we still have a lot of people out there with a hearing loss that is not getting a hearing aid. The adoption rate is really low. So I guess we just welcome another competitor.

[Peter La Cour Gormsen, Chief Financial Officer]

David, this is Peter. So maybe I can answer your question on the freight. It is still a very tight freight market we are looking into. And we're trying to get as much insight as possible, so -- but what we can look into, at least for Q4, is a continued very tight market. All the domestic airlines are still shut down. So that means higher freight prices, and that's what we need to absorb.

[Operator]

Our next question comes from Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

Obviously, bye, Marcus, it's been great. Morten, your birthday plans so far suck. Just one more left for me, please. On the Audio side, I'm just kind of curious, the penetration of all those users who've gone home and converting the rest of people to that hybrid working and selling them a headset or selling whatever, Speak 710 or something like that, is this a function of new products that we want to push into the home? Is there innovation on the product side that needs to happen? Is it more marketing? Or do you not need either of those, and as you said, it's just a conversion over time sort of culturally?

[René Svendsen-Tune]

I guess it is all of it actually. So over time is that, of course, you will have to offer people better more all the time. That means that we have to anticipate over time that the work-from-home station will be fitted better than it is today for home. So there will be product innovation coming. I think the underlying machinery is the same, right? Teams is evolving, as we speak. Zoom is evolving as we speak. And people are getting used to these platforms. Then obviously, you can say people need to know that there is a better answer than listening to the PC or the smartphone speaker. So we have to be out there educating the market with our partners and with the platform owners. And of course, we are working on that every day. And it is important for us that we are centered in the ecosystem like we have been. I mean we are a very key partner to these platform providers. And we need them and they need us, being the leader out there. So of course, we need to work with the ecosystem on educating the market that these solutions are out there. And then of course, you can say the channel will have to do. It's work beyond that when it comes to reaching customers where they are. I mean, right now, we can see a very strong channel to the large enterprise, small, medium enterprise. And of course, when this is sort of acquired by individuals, we have to be sure we are available on the platforms where these people shop, and we are to an increasing degree.

[Operator]

Our next question comes from Jannick Denholt from ABG.

[Jannick Lindegaard Denholt, Research Analyst]

One for Gitte and one for you, RenE as well. Just on your October numbers, you stated that you've seen a softening in the second half or the latter part of October. How do you see this evolving also going into November? And also with respect to your comments on you now having, let's say, your field force back on the street, could we expect even a reversal of that? And then to you, RenE a little bit on the Evolve2. So appreciate your backlog, as you stated, it's more reliant with the lower price endpoint. How is it on the Evolve2? Do you still carry 0 inventory on that? Is that basically just shipping out of the factories? Or are you capable on your capacity now to build up something as well?

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

Well, thank you for that. When I spoke about a softening in the October numbers, it was -- it's related to the second wave or third wave of the pandemic, I guess, depending on where you are and the different measures we started -- we've started to see being taken, for instance, across Europe. So I guess, in most of our -- in our European countries, we still see the clinics being open, but the measures are still very different. If I take France as an example, the hearing clinics are open. But they cannot do any advertising towards customers. And also, again, in France, the restrictions on leaving your own home are quite severe. So -- and obviously, things, measures like that will lead to a softening in our sales. Again, I'm not at all suggesting we are back at what we saw in April because I think both societies and individuals, we have learned to live with COVID-19. But it will have some impact on our sales. Again, I don't want to be speculating about this. I think what we are doing in GN is focusing on what is within our control and ensure that we have sufficient agility in terms of being prudent on the cost side and able to compete in the market with ReSound ONE.

[Jannick Lindegaard Denholt, Research Analyst]

And fair to assume that your current run rate would be below the 90% that you've seen on average for the month? So you'll be below that, maybe at 85% or something now?

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

Again, I don't want to give specific guidance on that or speculate around that. I just want to reemphasize that we're doing our utmost to be competitive in the market and is so when as to fact it's open.

[René Svendsen-Tune]

And to the Evolve2 question, it almost sounds like you have been out checking because the honest answer is that on the higher-end part of that, we are actually out of stock right now. And it's selling straight through when we have something. But we are increasing or we have increased capacity on the Evolve2 side beyond what we had expected from a business case. But apparently, not exactly enough, but we're getting there.

[Jannick Lindegaard Denholt, Research Analyst]

Happy birthday, Morten, and all the best, Marcus.

[Marcus Desimoni; Chief Financial Officer]

Thank you.

[Operator]

Our next question comes from Chris Gretler from Crédit Suisse.

[Christoph Gretler, Managing Director in Equity Research]

I have two questions left, actually. So first was on the share buyback. Actually, on the one circumstance, would you resume that? And secondly, kind of just coming back to this hearing device business, if I look at the last conference call, you indicated that basically in July you were running at index 90. And now basically September, October, still running at index 90. Some of your competitors have substantially improved momentum in this time period. Can you help me to understand why your business has been materially differently affected here over these past months and has not seen the same momentum increase?

[Marcus Desimoni; Chief Financial Officer]

Chris, it's me, Marcus. So as the CFO of the company, I have to say that the share buyback is a prudent instrument to trim the balance sheet. And as we have extremely healthy business on the Audio side and underlying, very healthy on the Hearing side, I wouldn't foresee that there is, in the mid-term, a change in our strategy. Personally, I love it because it boosts the EPS and I'm a capital market guy.

[Christoph Gretler, Managing Director in Equity Research]

Given the strong cash flow.

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

So back to the question on how we see markets opening up. When we -- in terms of July and being on index 90, I just want to point out that we -- our comparison in July 2019 was probably a little bit soft. So we have actually seen an increase months-over-months equally to our competitors. And also in August, as I've alluded to, we were -- we had an impact from the fact that we announced the launch of ReSound ONE in the middle of the month. And therefore, that led some audiologists to held back because they wanted access to the new products. And then I guess it's also a case that markets open up, then they are impacted by COVID-19 again and so on. So it's also a little bit of mixed picture throughout. And then finally, I just want to mention that we have half of our sales in the U.S. And as the U.S. is overall still has been a little bit slower to open up than Europe and Asia, that is obviously impacting our overall numbers when you do the comparison to our competitors.

[Christoph Gretler, Managing Director in Equity Research]

Okay. A fair point. Maybe just now kind of to follow up, also kind of touching quickly on your guidance now for full year that remained unchanged in Hearing, I'm talking about. I mean what would really need to happen that you're basically touching towards the points, you mentioned like flat operating earnings, kind of 0 operating earnings or 0 margin and kind of sales is down close to 30%? Because if I look at things, I mean, would you require something like high 20% negative sales now for Q4? That would be, I mean, coming from the base we are right now, a huge decline. And also on profitability, I mean, basically, we are running at a slight operating loss for the first 9 months. I mean it looks now very dull picture you retained here. So I was just trying to understand the background here.

[Marcus Desimoni; Chief Financial Officer]

Chris, yes, I thought with your thinking, you concluded your own statement. But my colleagues obviously said there was a question implied. As we have 6 weeks ago through the rest of the year, of course, we have our own outlook. But with the guidance given, we feel comfortable in the current environment to come home. And that is, of course, incurring the one or the other uncertainty. But with the magnitude of changes that we also see in the market, there's also a bigger volatility out there. I mean, in France, the dispensers are open. But they are not allowed to do marketing and push. So you can imagine which direction the revenue grows. In Germany, the German government runs in a direction of basically closing also down the markets. While in Asia, you're moving forward. So we see every day in the rest of the world, across the regions, different pictures. And that is also what we have to take in consideration. And that makes it very unpredictable to be very precise. And therefore, our team was always describing to you what do we see and how do we act and then have the conclusion to numbers instead of just putting out the number because we thought that's much more helpful.

[Operator]

Our next question comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I just have kind of two follow-ups, if that's okay. Just around the -- you've given us a bit of color on kind of how the markets are performing or sort of where you're seeing the restrictions. I'm just curious if you can actually comment a little bit more detail what that practical thing, I guess, in France. If you can't advertise, are we talking about the market down 20%, 30%, 5%? Just any kind of your best guess of what you're seeing from a market perspective, not necessarily for you, for the countries that have put a lockdown in place? That was just going to be my follow-up.

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

Well, thank you for the question. And I also completely understand your desire to know. I mean we really don't want to speculate about how this impact the individual markets. But I guess if we look to what happened in Q3, we really saw very different performance from one market to the other. I mean I guess one extreme would be India, where we saw a complete closedown, and countries like China and Australia coming back strongly. But you could also -- if you look to Europe, you'll see huge differences between Germany, on the one hand, with a very strong momentum in Q3, and then you have U.K. still heavily impacted by COVID-19 restrictions. So it is really hard to give specific view to what will happen in a specific market over the next weeks. But again, looking at Q3, I guess we should expect very different momentum from market-to-market.

[Operator]

There appears to be no further questions. So I'll hand back to the speakers for any other remarks.

[Morten Toft; Vice President of Investor Relations & Treasury]

Thank you, operator, and thank you, everybody, on the call. Before we close the call, I would like to take the opportunity to thank all of you for the collaboration during the past 1.5 years. It's been real pleasure to get to know all of you as Head of IR. I am happy to hand over the IR baton to Henriette Wennicke. I know Henriette for 4 years now, and I promise you that you're going to be in good hands with her. She is super sharp and very knowledgeable about GN. So with that, we appreciate your time today, your questions. And on behalf of Gitte, RenE Marcus, Peter and myself, we'll see you on the virtual road. Thank you very much.