GN Store Nord A/S

CSE:GN

Earnings Call Transcript 2021-Q3

[Henriette Wennicke, Vice President of Investor Relations & Treasury]

Hello. Welcome all to GN's Q3 2021 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; Rene Svendsen-Tune, CEO of GN Audio; Peter Gormsen, CFO of GN Store Nord; and myself, Henriette Wennicke, Head of IR and Treasury. Today's presentation, which can be found on gn.com, is expected to last about 20 minutes, after which we'll turn to the Q&A session. The agenda for the presentation itself is that Peter will start off with group highlights. Then Gitte will provide an update on GN Hearing. Rene will provide an update on GN Audio, after which we'll go back to Peter for a financial update and guidance. After that, we hand over to Q&A with the questions from the queue. And with that very brief introduction, I'm happy to hand over to Peter.

[Peter La Cour Gormsen, Chief Financial Officer]

Thank you, Henriette. Good morning, everybody, and thanks for joining our call today. Let me start by briefly addressing our revised guidance for the year. We are naturally disappointed by the fact that we had to adjust the guidance earlier in the month for GN Hearing and today for GN Audio. It is clear that it is very different circumstances that drives the revisions. We will come back to this later in the presentation. Let's move to Slide 4 and a snapshot of the performance in Q3. In Q3, the group delivered DKK 3.8 billion in revenue, equaling an organic revenue growth of 2%, driven by growth in both divisions. Excluding transaction-related costs, EBITDA reached DKK 625 million, translating into a group EBITDA margin of 16.5% for the quarter. This led to an adjusted EPS of DKK 3.46. And due to continued strong cash flow generation, the leverage reached 1.5x by the end of Q3. This is slightly higher than in Q2 due to our share buyback program, where we, in the quarter, bought back shares worth more than DKK 700 million. Finally, GN has now committed to the Science Based Targets initiatives to limit global warming to 1.5 degrees Celsius and being net 0 by 2050. This is beyond our existing 2025 climate goals. And with that short introduction, I would like to hand over to Gitte for an update on GN Hearing.

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

Thank you, Peter. Starting on Slide 6 and our financial highlights. GN Hearing delivered 4% organic revenue growth in a hearing aid market which is still impacted by significant regional differences due to COVID-19. The organic revenue growth compared to Q3 2019 is around negative 6%. The gross margin was 66.1%, which was slightly higher than in Q3 2020, primarily driven by higher volumes and positive mix effects. EBITDA increased slightly, mainly driven by the revenue growth and prudent cost management while we continue to invest significantly in R&D and IT. Moreover, we delivered a significant free cash flow of DKK 340 million in the quarter, mainly driven by a positive impact from a gain from channel investments. Even though we are encouraged by the improvements in our financial numbers, we are naturally disappointed with the fact that we are not able to deliver on the guidance we shared in the beginning of the year. On October 5, we revised the financial guidance due to delays in product development deliverables, leading to postponement of 2 key product launches. These 2 product launches were expected to generate a step change in the top line for the second half of the year. One of those product launches was Jabra Enhance Plus, a product expected to generate incremental revenue and with no cannibalization of existing sales as it is targeted towards the unaddressed part of the market. Moreover, new product introductions traditionally create positive momentum and excitement for the existing product portfolio. Even though we are disappointed by the delays, we have continued to execute on the sales side to defend our market share, which I'll get back to in a moment. Moving to Slide 7 and the regional development in the quarter. Looking at the U.S., we delivered 7% organic revenue growth compared to Q3 2020 and negative 12% compared to Q3 2019. We continue to see a solid performance in the independent market but offset by the development in VA. Moving on to Europe. We delivered an organic growth of negative 11% compared to Q3 2020, which translates into negative 3% compared to Q3 2019. We saw, among others, strong performance in France and Spain while Germany softened a bit compared to Q3 2020. In our Rest of World region, the organic revenue growth ended at 17% compared to Q3 2020 and 7% compared to Q3 2019 with strong performance in China. Japan continued to be challenged by COVID-19, and market normalization is still to come. Let's move to Slide 8. Following the recent guidance revision, I would like to give you some more insight into our performance and market share developments. This is the data I look at in addition to the financial performance when judging our performance. Even though we do not have exact market data across all markets, we have a good insight into the data in our main markets. Looking at the U.S. independent market excluding VA but including Costco. We have been seeing a stable market share development since 2019, driven by our upgraded product portfolio and the Beltone transformation that progresses well. The market share development has however been negatively impacted by the development in Costco until recently. When we look at the VA market share, the story is quite different. Our inability to visit the clinics following our launch of ReSound ONE has been very challenging, and we are not satisfied with these numbers. We do not expect miracles in the short term in VA, but we clearly expect to regain some of our loss here in 2022 when clinic visits are allowed. Moving to Japan, our second largest market. In Japan, we've been able to gain or maintain our market share in recent quarters. As I spoke to earlier, Japan was still challenged by COVID-19 restrictions during the quarter with volumes still below 2019 levels, but I'm overall happy with our market share development in Japan. This leads me to our worldwide unit market share. Despite headwinds from VA and Costco as well as a large U.K. retailer, our market share is currently roughly at the same level as of early 2019. So bottom line, we've been able to maintain or gain our global market share in recent years excluding the 3 highlighted accounts, VA, Costco and the large U.K. retailer. With that, let's move to Slide 9. Let's have a further look into our revenue development and the building blocks leading to the negative 12% reported revenue growth compared to Q3 2019. When excluding exchange rates and M&A, the organic revenue growth is negative 6%. In Q3 2019, we delivered DKK 1.5 billion in revenues. This revenue number naturally includes our hearing instrument business but it also includes other revenues, including sales of accessories, et cetera. In this bridge, we've outlined the impact from the 3 mentioned accounts which we have been speaking about for some time: VA, Costco and the large U.K. retailer. Those 3 accounts have an impact of almost 10 percentage points on our organic revenue growth compared to Q3 2019. So when excluding these 3 accounts, our organic revenue growth would have been around 3% compared to Q3 2019. The 3% is a combination of a strong unit uptake and the traditional negative impact on ASPs as well as a mix effect. So all in all, outside the 3 larger accounts, VA, Costco and the large U.K. retailer, we are generally satisfied with our performance and trend across markets. And that leads me to Slide 10. As announced on October 5, in connection with our revised guidance, we've initiated the transformation of R&D. This is, of course, a serious matter, but let me just stress that the core of our R&D is fully intact. Our innovation capabilities are as strong as they have been for many years, and we continue pursuing delivering industry firsts, including our press release yesterday, with the introduction of hand-free calling for iPhone users of ReSound ONE. As part of the R&D transformation, there are 3 areas I would like to highlight which we are working on improving. First and foremost, we still -- we will need to increase our focus and investments in software to ensure we deliver a great user experience for the audiologist and our end user. Secondly, we need a much more lean and flat organization that will enable us to significantly decrease decision time and increase efficiency and transparency. And finally, we will strengthen our product -- project management skills in order to make sure that we have robust, achievable yet ambitious time lines. I'm sure that this will make GN Hearing even stronger and that it will secure our competitive advantage going forward while maximizing our financial return on R&D investments. Let's move to Slide 11 and the long-awaited draft OTC legislation from FDA. I have to say that we are pleased to finally see the proposal from FDA. FDA with its ruling aims to deliver accessibility and affordability of high-quality hearing aids to people with perceived mild to moderate hearing impairment, something we fully subscribe to in GN. This is a major opportunity to increase the penetration rate in the U.S. market. Initially, we are very encouraged by what we've seen in the draft legislation, but we are currently evaluating and look forward to comment on the draft ruling. But as I've said at many occasions, we truly believe that GN is well positioned to enter the new OTC market. And with that, I'm handing over to Rene for an update on GN Audio. Thank you.

[Rene Svendsen-Tune]

Thank you, Gitte, and hello to all of you. So it's now my pleasure to take you through GN Audio's results for the third quarter of 2021. And let's move to Slide 13. So Q3 of 2021 was a quarter of strong execution for GN Audio, where we continue to see strong underlying demand but also a negative impact from the global supply situation. For the quarter, we were able to deliver positive organic growth of 1% on top of the 72% in Q3 of 2020. And the business is now anchored at a new and far higher level than before the pandemic. The Q3 2021 revenue however was significantly impacted by component shortages, and the underlying demand could have delivered solid 2-digit growth in a normal environment. Given the situation, we left the quarter with a significant increase in order backlog. And let me continue by addressing upfront the fact that we decided to revise our guidance this morning. The global supply situation of certain components has significantly worsened over recent weeks. And while up until now, we've been able to navigate in this situation, to a large extent, we now face real impact in the current quarter. The volatility in the component market has recently increased significantly, and we do experience an accelerating amount of delays in deliveries of components like we see an increasing amount of decommitments from certain GN Audio suppliers. As a consequence, we found it prudent to revise the financial guidance for organic revenue growth for 2021 to between 22% and 25% growth. And let me go back to the report. The gross margin was slightly lower than Q3 2020, driven by increased freight and production costs due to COVID-19. EBITDA margin reached 20% when excluding transaction-related costs associated with the SteelSeries acquisition. This is lower compared to last year and mainly driven by increased investments into future growth opportunities. Free cash flow came in at DKK 281 million, driven by solid earnings. All in all, a quarter with strong execution for GN Audio despite a challenging supply situation, which leads me to Slide 14. And let me spend a moment on explaining the supply chain situation and how we work to mitigate it. As you all know, the crisis was initially triggered by the outbreak of COVID-19. Production of all goods that require semiconductor chips have been impacted, from auto industry to electronic goods. While chipset manufacturers are accelerating efforts to increase supply, demand still significantly outstrip supply, especially for older chipset generations. Fortunately, we do in GN Audio use widely newer chipsets in many products, and where we don't, we are now working on reengineering headsets to fit the newer chipset technology in order to mitigate and address the current challenges on specific products. Further, we have put in more resources to optimize our internal change, and we are doing ongoing rehabilitation of our portfolio. And finally, we have an open line with all suppliers to ensure that we are in sync and we get the priority we need. And let me emphasize one more time, demand and markets are fully intact. All trends we are seeing are pointing towards an even bigger market tomorrow, and we are still comfortable that demand is 10% higher next year compared to this year. And with that, let's move to Slide 15 and an overview of our performance across regions. So overall, we continue to see solid demand across all 3 regions and across enterprise and consumer. In North America, we delivered 5% organic revenue growth, mainly driven by the enterprise segment. Since Q3 2019, GN Audio has delivered impressive 67% organic revenue growth, led by our industry-leading product lineup and strong commercial execution by our team in North America. In Europe, we continue to execute strongly. But as Q3 2020 was extraordinarily strong with 82% revenue growth, the comparison base for the region was very high. We delivered a negative 7% organic revenue growth for the region compared to last year but 74% comparing to Q3 of 2019. Year-to-date, the European region has delivered an impressive 34% organic revenue growth. In our Rest of World region, we delivered organic growth of 12% compared to Q3 of 2020 and 77% compared to Q3 of 2019. And this is driven by several strong performing countries in the region, including Australia and Brazil. With a strong broad-based performance with around or more than 70% growth on a 2-year basis across regions, we continue our strong momentum, and we have anchored, as I said, the business at a much higher level. Turning to Slide 16 and some of our recently announced products. Starting on the consumer side. We have announced additional products to our Elite wireless lineup, the Elite 7 Pro, Elite 7 Active and Elite 3. These new products are engineered on the back of 6 generations of true wireless products with each of the new products engineered for specific user needs. Elite 7 Pro comes with best-in-class core performance, longer battery life and adjustable ANC. Elite 7 Active offers the best grip for an active lifestyle. And Elite 3 offers high-quality product for the new addressable segment in the lower-end range. And beyond the consumer launches, we have also launched an exciting product in the enterprise business. The Jabra Evolve2 75 is in addition to the successful Evolve2 range and is specifically engineered for modern and hybrid working. The product is the first in the Evolve range to offer fully adjustable ANC and comes further with an even more sophisticated microphone technology. And moving to Slide 17. On October 6, we announced the exciting news of acquiring SteelSeries and then expanding our business into the highly attractive gaming market. Everything progresses well, and we are on track to close the transaction by the beginning of 2022 as we have earlier communicated. And I just want to stress once again that this acquisition is an ideal fit. We are adding a new growth engine to GN through a best-in-class player in the premium segment of software-enabled gaming gear. With the growth and scaling opportunity we have identified, this bodes well both for the future of SteelSeries and GN. And with that, I hand back to Peter.

[Peter La Cour Gormsen, Chief Financial Officer]

Thank you, Rene. Moving to Slide 19 and the group financial highlights. GN delivered 2% organic revenue growth in the quarter. When excluding transaction-related costs and gain from legal settlements and litigation last year, EBITDA decreased slightly, primarily reflecting investments into the business. We continue to be highly cash generating. And on top of our ongoing share buyback program, leverage ended at 1.5x. Due to the acquisition of SteelSeries, the share buyback program has been paused in order for us to deleverage after closing of the transaction. Let's move to Slide 20 and details on our cash flow generation. In the quarter, GN Hearing saw significant free cash flow, mainly driven by a gain from channel investments. In GN Audio, we saw a strong cash flow in the quarter but lower when comparing year-over-year. Remember that in Q3 of 2020, we received a gain from legal settlements and litigation of DKK 114 million, which naturally had a significant cash flow impact. In Q3 '21, we continued our investments into future growth opportunities across [ OpEx ]. Across the business, we continue to be highly cash generating. This is also why we are able to finance the SteelSeries acquisition without raising new equity. And speaking about this, let's move to Slide 21. The acquisition of SteelSeries will be structured as a 100% cash transaction utilizing the existing cash balance and the new bridge loan. The bridge loan is expected to be replaced with other debt instruments at a later point in time. Due to the size of the transaction, it is, of course, fair to expect a significant increase in our financial leverage next year. We do however expect to deleverage rather quickly and already within a couple of years. Our mid- to long-term leverage target of 1 to 2x to EBITDA is fully confirmed. Let's turn to Slide 22. Both Gitte and Rene have commented on the guidance revision, so let me briefly summarize. For GN Hearing specifically, we now expect an organic revenue growth of around 16% and an EBITDA margin of more than 12%. For GN Audio, we now expect an organic revenue growth of between 22% and 25%, but we continue to expect an EBITDA margin of more than 21%. The financial guidance for other is confirmed while the growth in EPS is now expected to be more than 40%. With that, I would like to hand over to Henriette.

[Henriette Wennicke, Vice President of Investor Relations & Treasury]

Thank you to Gitte, Rene and Peter for the updates. Just a few practical remarks before we move to Q&A. While we have been looking forward to meeting you all in person in our Meet the Management already in December, we have decided to postpone the event a few months due to the pending closing of the SteelSeries acquisition. So please mark your calendar for March 23, 2022. With that, I'm handing over to the operator for Q&A. [Operator Instructions]

[Operator]

[Operator Instructions] Our first question comes from the line of Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

I'll try to keep it to 2. I might do some subsets of questions, as we all do. Let me start with Hearing, please. Gitte, thank you very much for providing -- trying to provide a bit more clarity on what is going on and how your market shares have developed. However, can you please elaborate a bit more in detail what you mean when you say development -- delays in the development deliveries? Is it that your R&D department didn't provide you the correct data for the launch or there has been a last-minute hiccup? Or anything that we can get a better understanding of what has happened? And then over to Audio. Rene, could you please clarify what you mean when you say contract decommitment? Is it that your suppliers have taken the volumes and given it to someone else? Or has there been really a shortage of the raw material and that's it so there is no risk of, let's say, relationships with your suppliers going forward? That would be very helpful to understand.

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

So thank you, Maja, for that question. I mean when we look at the developments or development projects, I mean one of them, as we've pointed out, is Jabra Enhance Plus. And obviously, here, we are treading new ground, if you like, by combining a true wireless earbud and the hearing aids and also filing under the self-fitting regulation with FDA. And let me be clear, we have actually handed in the file now to FDA and is awaiting the approval. Now when the -- so the delay, I guess, is a combination of that we are treading new ground that probably we've been overconfident that we could solve the last technical issues and therefore, get the transparency on the issues we faced too late. This is why I talk about a strengthening of our project management and also increased transparency in the R&D organization.

[Rene Svendsen-Tune]

So Rene here. So thanks for that question. I think 2 comments to that. One, of course, is that let's just remember that the third quarter this year is the highest third quarter we have ever had. So we are getting a lot of components, and I mean we are more than 70% above 2019. So it's not that we are not getting components, we get a lot. So that's one. I think the second comment is, as you also commented yourself, this is a raw material crisis more than anything else. And I think also what we have said earlier is that we have these commitments, we have contracts in place, but if our suppliers can't get the raw material, they cannot get sufficient amount of chipset out. So it's not like we have sort of like 1 or 2 massive decommits from 1 or 2 supplier. It is simply that they are running out of steam. We have very good relationships with these people, but they are -- we work now on, unfortunately, very short notices. And I would say the recent couple of weeks here and the events here, the volumes we see are somehow triggered that we have to send this warning to the market now. Also, let's remember that the absolute revenue in Q4 is higher than in Q3 and we are getting the components for that. So there is a lot of components but not enough.

[Maja Pataki, Head of Med Tech Devices Sector]

Okay. Can I just have 2 follow-up questions, please? One is I guess asking you to look in the crystal ball, but how long do you think this raw material crisis is going to sustain? So in other words, how long are you going to be battling with the supply constraints? Are we talking 6 months? Are we talking possibly another 12 months? And then the other question is component issues -- supply issues have been a topic in tech, quite obviously. But why shouldn't we see maybe this starting to get more pronounced also in hearing?

[Rene Svendsen-Tune]

So to the first question, how long, I mean, there are as many speculations about that out there as there are people. I think we all have to understand this is not -- we know and you know this is not going to go away by 1st of January. Will it ease up in the second half of next year? I hope so, but I don't know. What I can say is that, of course, we are -- the mitigating actions we are taking is to try to somehow, for our own case, find places where the supply is safer, namely in the newer technologies where there is more available. And -- but I mean I would be wrong if I told you that I know how this will work. We have contracts going forward. Our vendors are, of course, very keen to work with us on high volumes. But if they can, I don't know.

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

So components on the Hearing side, clearly, it's also something that we have very much focused on and monitor closely. With what we know today, we do not see an issue in relation to components and delivering on our revised guidance. Clearly, we also have long-standing relationships with our suppliers. And in addition to that, we have increased inventories, as I'm sure you've noticed, in order to cover critical components. Again, we monitor the situation every day. With what we know now, I am convinced we can deliver on our guidance.

[Operator]

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

[Martin Parkhøi, Senior Equity Analyst]

Martin Parkhøi at Danske Bank. First question to Gitte. Can you speak about guidance? You have a midterm target, which you said last year, of coming back above 20% on GN Hearing. I know you didn't do that last year for good reasons. And again, of course, this year, there is a pretty long way from more than 12% up to more than 20%. Just try to explain to me how you should be able to meet this midterm target in 2022. And then to Rene on SteelSeries. Can you maybe speak a little bit about the performance of SteelSeries in the third quarter? I guess you have seen the numbers. And then maybe also say that -- are they also seeing some issues as well with respect to supply, which are similar to the situation that you are seeing right now? Because you can say things have apparently evolved for you since you bought -- at least set your intention to buy SteelSeries a few weeks ago.

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

Well, thank you for that question. In terms of '22, obviously, I'm not giving any guidance for '22 right now. But what I can say in relation to '22 is that clearly following the delay in our 2 -- delayment of 2 big projects in R&D, we've obviously scrutinized our R&D road map for '22, both in terms of sort of validity of the time lines but also innovation. And I'm actually very confident with what I see now in regards to '22. In terms of the midterm guidance, that is still our aim in midterm, to outgrow the market and deliver an EBITDA margin above 20%.

[Martin Parkhøi, Senior Equity Analyst]

Can I just follow up to Gitte on the R&D side? Because -- I think it was quite a dramatic way that you made the GN Hearing downgrade and in all respect, throwing the R&D -- head of R&D completely under the bus. So that doesn't really sound like that is a short-term issue to fix. I think that also R&D is something which you're developing on a long term. So is -- can you maybe elaborate a bit on the problems that you're seeing which made you make changes on the top management?

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

So clearly, I mean, we are an industry that live off innovation, so it's absolutely pivotal for us to have a well-functioning R&D machine. So what I do want to point out is that in terms of ability to innovate, that's a strength in GN Hearing and has been for a very long time and still is. Where we failed, and I'm obviously not happy about that, is to have the sufficient development, if you like, in our ability to deliver and also have the sufficient transparency around our product developments. That's the reason why we've made a change in the leadership, and that's also why we have announced that we are doing a transformation of R&D. Again, to put more focus on software going forward, to have a flatter and more transparent organization and strengthen our capabilities within project management, those are sort of some of the key cornerstones in the transformation we are embarking on, and that obviously takes some time. But of immediate interest, I think, is the road map for '22 that I already spoke to.

[Rene Svendsen-Tune]

So Rene here on SteelSeries. And you're right, I have the Q3 numbers. I'm not allowed to give exact details, but I can tell you that they were growing -- they had very solid growth. And what I have seen from other vendors, if that represents the market, they have also taken significant market share in third quarter. SteelSeries operate in -- you can say, in our environment. So without revealing any secrets, it's clear they are affected by component situation as well and working with this best they can. But in that situation still, I would just say they have delivered solid growth in Q3 and above market.

[Operator]

Our next question comes from the line of Christian Ryom from Nordea Markets.

[Christian Sørup Ryom, Senior Analyst]

A couple of questions from me, both of them to GN Audio. So Rene, first of all, could you help us with some insight to how the component shortages might be impacting different products across your portfolio? So when I look at revenues relative to the second quarter, you were roughly flat here in Q3. Is that -- was that development similar across both your consumer and your enterprise products? That's my first question. And the second question is considering these -- both components and logistics constraints that we are seeing and the fact that demand in the market remains very strong, are you pondering any kind of price increases towards customers potentially in the form of freight surcharges or something similar?

[Rene Svendsen-Tune]

So on the split, I guess I can say that we're a bit more hurt on the enterprise side than on the consumer side. We have talked about video earlier. It's not that it has -- this should be the biggest impact, but that's probably where we are the hardest hit on still. While we are now shipping video products in meaningful numbers, we are still not where we want to be. But in the split, we have seen -- the deterioration we are experiencing as we speak is mainly on the enterprise side. On the logistics side and the costs and so forth and the price increases, it's clear we need to find ways to deal with this if there are -- if price increases continue. And obviously, I mean, we do see the logistics and the transport, of course, is -- has not softened over this second half year. And I guess the next question you will bring is on component prices. Let's just take that upfront. We are not a lot in the spot market. So in that sense, of course, we are buying against longer contracts. Will there be component prices coming as a consequence of this? Maybe so, maybe likely. And then we'll have to respond in appropriate ways. If we would raise prices, I would have to tell our customers first and not this call, but I hear your question.

[Christian Sørup Ryom, Senior Analyst]

And just to clarify, you haven't implemented any significant price increases yet?

[Rene Svendsen-Tune]

Not that -- we have earlier but that was linked to something else, namely tariffs, where we responded with price increases. They are still out there, and -- but we have not in the context of this situation. That's correct.

[Christian Sørup Ryom, Senior Analyst]

And the timing of those price increases related to tariffs, when was that sort of roughly speaking?

[Rene Svendsen-Tune]

So yes, I think it's time back now. And it really was quite closely linked with when we saw that this would not go away, we increased our prices.

[Operator]

Our next question comes from the line of Julien Ouaddour from Exane BNP Paribas.

[Julien Ouaddour, Analyst]

So first question is for you, Gitte, on GN Hearing. How should we think, I would say, about the 22% top line growth for Hearing given you're likely to launch new products, I guess new platform, new OTC Jabra coming in on the back of, I would say, sort of a challenging year with a soft comp? So just maybe do you expect to be roughly at the same level of 2019 revenue, which was DKK 6.3 billion? That's my first question. On GN Audio, I know, Rene, you said that you don't expect really sort of normalization probably in H2 next year. But one of your competitors reported overnight and seemed confident that Q4 calendar year 2021 will be probably the trough in terms of supply chain and expect some secondary improvement from Q1 2022. Is it also a conclusion that you share with your discussion with suppliers? Could we see some sort of, I would say, sequential improvement in Q1, Q2 2022?

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

So we are not giving guidance for '22 yet. But I guess one way to think about it, and again, coming back to the road map we have for '22, I think we are looking at a good road map, both in terms of solidity and also in innovation level. And I guess normally, we are obviously quite sort of secretive about what our road map contains. But I guess one way to think about it is that normally, we have a 2-year cadence when we bring a new platform into the market, and therefore, '22 is an interesting year for us. And again, like I said, I'm actually pleased with what I see in our road map for '22.

[Rene Svendsen-Tune]

Rene here. So I mean it's a very good question on the situation next year, I guess. And there is a lot of speculation. I also saw the comment, and I also hear from some of the suppliers that we should expect a better situation in the second half of next year. We have to somehow see quarter-by-quarter, month-by-month now. We can get the contracts, as I said here, but can they be fulfilled is the question. One speculation that at least is out there that I do share is that do we actually see just now a hyper demand that everybody is trying to get almost more than they need and then this will somehow create a relief later on. We can hope for that because you can say some of it is actually quite sudden. So they could -- I mean we are trying to get all we can. And I mean I know any other people are trying to get -- if that is such a situation in place, then, of course, we should see some release -- relief next year, but I don't know.

[Julien Ouaddour, Analyst]

And just if I may, one follow-up for each, sorry. So Gitte, just to confirm the big changes, I would say, on the R&D side. So you do not expect any major delay in the next product launch? And just, Rene, is it also able for you to quantify, like you did in the previous quarter, how much of the organic growth was impacted by this lack of components?

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

So just to follow up, I do not expect any major delays for '22.

[Rene Svendsen-Tune]

So on the -- I think what we have said now and -- as you remember, we said that we expected some 2% to 4% we lost in Q2. I think as far as we want to go now is to say there is solid double-digit growth we could have had in the third quarter had we had a normal supply situation. Yes, I think we keep it like that. That's more than 10.

[Operator]

Our next question comes from the line of Carsten Lønborg from SEB.

[Carsten Lønborg Madsen, Research Analyst]

Just, yes, let me start with a follow-up question to Rene on just how much growth you have lost here in the quarter. Because -- I was just interested in hearing a little bit more sort of commentary on that because, of course, you could have delivered double digit in -- if you had -- if you could meet -- if you could deliver the products, but that's also in a situation where the competitors cannot deliver the product. So in a perfect world where you had -- everyone could get the product they wanted, then I guess it would not be double digit. I don't really know how to -- how you can talk about this, but maybe you could add a little bit more color about underlying growth, et cetera, market share gains, if that's possible. And then to Gitte on Hearing. In terms of the R&D revamp, can you confirm that there's been no issues in relation to this in terms of, for example, ReSound ONE, so products already on the market, that -- the fact that the head of R&D was laid off had only to do with the upcoming product launches that did not happen on time?

[Rene Svendsen-Tune]

So it's Rene. I mean the double-digit growth potential basically is a very simple math. We are looking at the increase in order backlog, and had these been products -- and the orders were there for the quarter that we couldn't ship. So I think it's no more academic than that. So it's -- there's no more science there. You're right, and of course, if someone else could ship exactly this kind of products now or before we can, then, of course, there's a risk we may lose this business. But in the quarter, we talked about this double-digit potential lost -- not lost but postponed.

[Carsten Lønborg Madsen, Research Analyst]

Any contribution from PanaCast in the quarter?

[Rene Svendsen-Tune]

Say again?

[Carsten Lønborg Madsen, Research Analyst]

Did you have any contribution from PanaCast in the quarter, any meaningful?

[Rene Svendsen-Tune]

Yes, we did have contribution but not any meaningful.

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

So in terms of products that are in the market and I guess, especially ReSound ONE, ReSound ONE, we continue to get great feedback from audiologists and users. This is really a product that does deliver something unique in terms of the audiological experience. And I think also that's the main reason why we see that our market shares we've been able to maintain apart from the headwind we've had in VA and also Costco.

[Carsten Lønborg Madsen, Research Analyst]

Yes. So your feeling about the product profile on ReSound ONE that you were promised from R&D, basically?

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

Yes. I think with ReSound ONE, I mean, we were the first to deliver the ReSound ONE with M&RIE, a microphone and receiver in the ear in an open fit. And that's actually a unique concept that we will build on also in future generations.

[Operator]

Our next question comes from the line of Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 2, please. One is just kind of circling back. I think Rene, I asked you this question, whatever, 3 weeks ago or so when you announced SteelSeries and that was your confidence in the 2022 growth for Audio being greater than the market expectation with 10%. And I think you sounded fairly confident. I'm curious if you'd like to change that statement in light of some of the supply challenges that you're seeing at the moment. So I guess any updated thoughts on how you're thinking about 2022 to growth for Audio would be helpful. And then my second question is on the OTC. And apologies, I joined the call a couple of minutes later. So maybe, Gitte, you addressed this in your prepared remarks, but I'd ask anyhow. I guess your thoughts on the fact that the FDA is not limiting the gain that the OTC devices are to deliver. Is that a positive or a negative as you think about, one, the opportunity; and two, the competitive threat for the industry? And I know, obviously, there's been some noise around the output being set 115 to 120. And maybe some of the industry participants think that it's too high, so I'm just curious if you have any views on that. And I'll leave it at that for now.

[Rene Svendsen-Tune]

So thanks for that. On the -- I mean we don't have a guidance for '22. And so we had our midterm guidance out that we do expect 10% market growth. And as we have said many times, we -- our ambition is to that beat that. Actually, I mean, as we see it now and what I do expect, I think there is a market growth out there. And I mean the underlying trends are intact. I mean this hybrid working is sort of expanding, and the platform uses are strong and so on and so forth. So all these things we have talked about are still there, and they are actually seen in the market behavior as we speak. So I guess where we are landing is that if that's the case and if we don't see a relief in the supply, '22 may be a supply-driven year to some extent. And then, of course, it's down to our ability to do what we have done in other quarters under the pandemic, and -- is that we actually did this better than the market. I mean, I think if you go 3, 4, 5, 6 quarters back, almost every quarter, we have handled the supply situation better than the market and competition and taking share. And still, at this point of time, I just want to repeat that Q3 is the highest Q3 ever. Q4 will be bigger. So there's a lot of components coming our way, but is it enough to drive the -- to beat the market or to satisfy the market in '22? We have to -- hopefully, we have a better view on that when we come back with the guidance in February.

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

So thank you for the question on the OTC legislation. There are maybe opportunities to further make the legislation precise. But having said that, I actually think that with the 115 dB output, the new legislation is addressing mild to moderate hearing loss because that is actually the level that this fits into. And I think, again, keep in mind that you cannot sort of make a comparison to this dB output and gain. Those are 2 different things. And a more sort of general comment to the OTC regulation, I think, as we've spoken to before, we see this as an opportunity. There is still a huge unmet need in the market. Many people choose not to use the traditional hearing aids or go through the traditional channel. So we really see this as an opportunity to reach many more people. And we are very convinced that GN, because we have Audio and Hearing under the same roof and with a product like Jabra Enhance Plus, we are really well suited to play into the OTC market.

[Veronika Dubajova, Equity Analyst]

That's helpful. Can I just follow up quickly? And apologies to kind of be going back to this, but I'm still a little confused as to what happened with the R&D delay this year and sort of exactly what the failures were. And I know the question has been asked a couple of times. I'm still a little bit lost so maybe you can just clarify it for me. Is this that you ran into delays with the FDA? Is this that you ran into delays with the kind of functionality of the product, you were promised something but when you looked at the product, didn't have it? Or is there something else? Is there a third category of something that's gone wrong that's neither the first or the second but something else? If so, can you help me kind of think through that?

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

Well, thank you for that question. And maybe in order to shed a little bit more light on this, I mean, I think where we failed is we were too overconfident in our ability to sort out technical issues at the last minute. And I think the real situation of the projects surfaced too late. So that's why I talk about increased transparency, more output and also better project management as we move forward. Those are clearly areas that we need to strengthen in order to not end up in this situation again.

[Veronika Dubajova, Equity Analyst]

Okay. So if I paraphrase it, tell me if I'm putting words in your mouth, basically, the product maybe didn't have features or there were issues that you identified toward -- shortly before the planned launch and you couldn't address those quickly enough and fix those quickly enough to meet the time line.

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

Yes. That's a good way of putting it.

[Operator]

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

[David James Adlington]

Most of my questions have been answered, but maybe just on the Jabra Enhance Plus. Just it would be great to get the latest thoughts on the launch profile there. And specifically, with that maximum dB level rather than the gain, where does Enhance Plus come out on that maximum dB level? Can you get to the 115 to 120 decibels? I'm pretty sure you probably can, but just wanted to double check that.

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

Yes. I'm happy to do that. So Jabra Enhance Plus actually fits from a technical perspective and in terms of dB levels well into the framework. We are around 110 dB output level, so it actually completely fits into the new legislation. And as I've already alluded to, we've handed in the files to FDA under the current self-fit regulation, and it's still not completely transparent whether that will be immediately transferred as also approved under the OTC legislation. I think that is one of the things that are still a little bit unclear in the draft legislation and obviously something that we need to clarify.

[Operator]

Our next question comes from the line of Mattias Häggblom from Handelsbanken.

[Mattias Häggblom, Research Analyst]

Two questions, please. Firstly, coming back to the GN Hearing and the transformation of the R&D organization. In light of what you said about some of the shortcomings, can you talk about what the key criteria was when you looked for the new leadership for GN Hearing R&D and also, if there was a complete extensive search or if this should be seen as more of an interimistic leadership? I may have missed those details. And then secondly on -- again, on Hearing with regards to the North American market. The company states that for hearing aids, the market did not improve in Q3 compared to Q2, which stands a bit in contrast to other market participants, which, in particular, pointed to North America as proof for recovery and strength and even an example for why there may be a pent-up demand happening. So should we see the difference in light of what you discussed earlier related to Costco and VA? Or is there something else going on that may explain the delta from what I'm seeing?

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

Yes. So let me start with the latter part of your questions on the U.S. performance. What explains the delta, to use your words, is VA and Costco. As you can see in our detailed layout of our Q3 performance, we have headwinds in VA compared to '19, and we also have in Costco. What has happened since 2019 is there's been a significant decrease in the sellout prices for hearing aids in Costco in the branded segment. They have lowered with close to USD 1,000 for a pair, and obviously, that also has an impact on our ASP selling into Costco. Not that we pick up the full bill of that, but still part of it also impacts our ASP, as I'm sure you can imagine. And then what I've also spoken to earlier is that we do have a strong position in the branded segment, and I'm happy with that. But admittedly, I also think that the current KS10 is doing really well in Costco. So the branded segment as such is probably less than it was in 2019. So when you look at the headwind we have for U.S., it is due to VA and Costco. In terms of the policies for the new leadership, it was obviously important to get a person in that has a strong experience in the hearing aid industry. And I think we found that with Günther Pausch. He brings close to 40 years of experience. He's been heading up R&D at Siemens Audiology or Sivantos earlier on. And in that capacity, he also went through a similar transformation of the R&D at Siemens Audiology. So I really think he brings exactly what we need, and that obviously is why I have appointed him as Head of R&D.

[Operator]

Our next question comes from the line of Niels Leth from Carnegie.

[Niels Granholm-Leth]

First question would be on component prices for next year. Since you have locked up supplies for a great part of next year, I guess you must have an insight into the changes in component prices for next year. Can you elaborate a bit more on how this will affect your gross margin in GN Audio for 2022? And my second question would also be a question about kind of looking beyond this year. I mean you're talking about that you expect the market to grow by 10% next year and that you will outgrow the market. But in Q1, you will be facing very difficult comps to this year. Hence, you need to grow fairly robustly in the remaining part of '22 in order to grow by double digits. Can you just elaborate a bit on that as well and tell us -- so do you really expect to see growth in the remaining part of next year going to pretty high solid double-digit numbers?

[Rene Svendsen-Tune]

So thanks, Niels, for this. I mean on the component prices, yes, we have some views, but there is also, of course, a lot of back and forth out there. And I guess it will also be implicated by what will really happen with this demand/supply balance that's out there. As some of you may have seen, the raw material prices were shoot up -- were increased 2 weeks back in an attempt to somehow dampen the demand. It didn't help. So we have to see what happens. I don't have a gross margin guidance for next year at this point of time. As I said a little bit earlier, of course, we will work with this best we can. And there are many tools in the toolbox that we can play with. One of the things that of course, is already here is that when I talked about some of these mitigation actions, that we are trying to move ourselves where supply is better. Second is we are not in the spot market, and that helps a lot because if you go there, you have uncontrollable prices. So we are working on this context. So we will come back with this. It's a super relevant question, of course. But there are handles in the toolbox that we can use to deal with this. And then on the growth, I mean, I don't have a guidance for '22 either. It's clear we have a very tough comp in Q1. I guess many would have said to us that, "Guys, in second half of '21, this is -- there's no way you can match what happened in '20." The market is matching it very well. So we have to see now. I will come back and talk about this more. Every dimension sort of out there of the underlying things are pointing to growth in this market. I'm not promising that we will grow in Q1, but growth in the market. And we have a very strong lineup of products, very relevant products in the market and in our road map. So I think we will be very competitive in that market if we can ship.

[Niels Granholm-Leth]

Great. And just to follow up on those higher input costs. So I think you mentioned that freight price increases had a negative gross margin effect of a couple of percentage points. And as it looks right now, that will obviously carry over into next year. So if we assume that freight prices would stay at current levels throughout '22, for how long would this have a negative effect on the gross margin for next year? So would that be in quarter 1 and quarter 2? Or how should we interpret that?

[Rene Svendsen-Tune]

That's, of course, very relevant. I mean first of all, it's 1% on the bottom line, as we speak, from last year. And I think it must be something like Q2, it will dilute, if it doesn't go up, right? So in the beginning of the year but not in the second half.

[Niels Granholm-Leth]

Great. So freight prices should have -- pretty much have a negative effect of approximately 1 percentage point next year even that it will only affect first half?

[Rene Svendsen-Tune]

Even -- yes. I think we don't know. I mean we don't -- but if it is like this, it will have a negative effect on a bigger part of the first half but not in the second half because then it's in the money already.

[Operator]

Our final question comes from the line of Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Great. Fantastic. Then a couple of questions. Firstly, one for Rene just on the talk about -- what Niels just asked about, the 10% that you're going after. That is, of course, based on a normal demand -- or supply situation. But the question from my side is that do you plan to grow like this? So in a situation where supply will be an issue next year then, are you willing to see your margin drop even below your midterm target to keep the investment plans you have even in a difficult supply situation? Then to Gitte, just now you indicated that you come with a new platform every second year. But you have also indicated that you have become delayed with line extension on the current platform. So do you still stick to the plan for the line extension even though it will come very close to a new platform launch? And then just finally, to Peter, to bring him into the game. On SteelSeries acquisition or attempt to acquire them, you have given some indications of synergy targets. But how the situation has evolved now, both for you but apparently also for SteelSeries, working in the same environment, could we see a situation that your synergy targets actually already are outdated?

[Rene Svendsen-Tune]

So Rene first. So on your margin question, I mean, first of all, we still don't have any guidance for next year, but it's clear that we will not run a machine where we are diluting the margins. I mean we have midterm targets out there, and we're going after those. I think also in this quarter, we are -- as you have seen, we are maintaining, despite the hassle -- the accrued hassle, we are sustaining our 21% more for this year. So this is -- this, of course, is intact in our sort of outlook, and we'll come back to that. I don't know if that answered your question, but the answer is we're not going to cut the margins.

[Martin Parkhøi, Senior Equity Analyst]

Yes, it did. It did.

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

So Martin, back to your questions on -- I mean I don't think we have necessarily confirmed that it's line extensions, but obviously, that's reasonable to think that, that is the other thing we were talking about. And in regards to our now road map for '22, clearly, for competitive reasons, I don't want to be too detailed about this. But I guess your assumption about things coming closer than what we would like in terms of line extensions and the new platform, I think your assumption is right. But then again, I mean, if I put on the positive hat, I guess it means that we have an interesting year ahead of us in terms of launches.

[Peter La Cour Gormsen, Chief Financial Officer]

Martin, it's Peter, and thanks for giving me an opportunity to chip in also here finally. So SteelSeries, first of all, of course, we have not closed the transaction yet, so there is a limit to how much we can do. But of course, we still remain confident in the synergies. And of course, we are preparing everything we can at this moment while not owning the assets. But of course, the second we have closed, we will certainly move forward as aggressively as we've communicated up until now.

[Martin Parkhøi, Senior Equity Analyst]

And just a follow-up, maybe you could take that, Peter, just on Audio. We have seen a significant benefit this year from R&D capitalization. And is this a onetime effect? Because looking into next year, how should we expect that to evolve?

[Peter La Cour Gormsen, Chief Financial Officer]

Yes. Of course, you see these patterns depending on when you launch your products. So there will be swings up and down, but it's probably fair to assume slightly more balanced going into next year. But we will continue to invest significantly into R&D. That has proven to be the right strategy, and we will certainly not change that going forward.

[Operator]

This concludes the Q&A session. I will hand back to the speakers for any final remarks.

[Henriette Wennicke, Vice President of Investor Relations & Treasury]

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