GN Store Nord A/S

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Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Rune Sandager, executive]

Hello, everyone, and welcome to GN's conference call in relation to our Q3 results announced yesterday. Participating in today's call is Group CEO, Peter Karlstromer; Group CFO, Soren Jelert; and myself, Rune Sandager, Head of Investor Relations. The presentation is expected to last about 20 minutes, after which we will turn to the Q&A session. The presentation is already uploaded on gn.com.

And with that, I'm happy to hand over to Peter for some opening remarks.

[Peter Karlstromer, executive]

Thank you, Rune, and thank you all for joining us today. In the third quarter, we have continued to execute in line with the strategic direction we put forward at our Capital Markets Day in May. We are happy to see the benefits to margins and cash flow as expected but saw a top line that was weaker than what we anticipated.

In Hearing, we continue to deliver very strong performance both in terms of growth and profit, delivering continued double-digit organic revenue growth from further improvement of profit margins even on a high comparison base from last year. With this strong execution, we are now back at historical healthy margin levels, highlighted by our 21% EBITA margin in the core business in the quarter.

In Enterprise, we are navigating in a difficult European market, currently impacted by some economic pressure in parts of the region, including Germany and France, that is putting pressure to our sell-in numbers. On the positive side, we are seeing good developments of the U.S. market and the APAC region and are globally defending our market-leading position well.

Despite the sell-in challenges and top line, we see continued benefits from the company-wide synergies as well as pricing discipline, leading to continued strong profit margins. As for the sell-out, this was stronger than the sell-out in the quarter, which will provide support for our business as we move forward.

In Gaming & Consumer, we delivered well on the Elite and Talk wind-down process, making us comfortable that we will be concluding this by year-end within the estimates we have given. In SteelSeries, we experienced a temporary slowdown in growth, which was a result of a slightly declining market and some quarterly fluctuations, including some delay in order deliveries.

We have been adding SteelSeries to our common operations and IT system setup, which most likely have caused some delays. With what we have seen so far in October, we are comfortable that we will be back in growth again in Q4 even though end markets continue to be somewhat challenged. We have also launched our first gaming earbuds and our new keyboards that will support our growth in Q4 and onwards.

Despite the temporary slowdown on the growth, our margins were fairly strong in the quarter as a function of the well-controlled wind down and company-wide synergies. On group level, the One-GN transformation continues to develop favorably, and in the quarter, we delivered another DKK 150 million in company-wide synergies.

In summary, we saw uneven growth across our divisions but we are pleased to see the company transformation continue well. We end the quarter delivering margins improvements and a free cash flow of DKK 786 million, further reducing our leverage.

With this introduction, I'm happy to hand it over to Soren for further details on the group performance during the quarter.

[Soren Jelert, executive]

Thank you, Peter, and thank you all for joining us today. On a group level, we delivered a minus 4% organic growth, and if we exclude the wind-down, organic revenue growth would have been flat. Despite the decline in top line, our strong cash flows and company-wide synergies led to a 29% increase in EBITA. In terms of margins, this translates into an EBITA margin of 13.3%, which is 3.6 percentage points higher than the same quarter last year.

So in summary, despite a mixed quarter for the top line, we delivered a substantial margin expansion, all leading to a free cash flow of DKK 786 million, excluding M&A, and a further reduction in our leverage.

Moving into financial details on Slide 6. Despite the negative development on the top line, our strong focus on cost and synergy realization resulted in a gross margin of 54.8% compared to 50.1% in Q3 of '23. R&D was slightly up year-over-year, which was primarily a reflection of ongoing investments in consumer-centric innovation and in driving synergies across the R&D organization.

Management and administrative costs decreased while sales and marketing costs were essentially flat compared to Q3 of last year. Consequently, EBITA grew 29% equal to an EBITA margin of 13.3%. The strong improvement in margin reflects the gross margin improvement and some leverage on OpEx despite the top line development.

Our solid earnings level led to a substantial positive cash flow generation of DKK 786 million, driving a further reduction of our adjusted leverage, which ended at 3.5x in the quarter.

With that, let's move to Slide 7 and more details on the free cash flow generation. As mentioned, the free cash flow ended at DKK 786 million in the quarter, reflecting a solid earnings level, but also a positive impact from change in working capital, mainly due to the decrease in trade receivables, which is partly offset by a one-off impact from the wind-down of the Elite and Talk product lines.

Moreover, we did see somewhat lower investment levels across R&D as a result of timing of product launches. The cash flow generation of DKK 786 million marks the strongest third quarter cash flow ever for the group, which underpins our strong focus on cash flows and margins in general. With the solid cash flow generation, our adjusted leverage ended at 3.5x, another important step in our deleveraging plan.

Moving on to Slide 8 and a brief status on the One-GN transformation. We remain on track to deliver around DKK 600 million in cost synergies by '26 of which around DKK 400 million expected in '24 alone, and during the quarter, we managed to realize synergies of around DKK 115 million.

Year-to-date, we have thus realized total synergies of slightly more than DKK 300 million, and are therefore on track to deliver as expected for '24. We remain confident about our ambitions for '26, which mainly involves a realization of further improvements in efficiencies and processes, which should further derisk the company's profile over the coming years.

Moving to Slide 9, where I would like to give you a snapshot of the development in our supply chain. As you might recall, at our Capital Markets Day in May, we provided an overview of our operations strategy for the coming years. We have continued to execute on this agenda.

Due to the strong recent growth in Hearing and to support future growth, and automizations, we are in the process of relocating to larger and more streamlined facilities across U.S., Australia and Malaysia. In addition, we have now moved SteelSeries to the same system and product flows as Enterprise, which will further support company scale.

Moreover, as illustrated by One-GN progress, we are continuing to see strong benefits across our operations team to drive margins by ongoing supplier consolidation. While we're certainly happy with the development so far, we have also been executing well on our diversification strategy, which allow us to be competitive in the future.

And with those group highlights, I'm happy to hand you over to Peter for some additional color on the 3 divisions.

[Peter Karlstromer, executive]

Thank you, Soren. Starting with our Hearing division. During the quarter, we continued to drive market share gains, thanks to the ReSound Nexia's continued success. As a result of our strong execution, we grew organically by 10% on top of a very demanding comparison base from '23 when we grew 15%. The gross margin increased strongly compared to last year despite the retail disposal we made, including Belaudicao.

This was driven by group operations synergies as well as the continued success of ReSound Nexia. Sales and marketing costs decreased slightly compared to last year, supported mainly by retail disposals. As a result of our strong top line development and prudent cost management, we delivered a divisional profit margin of 34.8%, which is an improvement of 6 percentage points compared to the same quarter last year.

Let's move to Slide 12 to let me share some more detail on the regional performance. Year-to-date, we have delivered 11% organic growth positively supported by all regions, channels and countries that have all grown faster than the market. In Q3, the organic growth was also supported by market share gains across regions, with a particularly strong performance in several independent markets, including North America, Italy, Germany and Australia.

Following several Nexia family extensions during the year, we marked the completion of the Nexia family within this quarter. It has, in broad terms, been well received by the market, and we expect continued strong momentum for Nexia.

With this brief overview of Hearing, let's move to Enterprise. The Enterprise division delivered negative 7% organic revenue growth in the third quarter, driven by volume selling pressure in parts of Central Europe. Our sell-out in the quarter was stronger than our sell-in which likely will support our business as we move forward.

Despite the negative top line development, gross margin improved compared to last year, primarily driven by group synergies and pricing discipline, keeping ASPs intact. Our sales and marketing costs increased slightly, reflecting certain channel investments to prepare for an improving market while also executing with a good cost control across the business.

As a result of the top line pressure, our divisional profit margin decreased slightly by 0.7% points compared to a year ago, ending at 33.8%. I think it would be helpful to take a step back and look on the development of the Enterprise business in the first 9 months. Encouragingly, our largest segments, our headset business, has experienced a relatively flat growth for the year as a function of a slowly healing market.

Also encouragingly is that we've seen double-digit growth in our video business, where we gained share, but from a relatively small base. What has been a challenge is that our speakerphone business has declined significantly due to difficult comparisons last year when we launched new products and a declining market that has explained that room investment is now moving into integrated audio and video solutions rather than video only.

So while we're not satisfied with the negative 4% growth for the year, this has essentially been driven by the structural decline in speakerphone category and the difficult comparison base of that category.

Let me move to Slide 15 to take a further look at the performance in the third quarter. With this slide, we have tried to provide more details on the development of the Enterprise business in the quarter. From a regional point of view, we have been impacted by the pressure on sell-in volumes in parts of Central Europe, which has led to a substantial year-over-year decline for the region.

More positively, we recorded growth in North America and a relatively flat development in the rest of the world. When looking at the sell-out data, the development has been much more balanced, with flat growth in North America and APAC and on a slightly declining European market. Sales per product category has largely followed the trends we have seen during the year and that I just went through.

In Q3, headset and video was slightly declining, while our speakerphones declined significantly. Sell-out-wise, we saw a somewhat stronger sell-out than sell-in, driven by headset and video that were approximately flat. So while we are somewhat disappointed by the reported organic growth number, we remain encouraged by the relatively stronger sales of headset and video as well as a somewhat stronger sell-out and sell-in, which likely will support the recovery of our business as we move forward.

This post-COVID adjustment process has been difficult, but we are likely experienced at the end of this with a market finding its way back to structural growth. We remain confident of the attractiveness of the Enterprise market and our opportunities ahead.

Moving to Gaming & Consumer. In our Gaming & Consumer division, we delivered organic revenue growth of negative 20% compared to last year, mainly driven by the wind down of our Elite and Talk product lines. Our Gaming business declined 4% organically in a slightly declining Gaming market. Following several quarters with strong positive growth and continued market share gains, the slight negative growth in the quarter is mainly a reflection of the difficult market and some quarterly fluctuations, including delays in certain order deliveries.

Our Consumer business declined 50% organically, purely driven by the wind down of our Elite and Talk portfolio, which is going according to plan. Our gross margin for the division increased 9 percentage points to 33% despite significant promotional activities related to the wind-down.

The improvement is reflecting group synergy and was further supported by a release of earlier recognized provisions in relationship to the ongoing changes in the supply chain integration. Sales and distribution costs grew 7% as we have deliberately been preparing for the important fourth quarter of the year. Altogether, the divisional profit margin ended at 4% for the quarter, negatively impacted by the wind-down effects.

Moving to Slide 17 and a few exciting launches in the gaming space. During September, we have launched 2 new important gaming products. Building on the utilization of the GN earbud know-how, we introduced the Arctis GameBuds by the end of the quarter, representing a form factor extension of our Arctis line of headsets into buds. The first of its kind earbuds provides a true gaming audio experience augmented by the recently launched Arctis Companion App, which allow gamers to adjust the sound profiles to the games you're playing.

Within our keyboard category, we are launching the Apex Pro Generation 3 series, which is the world's fastest gaming keyboard that would provide gamers with an unrivaled experience and competitive advantages. We are very excited about these launches that are reviewing very well among leading gamers.

And with that, I'm happy to hand it back to Soren for our guidance.

[Soren Jelert, executive]

Thank you, Peter. As you all saw, we updated our financial guidance yesterday evening. In total, we are currently expecting an organic revenue growth of 1% to 2%. Remember that this is including the negative effect of the consumer wind down. Looking at the recurring part of our businesses, this would translate into an organic revenue growth of closer to 3% to 4%.

Due to our increased earnings power and company-wide synergies, we can confirm our reported EBITA margin of 12% to 13% despite the negative revision of the top line. Again, please remember that the reported margin includes around DKK 200 million in wind-down costs, while the underlying EBITA margin is roughly 1% higher.

Finally, due to the strong cash flow generation we have delivered in the first 9 months, we have upgraded our free cash flow, excluding M&A guidance, to now DKK 1.1 billion.

And with that, I'm happy to hand you back to Rune.

[Rune Sandager, executive]

Thank you, Peter and Soren, for the updates. And with that, I'll hand over to the operator for the Q&A. Please limit your questions to 2 at a time, please.

[Operator]

[Operator Instructions] The first question comes from the line of Martin Parkhoi with SEB.

[Martin Parkhoi, analyst]

From SEB. And 2 questions. Firstly, just, Peter, on the speakerphone category which you stated is approximately 10% of Enterprise, what are they facing? If we look into 2025, I know it's early, but have you seen a bigger deterioration in the second half than the first half of the sales?

And then secondly, on the Hearing business, I think that -- at least I got the impression that you saw slightly lower growth towards the end of June, but now you're still delivering strong organic growth in Q3 as well. Has anything changed or picked up in Q3 versus Q2?

[Peter Karlstromer, executive]

Thank you so much for the questions. I mean, first, in Speak, as I mentioned briefly here in the intro, I mean, there are 2 effects. I mean it's a structurally declining market due to different behaviors in the conference rooms. So that is probably relatively stable effect that we're estimating is probably around a 10% decline in market over time.

The other effect is that we last year launched the Speak 2 product lines. And we launched that in March, that then, I mean, supported our business with quite some additional volumes of businesses. So it is those tough comparisons we are meeting at this point in time also that is kind of amplifying that kind of a speakerphone effect. So as you move forward and model the business into next year, I mean, have in mind that March and onwards, the tougher comparisons will start to get out of our way, so to say.

Then the question on hearing aids, I think we've seen a fairly stable environment for our business throughout the year. I think it's difficult to comment on it month by month, but in the quarter here, we continue to see strong kind of demand for Nexia, I would say, around the world. I think it's encouraging to see it continues to do very well in the U.S., but also to do well, in particular, in Europe, it's been picking up, providing very healthy growth also. So we, of course, are very pleased with the progress here on the Hearing side.

[Operator]

The next question comes from the line of Julien Ouaddour with Bank of America.

[Julien Ouaddour, analyst]

I ask 2 as well. I mean the first 1 is for Soren. So we learned yesterday that Trump won the U.S. elections. And let's say, as you know, part of this program is to put in place tariffs with China and probably also elsewhere in Europe. You mentioned in your presentation that you have some production relocation. You mentioned the U.S.

Have you, first of all, started to assess what would -- I mean, what could be the potential impact from the tariffs on your business? Because I think you and your third-party partners have also manufacturing footprint in China, and so roughly, would you say -- I mean could it be negative into next year?

And the second question is that -- I mean, you seem to be encouraged by the stabilization in Enterprise for headset and video categories. I mean my perception is that it's very similar to what you told us over the past quarters. I mean, so far, we haven't still really proved that the market is really to get back to growth. So what's your real visibility in terms of when the headset market could really return to growth? And do you -- like do we expect -- I mean, when do you expect the market to return to roughly mid-single-digit growth at some point?

[Peter Karlstromer, executive]

Thank you so much for the questions. It's Peter. I actually take both of them here. So if we start with the tariffs, I mean at this point in time, we, of course, acknowledge that the election in the U.S. and the speculation around tariffs. I think it's too early to tell exactly what kind of policies that might be changed and how they would change.

But I would say, in more general terms, over the last 12 months and a bit more, we have really diversified the footprint of manufacturing across our businesses. So at this point in time, we have a Hearing manufacturing in a significant way in different places around the world, and also for Enterprise, we're now manufacturing products also in different places around the world.

We still need to take some further actions on Gaming in that direction also, but I would say we feel well prepared for the different scenarios that might play out, but I think it's a little bit too early to give the financial estimates. But we believe we have the flexibility enough to handle this in a manageable way, so I feel relatively good about it.

Then in terms of the visibility on the Enterprise market, headset and video in particular, I think that as we talked about before, we have seen a market which, I mean, has improved throughout the year. I appreciate it's a little bit difficult to correlate to the top line development fully, but throughout the years, we've seen a stabilization of volumes. We've seen -- I mean, the adjacent industries, including PC shipments somewhat strengthen, I mean albeit they have been slow down a little bit over the summer period.

We also talk a lot to the distributors and our customers, and that is what's forming our point of view. What we've seen in the last months here on the sell-out data, I think it is encouraging because, I mean, that's very closely related, of course, to sell-in. And if we look on the quarter, I mean I just shared here in the opening that the sell-out data has been approximately flat here for headsets and video. And I can also confirm that, that positive trend have continued into October.

So we continue to see improvements. We feel better, and the way we see it is that the stabilization improvement trends is something that will continue to move forward. And as we're looking into '25, it's too early for us to give the guidance, but in the base case, we are expecting the market to be in growth for '25.

[Julien Ouaddour, analyst]

Maybe just a quick follow-up on the first question. I mean, can you maybe provide like the percentage of like Enterprise? What do you still produce in Asia and in like China in particularly? And for Gaming. I mean did you say that roughly most of it is still produced in Asia, and you're working basically to extend the footprint into maybe Europe or the U.S.?

[Peter Karlstromer, executive]

No. I mean, in Hearing, we are producing in a balanced way, so we don't see the real exposure there. So I think it is more for the Enterprise and Gaming business. Enterprise, we have already moved the volumes. At this point in time, products are being produced in places outside of China. And the exact volumes, I don't have them here with me on top of my mind either. But it's enough of volumes outside of China to supply the U.S. market for the majority of the product categories. There are some products which we have less sales of that we're still doing fully in China. But we think that when you model this out, we're in a good place.

And for Gaming, we are in the process of moving at this point in time. And we have the capabilities to move, and it's something we're going through at this point in time and started like a couple of months ago. So I would say that we feel relatively good about the flexibility we have. And we need to understand, of course, what new legislation that might be put in place, but feel good that we can manage this well and also do it in a way that financially is manageable.

[Julien Ouaddour, analyst]

Perfect. Makes sense. You also mentioned a provision, if I'm correct, in Gaming. Have you talked about the amount, the exact amount and the impact on gross margin?

[Soren Jelert, executive]

We've basically said that part of the good gross margin in Gaming, part of that is actually also a reversal of the provisions made in the first 2 quarters also surrounding the change in our setup, on a system set up for Gaming.

So we have not commented on it, but I think we are sort of closer to more at 32% is on a going rate in the Gaming. So that's the way you should model it. But of course, if you look at it year-to-date, it hasn't fluctuated. It's more a change from what happened in the first 2 quarters into what happened in third quarter isolated.

[Operator]

The next question comes from the line of Martin Brenoe with Nordea.

[Martin Brenoe, analyst]

Some of the questions have been answered. So I'll just ask into the solid profitability that you provided here in Q3, and maybe just help us understand a little bit how much of this is structural and how much of this is some temporary wins that you have. For example, in the G&A, I see that's been coming down quite a lot, both year-over-year and sequentially. It would be helpful to understand how we should model that going forward.

[Soren Jelert, executive]

I think fundamentally, I think it's been a really, really good quarter for us in terms of profitability. And I think it follows also the trajectory we have seen on gross margin improvements as we have been coming through the year. So in that sense, I think it's definitely a proof point that we're consistently now improving our EBITA margins.

So in that sense, I think it's not a special quarter that is really impacted by major one-offs. So in that sense, I think it's solid. When it comes to the admin as such, I think we are probably a little much lower there than what we normally would see in a quarter. But actually, also if you go back in time, traditionally, we seem always to drop a little bit in quarter 3 essentially over quarter 2.

So I think a mix between these 2 is probably a relevant measure for where we think it's going, and I think that should give you your guidance enough. But overall, importantly to understand that the synergies are definitely working, and we are seeing it coming in on multiple cost lines. And of course, especially the gross margin is still one of the key parameters of our synergy plan towards '26.

[Martin Brenoe, analyst]

And also congrats with the very strong cash flow. I think that's quite impressive. Some of that was driven by net working capital, and just have a quick follow-up on that. Historically, we've seen that Q4, the inventory level also typically goes down to more like 15% of 12 months trailing revenue. Do you also expect to see that in Q4?

And also on net working capital, I've been hearing through some channel checks that you have been doing a program where you try to release a lot of cash in each individual divisions as part of your synergy plan. Should we expect receivables to be lower than the 25% that we saw last year in Q4 that rise up? Or is that sort of the cyclical trend that we'll see in Q4 as well?

[Soren Jelert, executive]

I think in my humble world, cash is, of course, king. And I think it's been really nice to see the cash we have been able to focus on. I think this has been a journey, Martin, that we've been on since we started the transition, essentially. I think people pay attention to cash within the company these days, and I think that's rubbing off on us right now.

When it comes to the quarter 4, I think we will continue to focus on it. I think we will see an improved inventory balance, but I also think that some of the receivables that we have seen come in low here in the third quarter will go a little bit the other way, based on the phasing of how fourth quarter would come out. And that's, of course, why we overall have said DKK 1.1 billion in cash flow is the upgraded version, appreciating that we are at DKK 980 million coming out of third quarter.

So you should expect there is this balance, and you should also expect that we continue to invest in R&D also in fourth quarter, and that is behind the scenes. But overall, I think it's reasonable to say that we are pleased with the free cash flow year-to-date and the way we are operating the different business units, and they are actually helping and focusing on getting the cash in.

[Martin Brenoe, analyst]

And just a very last question for me. The R&D capitalization was a bit lower in Q3. How should we expect that -- should we expect that to come back as you say here in Q4?

[Soren Jelert, executive]

Yes, I think it is a good question. And actually, the way we look at it, it's better to look at the R&D capitalization rates in a year-to-date scale. And in a year-to-date scale, we are closer to the 50% mark. I know it was a little low here in quarter 3, and it was probably a little high, by the way, in the second quarter.

But year-to-date, we are probably more into the -- close to the 50%. And I think that's probably more a good mark for fourth quarter. And once that is realized, it is actually an improvement in our earnings profile compared to what we've seen in the past years. So I think here, we are in a more balanced situation this year than what we've historically been.

[Operator]

The next question comes from the line of Robert Davies with Morgan Stanley.

[Robert Davies, analyst]

Most of mine have been answered. I just had one. On the -- I think there was a comment in the release talking about a benefit to gross profit in Gaming from the release of earlier recognized provisions. Could you just quantify how big of a benefit that was in the quarter? Because it obviously pushed the numbers quite far ahead of consensus in that 1 division.

[Soren Jelert, executive]

I think I spoke to it earlier, actually, where I said that the Gaming isolated had a gross margin of 37%. I think you should consider the run rate of underlying Gaming around 32%. Of course, then you can say within that mix, how much of that is then the reverse provision, but majority of that is linked to that. So that's the way I think you should model it.

[Operator]

The next question comes from the line of Oliver Metzger with ODDO BHF.

[Oliver Metzger, analyst]

I will limit myself to 2 questions. First, on Enterprise. Now your CMD is 6 months ago, and you can remember you mentioned various data points as indicators for a turn to a better, while [indiscernible] was not a direct cross read. Now it would be good to know if also you look at which data points have proved misleading, and on which data points you rely currently.

You just mentioned the sell-in, out which is basically a very, very short-term data point. But are there still any data points where you think, okay, they provide some visibility, or if not, basically, if you say eventually, we do not have a visibility, and I think that's also fair because that's the situation, how it currently looks from the outside.

Second question is on Gaming. So over last quarters, you basically also reported quite solid market share gains in an overall weak market. Now your comment suggests that basically the market was just declining slightly, but your minus 4% appears that, basically, you lost some market share. Can you comment about just these short-term dynamics? What has changed compared to previous quarters?

[Peter Karlstromer, executive]

Thank you so much for the questions here. So let's start with the Enterprise I think that the way we are trying to do this is look on our direct visibility and then also other indicators as you speak to. The other indicators tend to be a combination of what the analysts say about IT spend, and in particular IT equipment spend, that we follow closely.

And then the industry which tend to be the closest to us with a good correlation is the PC shipments. And I think what has happened here also, since we gave an updated guidance in the summer time frame when we announced the wind down of the Elite and Talk product lines, is that I think that the Enterprise market has developed a little bit less favorably in the rest of the year than what we anticipated.

And I think that's actually true also for PC shipments that during the summertime and Q3 saw a little bit of a setback compared to what the industry believed. Not at all turning it into a very declining kind of outlook, anything, but a bit softer than anticipated. So I think it's fair to say that we see some level of softness in the broader enterprise equipment spend market compared to what we expected in the summer time frame.

But then at this point in time, when we speak to customers, what we see the very large customers are doing that we have a direct relationship with, and also speak to our channels, what they see in the market, I mean, we do continue to feel better about the market. And the sell-out data is, as you highlighted in your question, is very closely related to the sell-in. I mean the only thing between is the inventory sitting in the channel. And we did see a stronger sell-out and sell-in, in the quarter.

The good sell-out data, I mean, continued here also in October, which is encouraging. So we feel relatively good that the market is moving in the right direction, refraining a little bit to give a point estimate when this is turning to growth, but as I said here before, I mean, our base expectation is that there will be some level of growth in the Enterprise market for 2025.

Then moving to Gaming. The way we read the market shares on our estimate is that we have not lost market share. We are very much maintaining them. I think it's helpful to also recognize that market shares are based on sell-out data. And in the negative 4% we reported in Gaming were a couple of larger sell-in orders that unfortunately closed on the wrong side of the quarter.

I don't think this have held back the channels from selling our product well. So we do believe we have been holding good shares, and we also believe that over time, we will be able to continue to gain share as we have done in the past. So I appreciate it was a quarter a bit deviating from the very positive growth we've seen in the past, but we remain very confident about the growth in this business already in Q4 but also over time.

[Oliver Metzger, analyst]

May I quick -- ask a very quick follow-up on my first question, because you mentioned inventory levels. Which visibility do you have on your customers' inventory levels? Because this seems to be a quite big black box.

[Peter Karlstromer, executive]

No, you're right. It's difficult to know the absolute inventory levels. But in a period where we are -- see a larger sell-out and sell-in, I think it's fair to assume that, that is reducing the inventories in the channel. That is more what my comment relates to.

[Operator]

The next question comes from the line of Mattias Häggblom with Handelsbanken.

[Mattias Häggblom, analyst]

I have 2 questions, please. So sticking to Enterprise, but a detail in the guidance I've been thinking about. So why is there no range for Enterprise, but minus 3% organic growth for '24, when there is a range for Hearing as well as Gaming & Consumer? Is visibility so much better for Q4 in Enterprise?

And then secondly, on Hearing, you highlight strength with independents, and presumably, you anticipate this momentum will continue into Q4. So how do you think about visibility there, particularly in light of quite aggressive competitive launch ongoing?

[Soren Jelert, executive]

I can take the first one. I think it's right that we have said around minus 3% for the Enterprise, knowing what we know today. And it's also an area we felt that we had to update in terms of the guidance we had before in Enterprise to give you a more specific sentiment based on what we see coming out of third quarter.

Actually, when it comes to the other, I think it's actually firming up quite well with what we have said of Hearing being in the upper end of the 8% to 12% and actually also when it comes to the Gaming being in the midpoint of 2% to 10%. So in that sense, I think it's quite precise estimates, essentially, but we also felt it would be better for you to get our clear sentiment on where Enterprise is going. So that is the reason behind that.

[Peter Karlstromer, executive]

Then if I take hearing, no, we feel very good about the Q3, of course, and the growth there. And as you highlighted, I mean, it has been, I mean, strong across the board, I would say, across channel types, but the independents, in particular, grew very nicely. As we've given the updated guidance yesterday and for the rest of the year, we do expect Hearing to continue a very good growth quarter in Q4 as well, based on the very healthy momentum we see broadly geographically but also broadly across channels.

So I mean, we're picking up of course, all the signals we can from the market and of course talking very much to the people we have out in the various parts of the world of selling our hearing aids. So that is what we're basing our forecast on, basically. But broadly, we feel very good about the value proposition of Nexia underperformance in the market. We do recognize there's been strong competitors launching also, but we still believe that we will be able to perform very well with Nexia. That is the great hearing aid appreciated by many.

[Operator]

The next question comes from the line of Niels Granholm-Leth with Carnegie.

[Niels Granholm-Leth, analyst]

First question on your Gaming business. It seems like your recurring gross margin for the Gaming business has been around 32% or so for this year. Is that the level we should assume even for the Gaming business going forward? Or are you aiming for additional margin improvements in that business?

And on the Gaming business, could you just tell us where we should expect the sales and marketing cost to be going forward? And then just finally, on your working capital, which seems to -- for the group, which seems to still be above the pre-pandemic levels, is there a chance that we will see your net working capital to sales returning to pre-pandemic levels?

[Peter Karlstromer, executive]

Thank you for the question. I mean, as for Gaming, we've seen a good improvement of the margin here in the latest periods, which exactly what we wanted to see. We believe we have a bit more we can do here. So we would refrain from giving an exact guidance, but expect a few more percentage points of margins improvement in Gaming.

And that will probably be over time across gross margin and divisional margins, and we need to come back and update you as we're making progress here. But we believe that we should be able to improve the margin a bit here by the right way of launching many appreciated products and operating.

And as I mentioned also, we've taken quite some initiatives to move SteelSeries over to the supply chain and operations of the group, which, short term, has been a bit of an undertaking and maybe some level of distraction. Mid- to long term, this will lend a very healthy support the margins also for SteelSeries. So that is the direction we take in the business.

[Soren Jelert, executive]

And then when it comes to the net working capital question, I think essentially, what we should remind all of us that pre pandemic, there was very lean way of operating where you never actually saw hesitations of having net working capital at 1 place and not having to have micro depots around the world, and you got closer to safety stock levels, I think most of us has probably come to the conclusion that it was too tight back then.

I think we are -- we've also said as part of the capital plan, we have definitely focused on, of course, improving our net working capital. And I think actually, we also done that. We expect still the inventory levels to come down also from where we are now here in the third quarter, and we will continue to, of course, work to improve that.

But we will also remain the flexibility for us to ensure that we can deliver in a world where there are the regional depots that we also need to appreciate, and it takes time to move goods around. So I think we have come away and -- but I will not promise that we get to prepandemic levels. It was a different way back then.

[Operator]

The next question comes from the line of Carsten Lønborg with Danske Bank.

[Carsten Madsen, analyst]

Two questions here. First of all, I notice that you have 7,281 full-time employees at the end of this quarter, which is actually the same as 1 year ago. So I was hoping that you can maybe talk a little bit more about where your synergies are actually coming from, because it doesn't seem to be from a reduced headcount, and also in light of the cost savings you book on general and admin, which I would have presumed would be highly related to headcount reductions.

Secondly, the Hearing EBITA margin has come quickly to the 20%, it seems. What does this actually mean for the future? Are we now going to see that it's the other divisions that will contribute from here? Or do you think that could come more from Hearing also when taking into account that maybe, maybe not, we'll have to spend a little bit more on sales and marketing Nexia when a huge competitor is pushing very hard for a new hearing aid?

[Soren Jelert, executive]

I think when it comes to the manning, sometimes it is actually a little bit difficult to compare exactly like-for-like in a quarter, also appreciating that, of course, it's at the end of Belaudicao and it's actually also the building up to a restructuring that we did towards the end of the year, and this year is also about, and which I've said upfront, when are all the people out in terms of us relocating to [ Poland ]. They're not out all yet.

So I think it is a difficult number just to speak on quarter-to-quarter. I think you should probably rely more on the synergies that we see coming in. And then essentially also part of the synergies we see is also a more structured way of operating, and in some areas, positions that we did not anymore feel that we would have in the bank, and that's also a synergy for us going forward. So manning figures, I would at least be a little hesitant with -- to exactly track those down.

When it comes to the margin, there, I would actually still urge you to go back to our Capital Markets Day where we back then said, and it's actually also support exactly what Peter said a second ago on Gaming, that, that would be the one where we would be looking for margin improvements. And as you can also remember from back then, we said that we would have to improve margin, and that was actually within Consumer & Gaming back then. And now, of course, we have taken out the Consumer part of it, improving our ability to get to the 16% to 17% EBITA margin in the long haul.

When it came to Hearing and Enterprise back then, we said, yes, there's probably a little more to be had there, but we were actually definitely faring in the right direction, especially now where we can bank basically the Hearing margin that has been suppressed over years, and we have now fully back in the game when it comes to Hearing. Enterprise has actually been faring quite well over the past years.

[Carsten Madsen, analyst]

And in terms of spend on sales and marketing in Hearing considering the competitive environment going forward, do you feel you're at the right level? Or...

[Soren Jelert, executive]

I mean I think within Hearing, I think we should appreciate that we are also a growth within Hearing. And as such, we also expect to support and fuel that growth. And I think, overall, the company has been on the journey now where we see a better balance between growth and earnings, and that's, of course, the balance we and management are trying to strike the right way to ensure that we actually do get the growth where we believe we can get it at a reasonable price, of course.

[Operator]

The next question comes from the line of Maja Stephanie Pataki with Kepler Cheuvreux.

[Maja Pataki, analyst]

I have a couple of questions around Hearing, please. First of all, if we look at your strong Hearing growth performance of 10% organic, would it be fair to assume that your traditional business has been growing in the high single digits? That would be cool if you could confirm that. The second question, since you have been highlighting your strong growth with the independents, could you give us an indication whether pricing was meaningful in the quarter and also year-to-date when it comes to growth?

And then lastly, as many of my colleagues have been pointing out here, we have one of your main competitors with a massive launch out there and definitely beating the drums quite strongly. Could you maybe share some views or some feedback that you're getting from the market on why Nexia continues to do so well? So just to kind of understand what is it that is the one thing that people highlight about Nexia.

[Peter Karlstromer, executive]

Thank you so much for the questions here. On your first question, yes, we can confirm that. So if you look on the traditional business, that would be high single-digit growth. That's a good way to think about it. If you look on ASP, I mean, broadly, for the quarter, it's been a good ASP quarter for us, with some growth in ASPs. And I think that is driven also by the continued success of Nexia that is taking a higher share of our business. And as being an appreciated hearing aid, we're able to price it in a healthy way also. So we are seeing some of that effect.

I think it's important also to recognize we are highlighting the independent because, I mean, there, we really had a standout growth. But we've actually been seeing healthy growth in other channels also. So the way I think you should think about it is growing nicely across channels and regions, and then the independents are a little bit, I mean, standing out with even stronger growth. So that is great to see.

I think when it comes to the appreciation of Nexia, I personally believe it's difficult to highlight one single factor that is standing out. I think it's a combination that make it a very complete and appreciated hearing aid. I mean what we still believe is most important is really helping the users to hear well overall, but in particular, noise environments. But then if you add to that the size of it, the battery performance, the comfort, the connectivity, I think it makes a very compelling proposition.

And then also, I would say, we have gradually seen also increased level of audiologist support for it. They like working with it, and there is also good quality and very satisfied users for them. So I think it's been very good momentum we built up here around Nexia. And to be fair, it started even before the product, before Omnia, and Nexia then have been taking it to the next level.

And that's also why I believe we see the broad-based growth around the world and across channel types. So we do recognize that there have been competitive launches, but we very much believe that Nexia remain a very good proposition in the market, and as such, also, we believe we should be able to do well in the market.

[Maja Pataki, analyst]

And just to have a bit of a better understanding of the ASP impact, Peter. If we assume the market has been growing 3%, 4% in units, were you still growing above the market in unit terms? Or has -- have you been more in line with market?

[Peter Karlstromer, executive]

No, I would say we've been growing faster than the market in volume, and then been able to add a bit on top of that with ASP expansion.

[Operator]

The next question comes from the line of Shubhangi Gupta with HSBC.

[Shubhangi Gupta, analyst]

I have a question on the Gaming business. So you have mentioned you're seeing slightly declined markets. So can you please elaborate? Is it specific to any geographies? And also with the medium term, how do you think about the ASP development in Gaming as well as for gross margin? Are you looking at improving it to mid-30s percentage as some peers already out there?

[Peter Karlstromer, executive]

In terms of the market development, just to make sure, to calibrate to get the right understanding across, I think it's a market that's been kind of hoovering around flat development throughout the year. And in the early part of the year, it was in slight growth, in the way we read the market, from 1% to 2% for our categories. And now it's a slight decline, probably 1% to 2% of decline.

So the shifts have not been very dramatic and as such, also like to downplay it a bit because we should be able to grow in the current market environment. We believe we have strong offerings and strong offerings in the pipeline, and we should be able to grow even if the current environment is showing a slight decline. In terms of the geographic split of that, I think there are small differences. So I probably would refrain from highlight those.

It's a fairly global phenomena, what we're picking up. The ASP development, it is something, for us, that's important. I mean SteelSeries, we position ourselves as a premium equipment manufacturing in Gaming. And as such, we really like to be able to command a pricing premium also. And the products we launched, I think we launched them to healthy price points and, I would say, margins that help us to further build our business. So I haven't seen any kind of negative trends of that.

I would say a bit on the contrary, I mean, last year and the year before, there was so much excess inventory in the industry. So I think the pricing environment were relatively difficult because there were so much extra promotions to get rid of the excess inventories. I think we have addressed the -- our excess inventory, and I think many of the other industry players have as well. So the pricing environment is probably a bit better today than it was a year ago, in our mind.

[Shubhangi Gupta, analyst]

And on the gross margin medium-term development?

[Peter Karlstromer, executive]

I mean on the gross margin, we talked a bit about, I mean, this before. Maybe if I not break out gross margin versus, I mean, the other costs, but we do believe that we are able to further improve our margins in Gaming a bit over time. We have made a very healthy improvement already, but are working to further improve that a few percentages point over the, I would say, over the coming year or 2 as we're taking more initiatives.

It also has some initiatives are more short term in nature, but some also takes a little bit longer time related to how we operate our supply chain on a global basis, but we are very keen here to improve the margin a bit further in the Gaming business.

[Operator]

The next question comes from the line of Hugo Solvet with BNP Paribas.

[Hugo Solvet, analyst]

I have a few, please, clarification, and sorry if I missed the answer earlier. But on audio end markets, just wanted to get some clarification on how do you position against the risk of recovery in those end markets to come with potentially higher discounts and what the guidance can accommodate when we look Q4?

Second, follow-up on Julien's question earlier on the fact that you're moving manufacturing outside of China for Gaming. Just wanted to clarify how long that is expected to last, and when will you be effectively outside or most of the production for Gaming will be outside of China?

And lastly, on in Hearing, thanks for the earlier comment on competitive dynamics. Just when we zoom in into Europe wholesale, can you give us a bit more clarity on what you're seeing maybe by region? That would be helpful.

[Peter Karlstromer, executive]

Thank you so much. So let me start here with the Enterprise. I think we see, in terms of the pricing environment and our ability to maintain our ASPs, I think we have actually been able to do that, in our mind, in a very healthy way throughout this whole kind of post-COVID adjustment process. And also in the most recent quarters, have been able to price well in the market and protecting healthy ASPs in the markets.

So I don't see any major risk there. I mean, in the short term, for sure, not. We are very disciplined on how we approach that, and we don't foresee that to change here in the coming period. Of course, I mean, if you look on Q4, there are some level of ranges for where the quarter can land. But we, of course, are a month into it now when we're giving you the updated guidance, which we have factored in.

So essentially, we have 2 months more to go. So I think we're coming back to the full year guidance for Enterprise is around the negative 3% that Soren spoke to here earlier, and you should probably see some kind of small range around that number for Enterprise. But I think -- I mean, importantly, we're really, I think, working to position us well also from an improving market over time. I mean, we appreciate it's been taking a bit longer than what we thought it would do and as I think many others have thought as well, but it is still taking place.

And as I said in the opening, we're quite positive of what we see, in particular on the recent sell-out data, and our base case for '25 is some level of growth in the market, which we will update you more on when we're giving our guidance here on the next quarterly call. Then if I move to Hearing, what we see here around the world, I mean, I can speak -- I mean, market-wise, first, if I start there, the market is holding up relatively well.

It's probably a bit pressure in the market compared to the normal structural unit growth, but still a fairly healthy market in our mind, but probably on the lower end of what's considered normal, so to say. Then our own performance here, we continue to do well in the U.S. It's really been another good quarter for us in the U.S. But also, I would say, a very good quarter in Europe growing, also nicely supporting the global growth of the business. And then the different channel types, we highlighted independent as extra strong, but it's actually been healthy growth in several other channel types also. So fairly broad-based growth for us.

[Hugo Solvet, analyst]

And on outside of China manufacturing for Gaming?

[Peter Karlstromer, executive]

Sorry. I missed that for you, so apologies. It's hard for me to give an exact time estimate today, but I think that we work here with outsource manufacturing, so it's essentially to plan that together with existing manufacturing partners, but also as we're planning future launches and future growth, making sure that we have manufacturing partners that can support us in locations around the world.

So it is a bit of a process to take us there. And we believe we should be able to manage this in a good way. But it's, of course, difficult to comment on exactly before we know any possible change. And the difference there is that for Enterprise, we've already been going through this. So here, we already have it in place.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Rune Sandager, executive]

Thank you very much, operator, and thank you, everybody, on the call. See you on the road.