U.S. Markets closed

Edited Transcript of GN.CO earnings conference call or presentation 22-Aug-19 9:00am GMT

Q2 2019 GN Store Nord A/S Earnings Call

Copenhagen Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of GN Store Nord A/S earnings conference call or presentation Thursday, August 22, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jakob Gudbrand

GN Hearing A/S - CEO

* Marcus Desimoni

GN Store Nord A/S - CFO

* Morten Toft;Vice President Investor Relations & Treasury

* René Svendsen-Tune

GN Store Nord A/S - CEO

================================================================================

Conference Call Participants

================================================================================

* Annette Lykke

Handelsbanken Capital Markets AB, Research Division - Medtech Analyst

* Carsten Lønborg Madsen

SEB, Research Division - Research Analyst

* Maja Pataki

Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector

* Martin Parkhøi

Danske Bank Markets Equity Research - Senior Equity Analyst

* Michael Klaus Jungling

Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst

* Nyeok Lee

Jefferies LLC, Research Division - Equity Associate

* Oliver Metzger

Commerzbank AG, Research Division - Equity Analyst of Life Sciences

* Patrick Andrew Robert Wood

BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team

* Veronika Dubajova

Goldman Sachs Group Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Morten Toft;Vice President Investor Relations & Treasury, [1]

--------------------------------------------------------------------------------

Hello. Welcome all to GN's Q2 2019 Conference Call, following our release this morning, Danish Time of GN's Q2 report. Thank you all for dialing in. We are extremely excited to be here and have you all on the call today. Participating on the call is René Svendsen-Tune, CEO of GN Audio; Jakob Gudbrand, CEO of GN Hearing; Marcus Desimoni, CFO of GN Store Nord; and myself, Morten Toft, Head of Investor Relations and Treasury.

Today's conference call is expected to last about an hour. First, we'll go through the presentation we have uploaded on our website gn.com.

The agenda for the presentation itself is that Marcus will start off with financial highlights, then Jakob will provide an update on GN Hearing, René will then provide an update on GN Audio, after which we will go back to Marcus for an update on financial guidance. After that, we'll hand over to Q&A with questions from the queue. And with that brief introduction, I'm extremely happy to hand over to Marcus.

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [2]

--------------------------------------------------------------------------------

Good morning. Thank you, Morten. Morning, everybody on the call, and thanks for joining. As always, it's a pleasure for me to run you through our financials from GN, and therefore, let me start with our group numbers.

On Page 4, you can see the revenue growth came in with an impressive 16% organic, 19% all-in, and therefore, roughly 3% FX translation effect. Based on our strong performance across all our businesses, we have been able to increase our EBITA with 16% in the quarter, which is also including roughly DKK 7 million transaction-related costs of the Audio acquisition. EPS is up 9% in the quarter, driven by the strong performance from top and bottom line and in the first half of 2019, EPS was increased by 19% -- by 15%. If we adjust in the quarter for the onetime effects of noncash item from repurchasing convertible bond, that was roughly DKK 22 million, the EPS would've been higher, including the noncash acquisition-related amortization from Altia, EPS would have been in the quarter with 19%. Cash flow generation was, as expected, strong in the first quarter with 90% cash conversion, and that was leaving our leverage with roughly 2x. Our long-term target is around 2x. We are slightly ahead in the quarter, driven by the Altia acquisition and the impact from IFRS 16. However, we believe and we foresee that we will run in the third quarter and the fourth quarter absolutely into our range of 1.5 to 2x leverage ratio again.

On point -- on Page 5, you see our cash flow. The development, as I mentioned, have been really, really positive. Operating cash flow in both divisions have been strong driven by, of course, the underlying performance of the business but also by a focus on cash collection and working capital.

In GN Hearing, we saw a strong development in net working capital, realized a debt of around DKK 50 million compared to second quarter in 2018.

And in GN Audio, it was expected, the impact driven by the very strong sales momentum. However, the quality also improved in Audio. Investing activities are slightly lower than the second quarter 2018, primarily driven by less activities around the financial support agreements in GN Hearing. And that is leading us to a strong increase in free cash flow in the quarter and set as expected.

Let me give you a few highlights around our funding profile that you see on Page 6. For me, it's important to de-risk the balance sheet and to keep flexibility in order to leverage opportunities in the market. As you have seen, we have taken opportunities in the second quarter with repurchasing of the convertible and issuing a new convertible and that was increasing our debt profile towards 2024. At the same time, with the new convertible, we have been able to increase our conversion with a strike price of DKK 474, 0% compound, and it came out with a negative yield. And as we have promised and as we issued the first convertible 2 years ago, it will avoid dilution with the repurchase we have done so. And we are able to cancel 1 million more shares that are currently hold in treasury and that will be happening after the approval of the next AGM.

If you take a look then into the years '19 to '22, you see a smaller issuance that might have to be revisited. We, of course, as I said in the last call, taking a look into the opportunities of the market. And we will ensure that we don't have a short-term overhang and that we have flexibility, but also be able to prolong our maturity profile and taking efficient opportunities from the markets right now into consideration.

And with this, I'm very happy to hand over to Jakob for GN Hearing.

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [3]

--------------------------------------------------------------------------------

Thank you, Marcus. Good morning, everyone, and thanks to everyone for attending our conference call today. First of all, I'd like to thank our colleagues across the world. Their dedication and commitment is the reason why we have been able to deliver the strong results in the quarter.

With that, I'd like to start with GN Hearing's key highlights from the second quarter 2019 on Slide #8. In Q2, we continued our positive growth momentum, driven by our Premium-Plus ReSound LiNX Quattro. Organic growth in the quarter was strong at 8%, while revenue growth was 11% with 3% (sic) [2%] impact from FX and insignificant impact from M&A in the quarter.

The organic growth in Q2 reflects a strong performance across our 3 sales regions, which I will get back to a little later in the presentation.

Gross margin in Q2 '19 was essentially flat compared to Q2 '18. The EBITA margin reached 18.9%. This is slightly lower than in Q2 2018, which reflects, among other, the development in foreign exchange rates as well as ongoing infrastructure investments, particularly into IT, which we have talked about for some quarters now.

Free cash flow, excluding M&A, was very strong, as Marcus mentioned, a cash conversion in the quarter of 97%, driven by lower FSA activity as well as a strong development in net working capital as expected. Year-to-date, we are now on a cash conversion of 44%, which is slightly higher than in the first half of 2018. All in all, we are very pleased by this development.

Turning to Slide 9. I'd like to give you some additional color on the strong organic growth in the quarter. Overall, Q2 was a strong quarter for GN Hearing across our 3 sales regions, which positions us well for the rest of 2019. In North America, growth in Q2 was driven by strong performance across channels, partly offset by the loss of a large customer, which, as we have previously said, is a headwind on growth of up to 150 basis points for the full year 2019. The negative impact in Q2 was slightly less than in Q1. We saw strong sales in Q2 in the VA. In Europe, we continue to see solid growth across the region with particularly strong performance in Germany, Spain and the U.K. In our Rest of World sales region, we delivered strong growth, again, in Q2, most notably in China and Japan.

On Slide 10, I'd like to give you a bit more color on our performance in Japan, which we have mentioned a couple of times in the past few quarters due to our strong recent performance. Japan is a very interesting market due to several factors. First of all, Japan is the third largest hearing aid market in the world with around 600,000 units annually, corresponding to around 4% of global units and with relative high ASPs translating into roughly 7% of the global hearing aid market in value.

The market growth has been modest in recent years, although it has picked up in first half of this year, but we have been able to grow strongly over the past 1.5 years leading to a current market share of around 20%. The strong performance is first and foremost based on a very structured approach. We have a new leader who has been in place since the beginning of 2018, who together with a team, has secured a data-driven, commercial excellence implementation, especially a clear data-driven focus on effectiveness and efficiency in our sales force has been a great success. All in all, we have delivered excellent results driven by the right strategy and execution and, not to forget, our market-leading technology.

On Slide 11, we have provided an update on the rollout of ReSound LiNX Quattro. As of today, the commercial rollout is practically complete with a product being launched in more than 50 countries worldwide. The feedback we continue to receive is simply amazing with hearing care professionals and user highlighting our sound quality as well as our state-of-the-art rechargeable solution. And the positive trend with regards to our focused sales KPIs continues, among others, the generation over generation cannibalization pattern has changed compared to earlier launches with us seeing less cannibalization than what we have previously seen. We also continue to see positive ASP development on a like-for-like basis versus ReSound LiNX 3D.

Turning to Slide #12, I'd like to share a user story that I'm very proud of. On the picture, you see Andrew Hugill. Andrew lives with Ménière's disease, which is a severe disorder of the inner ear that can lead to vertigo, tinnitus, aural fullness and hearing loss. This disease separated him from parts of this life as a composer and a musician. And he kept it secret for a decade, as he felt it was a sign of weakness. In September 2018, Andrew was fitted with ReSound LiNX Quattro, a hearing aid that brings the music back in his life and gives him the confidence to attempt to play live music. It also gives Andrew the confidence to initiate a new music project called Aural Diversity, an innovative project, which brings together professional musicians with different hearing profiles to create music that reflects their hearing experience. We are proud to support Aural Diversity and the amazing work of Andrew Hugill. He is an inspiration for all of us. When we grow our business, we help more people. This is something that truly motivates and inspires our global colleagues.

And with Slide 13, we'd like to remind you of our partnership with Google. As you know, we have co-developed a protocol that will enable a full spectrum of direct audio streaming from android devices to hearing aids. At Google I/O Conference, during the quarter, Google showcased and celebrated our important relationship, which allows a full spectrum of direct audio streaming from android devices to hearing aids. This is a testimony that not only us at GN, but also Google is keen to deliver this feature to hearing-impaired users, which will come soon.

With that, to round off, I'd like to summarize that Q2 was a strong quarter for GN Hearing with a strong development across channels and markets, and this bodes well for the rest of 2019.

With that, I'd like to hand over to René.

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [4]

--------------------------------------------------------------------------------

Thank you, Jakob. So -- and good morning to all of you on the call today. So now I'm pleased to take you through the GN Audio's result for the second quarter 2019. And as I started, you all know that we upgraded our full year guidance on organic growth yesterday, where we now expect around 24% growth for the year.

So if you go to Slide 15, the second quarter of '19 was yet again a very strong quarter for GN Audio, and we achieved 26% organic growth. The growth continues to be driven across our CC&O and consumer businesses with I have to say exceptional performance by our teams around the world. They are doing a really great job. Revenue growth was 30%, including around 3% impact from foreign exchange and around 1% impact from M&A. Gross margin was down 3 percentage points compared to the second quarter of 2018. That was entirely driven by foreign exchange and mix effects. On a like-for-like basis, we continue to see very stable development in terms of both ASPs and product gross margins. EBITA increased by 29% after expensing DKK 7 million of transaction costs related to the Altia Systems deal we made earlier this year.

The reported EBITA margin was in line with second quarter of 2018. However, if we take into account the transaction-related cost and the development in the foreign exchange, we continue to see strong underlying leverage in the business. Free cash flow was slightly down compared to last year, and this is mainly driven by change in net working capital as a result of the very strong top line growth and some inventory sort of triggered buildup.

If you move to Slide 16. On this slide, we dig a bit deeper into development in our CC&O division. In Q2 2019, the CC&O business continued to develop very favorably with strong organic growth across all 3 regions. As a consequence, we have once again taken market share, and we have strengthened our position in the global CC&O market. In North America, we continued to deliver solid organic growth based on strong product portfolio and our commercial excellence initiatives. In Europe, we saw, again, very strong organic growth, driven by a solid range of larger countries. Europe was again the fastest-growing region in this quarter. And in a similar way, in our Rest of World region, we delivered strong organic growth. Also, this growth was broad-based across countries in the region.

So if we move to slide '17, then I will, once again, use this opportunity to take a step back and look at the overall market structure and market drivers. As starting point, it's important to say that the market growth observed during the quarter was as solid as we have seen in recent quarters and fully in line with our expectations.

In line with our business, we divide our market opportunity into 2 different segments, as you know, the CC&O segment and/or enterprise, as we talk about and Consumer segment. As discussed before, we divide the CC&O market into 2 segments again, the call center or call-centric part and the office part, the latter often referred to as the UC market. The 2 enterprise segments offer different growth prospects with the call center market being fully penetrated and leading to low single-digit market growth. And the office market still offering nice double-digit growth. In the call center market, GN Audio is currently #2 in terms of market share. And in the faster-growing office market, we are the market leader with a #1 position.

On the consumer side, the market for true wireless continues to develop very favorably. And we are excited to see that our ear buds continue to come out on the top of product reviews. With the introduction of our over-the-ear headphones, we are currently well positioned across the consumer market. And all in all, we are still exposed to healthy growing markets across our business areas.

So let's move to Slide 18, where I would like to spend a few minutes on our recent launch of Jabra PanaCast. As you know, we acquired Altia in March of this year and driven by very strong efforts across our teams, we have been able to start shipping the first Jabra products in this segment by end of August, actually just now. The solution we are now shipping contains leading-edge cameras and microphones combined with the so-called fourth-generation stitching technologies and intelligent vision software. The solution is plug-and-play and works with all major technology platforms, such as Microsoft Teams, Skype for Business, Zoom and so on and so forth.

The early feedback we have received is very encouraging, and it is well in support of the ambition we set out. Companies do experience substantial cost savings and savings in carbon footprint by reducing travel, while at the same time, they do see improved meeting efficiencies with a reduction in meeting duration. While it is still early days for us in this space, we are very confident that this will offer interesting growth opportunities for the years to come. Further, as we have said before, we still expect this acquisition to be accretive to our financials already from next year.

Finally, on Slide '19, let me give a bit of color on the initial feedback we have received from the launch of Jabra Elite 85h, which we started to ship during the second quarter. The Jabra Elite 85h, which is our new over-the-ear consumer headphone that has a superior sound, voice assistant control and market-leading battery technology.

On top of this, we have included, what we call, state-of-the-art active noise canceling and it uses artificial intelligence to adjust settings to your specific surroundings and preference. The product is the first of its kind using the soundscaping analysis from German company audEERING, the artificial intelligence company, in which we invested in 2018. And as you can see from the product reviews on the right side of this slide, the initial market reaction is very good.

To round off, second quarter '19 was yet again very good quarter for GN Audio, where we managed to sustain and even further strengthen our momentum and market position. We achieved very strong performance across all our business segments, geographies and channels.

And with that, I would hand back to Marcus.

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [5]

--------------------------------------------------------------------------------

Thank you, René. Turning to Slide 20, we'll see our updated full year guidance. In GN Hearing, we are guiding for an organic growth of around 7%. And at the same time, EBITA margin is about more than 20%. If you look on GN Audio, we have raised our guidance, again, last night, and we expect now an organic growth rate of more than 19% for the year and an EBITA margin, before transaction-related costs, of around 20%. We are confirming our effective tax rate guidance. And in total, we expect a double-digit EPS growth again.

And with this, I hand over to Morten for the Q&A.

--------------------------------------------------------------------------------

Morten Toft;Vice President Investor Relations & Treasury, [6]

--------------------------------------------------------------------------------

Thank you, Marcus, just a practical comment, just an update, the updated guidance for Audio is, of course, around 24%, as it's also said on the slide. So with that, thank you, Jakob, René and Marcus for the updates.

On Page 22, we have a practical point before we move to Q&A. EUHA this year will be held in Nürnberg, where we'll host our Investor and Analyst meeting on October 17 at 9 a.m., and we hope to see many of you there. A formal invitation will be sent out later. And with that, I hand over to the operator for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Carsten Lønborg of SEB.

--------------------------------------------------------------------------------

Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Carsten from SEB. A question for René to start out here at least. So in terms of EBITA guidance, you have this around 20% margin for the full year. And so far, you had 18.3% year-to-date adjusted for the Altia acquisition cost. So apart from FX, what is it that you expect to -- that will change significantly in the second part of the year? And this is, of course, also closely related to my second question, which is more specifically on the gross margin, which was maybe a little bit of a disappointment. In this quarter, how much of this, if you look at -- I don't know if you can pinpoint this down, but if you look at like-for-like ASP pricing in the consumer segment, I was seeing a deteriorating price for your consumer assets or are pricing stable? Because we're seeing some discounts that we see in Denmark on the Elite 65h -- sorry, Elite 65t, sorry -- Elite 65t?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [3]

--------------------------------------------------------------------------------

Thanks for the question, Carsten. So on the full year guidance, I think we are exactly on the same place as we have been so far that, as I said in the commentary, there is leverage in the business, as we are growing at the pace we are growing and we see still opportunity for actually driving more absolute growth. We are putting money in that direction. There is some foreign exchange headwind on the bottom line that is absorbed here. We have this Altia thing as you commented yourself. You may also have noticed actually we have reversed the R&D capitalization versus the amortization. So there's a small effect in that direction. But you can say the -- we are still of the view that there's a better use of the last dollar to put it back in the market, then put it on the EBITA line.

And then on the gross margin, I think the gross margin decline is driven by basically 2 things. One is, half of it is on foreign exchange; and the other half is purely mix. The -- as we have had this higher growth on the Consumer side, we have had on the enterprise side, the mix is impacted, mainly this way, but also some regional and office versus call center mix here drives a gross margin decline, which I understand was not expected by you all.

So on the like-for-like, as I said, there is no change. The margins -- the ASPs are stable. The margins are stable. And actually, in all transparency, we have some improvements on the consumer margins in the making.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question comes from the line of Annette Lykke of Handelsbanken.

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [5]

--------------------------------------------------------------------------------

First of all, can you share with us how the introduction of your Jabra Elite 85h is going? Have you rolled out in all markets? And how has the uptake and the feedback been in this respect?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [6]

--------------------------------------------------------------------------------

So René, again, here. I think I can say, I mean, 2 or 3 things about the 85h. One is that from a, you can say, PR point of view, a media point of view and an analyst point of view, the reception has been very strong and very solid. And you can say that the product is categorized with the market leaders Bose and Sony at this point in time. We are rolling out merchandising and listings as we speak. We have not said anything about the - it had a certain impact on the second quarter, but nothing that fundamentally changed a thing. So we -- but the listing and the ranging is good and the selling has been fine. We don't have a strong view on the sell-through yet.

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [7]

--------------------------------------------------------------------------------

Okay. And in this respect, can you -- I mean, these type of products -- this is a high-margin product within the Consumer segment, but still a low-margin compared to CC&O.

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [8]

--------------------------------------------------------------------------------

I -- we don't have a guidance on the specific product margins within the segments, but it still stands that you can say, the call center segment has the highest margins, the office segment a bit lower and the Consumer space a bit lower again.

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [9]

--------------------------------------------------------------------------------

And then René, you made your second profit upgrade here. And now an implicit guidance for the second half is 17% or so if you have to reach the 24% for the full year. And of course, it can be a little bit higher as well. But what is it -- what kind of segments are you seeing lower activities within -- in the second half?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [10]

--------------------------------------------------------------------------------

No, we are not seeing lower activities in any segment. Actually, I think the reality is we have a much tougher base in the second half than we had in the first half. As you know, some of the launches we made last year had full effect in the third and fourth quarter. We had very strong fourth quarter. And so the -- on an absolute basis, we still have to create a very strong second half to make this happen. But as the absolute numbers are growing bigger, then, of course, the mix between the percentages and the absolutes are diluting. So it is mainly related to the comp.

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [11]

--------------------------------------------------------------------------------

Okay. And then just a final question on your EBITA margin guidance of around 20%. When that is recapped compared to Q1, is that because that the increase in organic sales outlook is mainly coming from the Consumer segment?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [12]

--------------------------------------------------------------------------------

Can you say that again, sorry? The increase in...

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [13]

--------------------------------------------------------------------------------

Yes, the increase in your organic sales outlook from at least 19% to at least 24%. At the same time, you're sticking to your market or EBITA margin of 20%. The fact that you're not opting or changing your EBITA margin guidance. Is that related to the fact that the majority of the higher sales -- or the higher-than-expected sales is coming from the Consumer segment?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [14]

--------------------------------------------------------------------------------

No, no, no. We have a stronger execution across the board. And I think the reality, of course, if you look at the numbers, to drive this level of performance without strong contribution from the professional side, wouldn't be possible still. So -- but we have higher growth on the Consumer side than we have on enterprise. But you can say, the outlook that -- the upgraded guidance is a mix of what we have achieved and the outlook. And in that mix and with the outlook, we still see very strong performance on the professional side. And we are back to the -- driving the leverage as a mix of the top line benefits, but also what we meaningfully can invest back into the market. And then we have these FX issues for now.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question comes from the line of Maja Pataki of Kepler Cheuvreux.

--------------------------------------------------------------------------------

Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [16]

--------------------------------------------------------------------------------

I'd like to push over to Hearing. Could you tell us what is your underlying assumption on VA growth for the second half of the year? It has been a strong contributor in the first half of the year. With your guidance, do you expect this to slow down? Or if it stays status quo strong, is there upside to your guidance? Second question, back to Audio. René, could you give us a feeling whether the share of Consumer in Q2 versus Q1 is flat, down or up? And then my last question is relating to your business plan 2020 to 2023 or 2022. We're now a bit more than 4 months, and we're going to start a new year, your guidance is -- your -- sorry, your business plan is coming to an end. And the last time, you've mentioned that your strategy is going to change considerably. When are you planning to release the strategy update to the financial markets?

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [17]

--------------------------------------------------------------------------------

Yes. Maja, it's Jakob here. I'm going to start with commentary around the VA. So I'll give you a bit more detail on what we've seen the VA, but, high level, we don't comment on specific channels and how they evolve in our guidance. So obviously, we had significant growth in the VA channel, as you well know, we saw strong growth also in July year-over-year. The comparison's getting into the second half of the year and actually changing, as you also know. The biggest change in the VA is really when you look at the category that the rechargeable category is up dramatically year-over-year and the non-rechargeable is down, that drives the growth in the VA. We are well positioned with our ReSound LiNX Quattro, which is a Premium-Plus hearing aid in that channel. It offers really amazing, not just sound quality, but also rechargeability for the user streaming 50% of the time 24 hours. So I feel we are in good position with the technologies we have in the channel.

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [18]

--------------------------------------------------------------------------------

And René here. So on the question on consumer share of Q2 over Q1, it is slightly up.

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [19]

--------------------------------------------------------------------------------

Maja, it's Marcus. On the Capital Market Day question and on the strategy. Well, I think you are -- you all have to look on the working assumption that the whole team and everyone is focusing to execute on what we promise and to deliver this year's results. At the same time, planning, building and preparing for execution of the years to come. And normally, when we have our fiscal year conference then we will give you an update on the next year guidance. And I think that is a working assumptions for the time being.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

--------------------------------------------------------------------------------

I have 3, please. One on Audio. René, can you comment a little bit on the exit growth rate that you saw as you finished up the quarter? And I mean, to the extent that you feel comfortable talking about July. I know one of your concerns earlier this year was once you start annualizing some of the tougher comps, how sustainable the growth rate would be in the consumer business? So if you can give us an insight into how growth progressed throughout the quarter? That would be very helpful. My second question is for Jakob on the hearing side of the business. Just curious if you can share any timelines for us in terms of the Google android connectivity, when might we see a product from you out in the market commercially available? And my last question, financial, one for each is for Marcus just on the corporate spend. It's running a bit ahead of the full year guidance at this point in time. Is this just a phasing? Or is that something we should be rethinking?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [22]

--------------------------------------------------------------------------------

So René here. And of course, I don't want to give you the exact guidance on where the growth rates are in this quarter. But obviously, we have been monitoring this, especially the sell-through throughout the summer to have us a good feeling for the guidance if at all possible and along with the, of course, the predictions for Q4. So we feel very confident about this guidance in both directions. And at least, you can say everything we see in the market just now supports that.

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [23]

--------------------------------------------------------------------------------

Veronika, It's Jakob here. So on the Google One, I think, as I have shown in my prepared remarks, and it is indeed soon. Exactly how many days we're going to be out, I don't know. We have a product ready, so whenever Google is ready to launch their android software update, we're ready as well. And I think that's as much as I can say right now, but it's close.

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [24]

--------------------------------------------------------------------------------

Veronika, I think you're referring, in the segment report, to the slides, others, where we have the residual of corporate and our research activities, which was roughly DKK 44 million negative in the second quarter slightly up from DKK 33 million last year. And year-to-date in the first half year, DKK 80 million versus DKK 67 million. I would not think that we overshooting our fiscal year guidance. It's a little bit -- sometimes a little bit of rounding. But for the time being, I'm sticking to the -- around DKK 150 million for the full year guidance on that.

--------------------------------------------------------------------------------

Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

--------------------------------------------------------------------------------

That's very clear. And René, can I just follow-up? I mean, I appreciate you don't want to tell us necessarily how the business did in July. But can I -- let me ask a question slightly differently. Have you seen a meaningful deceleration in growth in Q3 or not?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [26]

--------------------------------------------------------------------------------

So I mean, we are guiding, of course, with a lower growth in the second half than in the first half. And it is in line with, you can say, the projections. I repeat, I can't tell you exactly what happened in July, and there's a lot of competitive issues out there. But we are very confident with this guidance we've put out now. And I think it is the best place to put ourselves right now.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from the line of Michael Jungling of Morgan Stanley.

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [28]

--------------------------------------------------------------------------------

I would like to ask 3 questions. Firstly, on the Google connection launch. Do you have a sense of how many phones this will work with on day 1? Secondly, did you participate in the tender of Costco, the most recent KS tender? And if you did, why did you not win it? Was it price or technology? And then thirdly, it's more of a broader question, but I think kind of important. What are your thoughts around the MSCI classifications from being currently classified as a health care company? But if you look at the growth trajectory, really, 2020 is going to be the year where consumer electronics for the first time overtakes your health care business. And with MSCI using revenues primarily as a guide for classification, do you expect it to be reclassified in 2020? Do you want to be reclassified? And would you break up the company if indeed, you were forced to be reclassified as an electronics company?

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [29]

--------------------------------------------------------------------------------

So I'll start with the question around phones and number of phones. We don't have a sense for how many phones is going to be ready. I think the fact that we now enable android device users to stream music and phone conversations in the way we do similar to Apple is going to be a positive for the market and for our users. So we expect that. It's a constant moving thing. Samsung comes out with new devices early 2020, we think so, there's going to be a constant growth in that space. On the KS9, yes, we did participate. Costco is a fantastic customer. We have closed with Costco since many, many years. We launched a (inaudible) hearing aid in Costco, and we are very pleased with the development in Costco and the relationship we've had for quite a long time. So very positive there.

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [30]

--------------------------------------------------------------------------------

Yes, Michael. I'm happy to take the technology question on MSCI. Of course, we're taking a look into this. And we don't expect to have the impact of a breakup. There are other technologies and other sector momentum topics moving currently in this space that could impact next year or the year after. In general, let me make 2 statements: a, as a company, we are absolutely in for an increase in terms of regulation, in terms of safety and reliability because that is in the benefit of the users in all the directions and it helps on the product side and, therefore, on the user friendliness for the users. On the other side, it increases also cost because FDA readiness, (inaudible) readiness and all the other topics that, going in the same space, having a cost increase on the company, but it just strengthens our processes and our reliability. And therefore, on the Hearing side, we are well prepared. On the Audio side, we are doing a fantastic job as well. And therefore, we are not afraid, but we also don't think that, that will have a cause in terms of our business model.

The second thing, well, we are always looking and we are always aware of changes in the environment, driven by technology, by business model disruptions and by other topics coming up. And I don't think that, that is a topic high on the list into increase that risk. But of course, we're looking into these things always.

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [31]

--------------------------------------------------------------------------------

Okay. And may I just follow-up on the Costco side? Because you didn't win KS and one of your major competitors did. Do you know why you didn't win it? Was it price or was it the technology that wasn't quite competitive enough? And some sort of insight would be useful.

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [32]

--------------------------------------------------------------------------------

Yes. It was obviously the information we won't share Michael, but again, Costco is a solid, strong customer of ours, solid growth as well. We expect that, that relationship will continue in a positive way. And as you know, we didn't have the KS8 and 7 either. So net-net, if you look at growth, it's not really a concern for us.

--------------------------------------------------------------------------------

Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [33]

--------------------------------------------------------------------------------

Okay. And Marcus, just as a follow-up. When you present your midterm strategy in the not-too-distant future, will you address more specifically what it means if your revenues become larger in consumer electronics and health care? What it means in terms of reclassifications and how you intend to target it not to be reclassified if you don't want to?

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [34]

--------------------------------------------------------------------------------

I think that is a question that could be then addressed on the fiscal year announcement or whenever we would have a Capital Market Day. For the time being, we focus on executing of the current strategy, and we are looking very diligent into the future and the setup and on the execution. And I just would like to leave it like this, Michael.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [36]

--------------------------------------------------------------------------------

Perfect. I have a few, please left. The first to be on CC&O in general. Why do you think you guys are seeing such intense share gains across the markets? Is some of that just the mix that you have, the greater mix of office versus call center relative to your peers? Or are you taking a share within both of those channels officially? So that'd be the first question. On the second one, sort of still within the CC&O. I'm surprised to see -- and apologies if you've covered this, but I'm surprised to see Europe as the fastest-growing region doing so well. What's happening in that market that feels different or better, if you like, than the other markets? That would be helpful.

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [37]

--------------------------------------------------------------------------------

I think the -- on the CC&O side, we are taking share basically in all segments. And then we have that phenomena that we are also the largest in the largest segment. Nowadays, the UC segment is the fastest-growing and close to be the largest. So in that sense, of course, everything else equal, we take share from competition. But we also do that in the segments where we are not #1. On the EU side, why Europe is the strongest region? I think there are 2 phenomenas, where one is that this is our home base. This is where we have the widest distribution, but perhaps also -- and where you can say the defense from key competitors is perhaps a bit less developed. The other part probably being that the deployment of UC seems to be faster and stronger in Europe than in other parts of the world still.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Our next question comes from the line of Kit Lee of Jefferies.

--------------------------------------------------------------------------------

Nyeok Lee, Jefferies LLC, Research Division - Equity Associate [39]

--------------------------------------------------------------------------------

I have 2 questions, please, on Hearing. I guess, firstly, just on U.S., can you comment on your growth in the independent channel in Q2? I believe, you used to disclose double-digit growth sometime last year in U.S. and in that channel. I'm just wondering how you did there in Q2? And secondly, just on Japan. If I understood it correctly, I think Japan is a deregulated market with lots of PSAPs and a lot of cheap products flying around. I guess, how do you approach the market to sell your ISP hearing aids? And maybe can you just talk more about that, and just your -- just the general market environment there and whether PSAPs are a meaningful part of the overall market?

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [40]

--------------------------------------------------------------------------------

Kit, thanks for the question. So on the U.S. and independent channel, we don't comment on the development of how different channels are performing. The independent channel -- or broadly speaking, the channels in the U.S. and for that matter globally developed in line with our expectations at the beginning of the year. And we believe, from what we see right now sitting here late August that, that's going to be the case also for the balance of the year.

Yes, Japan, great story there, I think. And the team have done extremely well. There is a sort of an OTC, a PSAP category in Japan. It's not a huge part of the market. It does exist. Obviously, we don't have SR Technologies participating in that category. However, I'd just say, if you look at Japan, in general, it is a high ASP country. And given our premium product line in the ReSound LiNX 3D and our Premium-Plus category in the Quattro line, we are very well positioned to benefit for growth in a country like Japan, who clearly values technology and quality in the technology. So I think that's where our growth is coming from. And the other interesting piece about Japan is that the market data is publicly available. So you can see what is imported, exported, and you can get deep insight to Japan just like you can on the VA, or not quite the same, maybe, but close, so okay.

--------------------------------------------------------------------------------

Nyeok Lee, Jefferies LLC, Research Division - Equity Associate [41]

--------------------------------------------------------------------------------

Okay. Great.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from the line of Oliver Metzger of Commerzbank.

--------------------------------------------------------------------------------

Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [43]

--------------------------------------------------------------------------------

My first one is on Beltone. So basically, in your presentation and press release, information regarding Beltone are missing. So can you give us a few comments about the underlying performance of Beltone? How -- also compared to previous quarters? And my second question is on the CC&O -- sorry, on Audio business. You provided quite detailed view about regional performance for CC&O. Could you give us also the same information for the consumer business? How it developed among the regions, please?

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [44]

--------------------------------------------------------------------------------

Thank you, Oliver, for the question. I'll start on your question about Beltone. So again, it's part of our various channels and go-to-market, and again, we don't comment specifically on how those channels developed. I'd just say that we have talked about for some time a turnaround plan around Beltone. And the way I look at it is, it's developing in line with our expectations. And I think we are going to continue to execute on that asset.

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [45]

--------------------------------------------------------------------------------

So René here on the Consumer regional question here. So it's a good question. So I think the phenomena we see is that U.S. is typically running ahead and probably for many reasons. One is that the consumer retail in North America is very consolidated. And in that sense, if one of the key retailers or onliners there drive things, so you have a major impact. But what we also see is that, I mean, the European market and the developing countries in Asia Pacific, not the developing, but the -- you can say, Europe-like countries, and they follow through very strong. So the impact is global. But typically, U.S. is running a bit faster.

--------------------------------------------------------------------------------

Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [46]

--------------------------------------------------------------------------------

Okay, great. A follow-up regarding your comment. If you say that the market is very consolidated and now it's moved, for you, in a favorable direction, how can you prevent that it turns around? That if one of bigger ones delists you or promotes you to a lower extent that we see a quite negative effect?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [47]

--------------------------------------------------------------------------------

But that's a reality, of course, of any channel you work with that if you're performing well then you get more support from the channel. If you're performing not so well, you get less support from the channel. And of course, that is our job to ensure that we have attractive products, that the merchandising is fine, that the online sort of contribution is good and solid. So yes, I think that goes actually whether you have a consolidated channel or not. I think -- and that we have a clear strategy. We are working with the leading retailers across the world. And of course, that has a lot of upside, but it has this, are you good or are you bad? But that goes for most businesses, basically.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Martin Parkhøi, Danske Bank Markets Equity Research - Senior Equity Analyst [49]

--------------------------------------------------------------------------------

It's Martin Parkhøi, Danske Bank. Also a couple of questions. First, one for René. I noticed on the market development section, in Q2, it was slightly different than Q1. Now you mentioned a risk about recession and increased risk of trade war. Is this only due to housekeeping? Or is it actually because your audio business and you're seeing much higher growth in the consumer business. So you are slightly more sensitive to a potential recession since you've put it in now and you didn't have it at Q1.

Then moving onto the hearing aid business. Just 2 clarifications on the Google One, as you also say that it's fully compatible with LiNX Quattro. It doesn't mean that when you have access to it that you don't need to wait for a new VA window or can you enter directly into VA outside the normal 1st November -- 1st of May windows?

And then, I promise, the last question, just going back to Costco and the dynamics there. Of course, you didn't win the KS9 contract. But I guess that -- do you think it's an advantage for you that -- firstly, that it's -- Phonak wins it, which means that they are pulling their branded product, which gives some room for you in this segment. And then secondly, how do you think we should expect going forward the split between Bryant and Kirkland Signature in Costco? It has been more than 50% in Kirkland Signature, but I'd, of course, noticed that the new KS9 product is -- does not include rechargeability, which I guess could make this diminished a bit given the -- at least the current attachment rate to this?

--------------------------------------------------------------------------------

René Svendsen-Tune, GN Store Nord A/S - CEO [50]

--------------------------------------------------------------------------------

So René here. So on the question on the sentiment, I mean, recession risk and trade wars, et cetera. This is housekeeping. We expected that we would get a lot of questions when we up the guidance in an environment where newspapers write about this every day, we would get many questions. So therefore, we've put it in here that, of course, we can only guide from what we know and can see and irrespective of these phenomenas that are outside our control and outside our planning ability.

--------------------------------------------------------------------------------

Jakob Gudbrand, GN Hearing A/S - CEO [51]

--------------------------------------------------------------------------------

Yes. Martin, on Google and the launch into the VA, it's actually quite complex on how that's working. So we're not going to be able to comment on that, unfortunately. Because obviously there's a timing of us launching being ready and all that. So we refrain from that.

On KS9 and Costco, you asked a number of questions and they were mostly related to our colleagues and competitors in the industry, and I'll just refer to them in terms of how they think about that. And I refer to Costco on the other question because that's somewhat relevant to how they drive their business.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

All right. Carsten again. Didn't actually expect to come online here one more time. But Marcus, in -- or Jakob, in Hearing, if you look at the management and administration costs in percent of sales, then this has jumped to 9% for Q1 and Q2 versus 7.5% for last year. Could you maybe give us a little bit color on what's happening here? And also what we should expect for the rest of the year? And also sort of a sustainable trend longer term for management and admin in percent of sales?

--------------------------------------------------------------------------------

Marcus Desimoni, GN Store Nord A/S - CFO [54]

--------------------------------------------------------------------------------

Carsten, it's me, Marcus. Yes. If you look into -- specifically, into the G&A in Hearing in Q2, then you'll see an increase year-over-year of give or take, what is it, DKK 25 million or something like that. DKK 5 million is roughly FX translation effect. And then we have a bigger portion of IT and that is roughly DKK 25 million, which is driven by the ERP rollout that we're doing in Hearing as well as what we started since almost 2 years now, the upgrade of infrastructure and security, including GDPR and other topics. So these are the drivers why the underlying costs that you see back-office, G&A, management, like-for-like is exactly the same level like on prior year. And therefore, you see this in Q2 over Q1 is also flattish. It's just the year-over-year increase. And again, it's driven FX and IT, the project that we are ramping up.

And on your question, looking forward, I would expect Q3 is roughly in line with Q2.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

(Operator Instructions) And there are no further questions at this time. Please go ahead, speakers.

--------------------------------------------------------------------------------

Morten Toft;Vice President Investor Relations & Treasury, [56]

--------------------------------------------------------------------------------

Thank you very much, operator, and thank you, everybody on the call. We appreciate your time today and your questions. On behalf of Marcus, Jakob, René and myself, we see you on the road. Thank you very much.