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Edited Transcript of GN.CO earnings conference call or presentation 1-May-19 9:30am GMT

Q1 2019 GN Store Nord A/S Earnings Call

Copenhagen May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of GN Store Nord A/S earnings conference call or presentation Wednesday, May 1, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jakob Gudbrand

GN Hearing A/S - CEO

* Marcus Desimoni

GN Store Nord A/S - CFO

* Peter Justesen

GN Store Nord A/S - VP of IR & Treasury

* René Svendsen-Tune

GN Store Nord A/S - CEO

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Conference Call Participants

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* Annette Lykke

Handelsbanken Capital Markets AB, Research Division - Medtech Analyst

* Carsten Lønborg Madsen

SEB, Research Division - Research Analyst

* Christian Sørup Ryom

Nordea Markets, Research Division - Senior 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

* Oliver Metzger

Commerzbank AG, Research Division - Analyst

* Veronika Dubajova

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Peter Justesen, GN Store Nord A/S - VP of IR & Treasury [1]

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Hello. Welcome all to GN's Q1 2019 conference call following our release this morning, Danish time, of GN's Q1 report. Thank you all for dialing in. We are extremely thrilled to be here and to have you on the call today.

Participating on today's call is, as always, René Svendsen-Tune, CEO of GN Audio; Jakob Gudbrand, CEO GN Hearing; Marcus Desimoni, CFO of GN Store Nord; and myself, Peter Justesen, Head of IR and Treasury.

Today's conference call is expected to last about an hour as always. 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'll go back to Marcus for an update on financial guidance. After that, we hand over to Q&A with questions from the queue.

And with that very short introduction, I'm extremely happy to hand over to Marcus.

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

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Thanks, Peter. I like your word happy because today everyone of us is happy because we've had a fantastic first quarter. Fiscal year 2019 started extremely strong for GN Hearing in all the dimensions. We've had 24% reported revenue growth translating into a 19% organic growth in the first quarter. Both businesses that we will discuss it in a second have been starting very, very strong. In terms of gross margin, we have been in ballpark last year and that was falling down to a 24% EBITA increase in absolute terms and a slightly positive increase in EBITA margin as well. EPS have been growing 25% year-over-year in the first quarter.

As the CFO, of course, I have to say I'm not happy with the free cash flow development in absolute terms. It's around the 0 line, and I don't like that.

However, we will discuss in a second. If you see the reasons for that, then you can understand that it's actually kind of okay. The leverage is 2.3 in the first quarter. It's slightly ahead of our guidance, but it was impacted of roughly DKK 500 million from IFRS 16, as we have been guiding in our fiscal year outlook.

If we discuss a little bit further the cash flow, there have been 2 main impacts. One is seasonality and the other one is the extremely strong growth momentum. You see on the slide that we try to slight a little bit to make it easier for you to understand it. So let me start from the left to the right. The big increase is coming from change in working capital driven by inventories and accounts receivable, and that's across the organization in Audio and in Hearing. In Audio, it was extremely strong. You have seen the growth in the first quarter and that growth continues in the second quarter. So of course, you're building up based on the momentum and the product launches products.

The same accounts for GN Hearing, where we also have a strong momentum in the first quarter carrying into the second quarter, including additional products coming out into the volume markets, and with this, we had to build it up. And as I have alluded in the fiscal year call in February, we have been building up towards end of March higher inventories, in particular on Hearing in the U.K. and in Central Europe for the potential Brexit topic that we wouldn't have foreseen in which direction it will move. So we would see a normalization out of these topics over the quarters and into the year-end.

The investments, the ordinary investments in both businesses are ballpark to prior year. So therefore, it's a minor change. And then you have a little bit of change in GN Hearing, where we've had a higher tax payment in the first quarter. Something to do with seasonality, but also, if we can afford it, then we pay the tax and that is nothing unusual if you take a look over the last 5 years with the periodic cash payments.

If you go down to the bottom line, you see that in the footnote that we had even more cash outflow due to an acquisition in Audio, but that hadn't really an impact on our cash flow definition. So again, it's a seasonality impact that we're leveling out over the year and very, very strong growth momentum.

If we take a look on the capital structure, I would like to highlight this over here because we are above our guidance of 2x leverage in the first quarter. Guidance for the year, we will be back in our guidance range. And the IFRS 16 topic, which is roughly DKK 500 million by the end of March, is basically dropping us down to the 2.0x mark. Rating agencies, banks, everyone has it incorporated already. We have been guiding that, and we're reporting this for 5 quarters in a row internally, so that we can exactly predict where we are. That's the orange bar that you see on top of the first quarter button.

Nevertheless, we had a lot of cash outflows in the first quarter. Number one, was the Altia acquisition of more than DKK 600 million; secondly, we've had a high dividend payment in March; and thirdly, our share buyback. All these coming together, it's a seasonality impact that again, as I said, will level out over the year. And for the rest of the year, we will come in below the 2x mark.

Nice to say, today this morning, as expected, we have been communicating that we're going to start the new share buyback with another DKK 1 billion over the next 12 months and that probably will be concluded latest by March 10, 2020.

And with this, I'm happy to hand over to our CEO of GN Hearing, Jacob.

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

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Thank you, Marcus, and thank you, everybody, for attending our conference call today. I'll start with GN Hearing key highlight from the first quarter of 2019 on Slide #8 here. So in Q1, we continued our positive growth momentum and share gain driven by our Premium-Plus ReSound LiNX Quattro product. Organic growth in the quarter was 8%, while revenue growth was 10%, with 2% impact from foreign exchange and insignificant impact from M&A in the quarter. The organic growth in Q1 reflects a strong performance among independent customers. And as I will get back to a little later in the presentation, a strong development across all 3 of our sales regions.

Gross margin Q1 '19 increased 1.4 percentage point compared to Q1 last year, reflecting very strong mix in the quarter. The EBITA margin reached 18.7%. This is slightly lower than Q1 '18, which reflects that the strong gross margin increase was offset by the development in foreign exchange rates and in particular, European pound and the U.S. dollar. Free cash flow, excluding M&A, was negative DKK 37 million, impacted by traditional seasonality, as Marcus mentioned, and a higher level of trade receivables and inventories driven by highly successful ReSound LiNX Quattro launch, also mentioned by Marcus.

So turning to Slide 9, I'd like to give you some additional color on the organic growth and share gain in the quarter. Overall, we had a very strong quarter in the independent segment, which again was a clear growth driver for Q1. In North America, growth in Q1 was driven by very strong performance in the U.S. independent market, partly offset by the loss of a large customer, which we have previously said is a headwind on about 150 basis points for the full year with most of the impact in Q1. We saw strong sales in Q1 in the VA channel. I'll also get back to that later.

On Beltone, we, as expected, saw a return to normalized growth levels following a temporary slower growth in our fourth quarter of '18. In Europe, we continue to see solid growth in the independent part of the market and in particular, strong performance in Italy, Spain and the Nordic countries. In the rest of the world, we delivered strong growth again in Q1, most noticeably China and Japan. We have recently seen some highlight on efforts in China, and I'm very excited and pleased that we continue to deliver growth in China. In fact, we have delivered growth in China for the past -- double-digit growth in China for the past 14 quarters, and that's fantastic team effort. And while China is still relatively small part for us of the total, GN is partly single digit. It's very interesting market from growth perspective. All in all, Q1 was a strong quarter for GN Hearing across all 3 regions, which position us very well for the rest of 2019.

Moving to Slide #10. In Q1 2019, GN Hearing reached a big milestone. As of March, for the first time ever, GN Hearing is the biggest supplier to the Veterans Affair, which account for roughly 20% of the total U.S. market in volumes. And since the introduction of our ReSound LiNX Quattro in the VA, in November 2018, we have grown our market share and it actually more than doubled from 13% so far to 28%. The strong development is driven by unique product features of the ReSound LiNX Quattro, and a focused customer-centric approach from our sales and marketing teams.

As you all know, there is a new VA launch window just around the corner in May, actually today, and with that, the intensity continues. But I do want to take this opportunity to say that I'm extremely proud of our U.S. sales team as well as our R&D organization and marketing teams for reaching this important milestone.

On Slide 11, we have provided an update on the rollout of the ReSound LiNX Quattro, which was launched in August last year starting with North America. As of today, the commercial rollout is practically complete with the product being launched in slightly more than 50 countries worldwide. The feedback we have received continues to be amazing with hearing care professionals and users 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.

And I want to highlight one, the generation over generation cannibalization pattern has been very consistent and changing it is not easy, as you know. But because it would obviously be very valuable to achieve even a small change to this pattern, it is one of the ambitious launch KPIs that we have for ReSound LiNX Quattro, and we are very pleased to see a successful development here.

We also continue to see positive ASP development on a like-for-like basis versus ReSound LiNX 3D. On top of this, we also see a continued price point off-selling driven even better -- driving even better mix, and we are experiencing that customers have accepted the new Premium-Plus category and are willing to pay for this superior technology in the ReSound LiNX Quattro category.

My last slide -- sorry, on Slide 12, I'd like to comment a bit on our recent collaboration with Apple as well as partnership with Google. And as you know, we were the first hearing aid manufacturer to introduce Made for Apple hearing aid. Earlier this year, we have once again partnered up with Apple to be the first manufacturer to introduce artificial intelligence in our hearing aid using Apple voice assistant, Siri. In late February, Apple actually recognized ReSound as one of the 6 showcased apps in the overall health category based on our competitive edge in the industry. It was a very strong accomplishment by our R&D team that are working hard to make sure that we are introducing products in the market with a user-centric approach.

In August of '18, we announced our relationship with -- our partnership with Google. And we have in that -- to that extent managed to be the first manufacturer to enable a full spectrum of direct audio streaming from Android devices to hearing aids, and we are actually very close to seeing this in the market. As you may remember, at the Annual Hearing Aid Conference, AAA, in the U.S. a month ago, our CTO performed a live demo, direct streaming to an Android device to our ReSound LiNX Quattro hearing aids.

Moving on to the last slide, a story that I want to share with you that makes me very, very proud to be a part of this amazing company. The story is about the Oarsome Four, and it's O-A-R, Oarsome Four, as in rowing. Second to the right, you see a lady called Mo O'Brien. She is part of the amazing Oarsome Four teammates and she is a user of our ReSound ENZO 3D hearing aid. Mo is a very determined and very strong-minded person and actually an incredible focused individual. Mo has had a profound hearing loss since her childhood, but right now, she is aiming to become the first deaf person to row across 3,000 miles of the Atlantic. For the Oarsome Four, taking on this world's hardest rowing challenge and doing that across the Atlantic is just an amazing achievement when they complete it.

As you know, at the deepest level, the Atlantic Ocean is more than 5 miles deep, and as she continue the rowing across the Atlantic, she will probably be met with 20-foot high waves, lot of rain and lot of wind, but we know that the ReSound ENZO 3D hearing aid will be and has been a game-changer for her to fulfill her vision and purpose as a human being. And that makes me exceptionally proud to be part of this company where we innovate products to really impact people's lives.

So with that, going to round off by saying and summarizing that Q1 was a really strong start for GN Hearing, and we continue to see strong development in the independent market, and we confirm our guidance for 2019.

And with that, I'd like to hand it over to you, René.

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

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Thank you, Jakob, and thanks to all of you for joining our call again today. So it is now my pleasure to take you through the GN Audio's results for Q1 of 2019. And as we all know, we have preannounced key numbers here along with our guidance upgrade on the 12th of April this year.

Moving to Slide 15. So Q1 was a very good start to 2019, and we managed to deliver 36% organic growth. The growth continues to be driven across our seasonal and consumer businesses, and we are helped by fantastic performance by our teams around the world and they are doing a truly excellent job.

Revenue growth was 43%, including around 7% impact from foreign exchange and around 2% impact from M&A. The M&A component is primarily related to our 2018 acquisition of the Indian company, Innova, whereas we see only a very minor contribution from Altia Systems, where we closed the acquisition in the middle of March this year. Gross margin was slightly down compared to Q1 of 2018, and this is driven by mix effects in the quarter and a slight negative impact from foreign exchange rates.

Our EBITA increased as much as 53% after spending DKK 45 million of Altia Systems' transaction-related cost, and excluding these acquisition-related cost, the EBITA increase was 89% year-over-year. The margin development reflects very strong leverage, partly offset by continued investments into the business and by foreign exchange. The free cash flow was slightly down compared to last year. This does include normal seasonality and some targeted inventory build to deal with the growth.

So if you go to Slide 16, we can dig a bit deeper into the development in our seasonal business. So in Q1 of '19, the seasonal business continued to develop very favorably with strong organic growth across all 3 regions, and we have again strengthened significantly our position in the seasonal market. In North America, we continue to deliver a very solid organic growth based on our strong product portfolio and our commercial excellence initiatives. In Europe, we saw again very strong organic growth driven by portfolio countries, including Nordic countries and Germany. And 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. The growth was broad-based across countries in the region, but it is again worth mentioning countries like India and Australia, New Zealand, as specifically strong.

So moving to Slide 17, let me just say a few words about the acquisition of Altia Systems. So on March 11, all necessary conditions were met, and we could complete the acquisition. With this acquisition of Altia Systems, GN Audio has taken a major step towards bringing best-in-class audiovisual system to support Unified Communications, or UC, supported plug-and-play videoconferencing for this rapidly growing segment of small meeting rooms around the world. With the acquisition now fully completed, we can focus on integration and product raising and I can just relay here that all first observations are very positive.

So let's go to Slide 18. We showed you this slide also in connection with our 2018 annual call. And we've included again here because there are some relevant observations for also this quarter numbers as we have announced them this morning. We'll say, the first overall observation that are very strong Q1 numbers clearly show that our business mix is very attractive. We see very strong top line development and strong margin development. Also that it's worth noticing that the market growth observed in the quarter was in line with recent quarters. However, we do see a particularly strong market growth in Europe, as we speak, across the call-centric and the office categories. Both are growing nicely.

On the consumer side, the market for true wireless earbuds or products continues to develop very favorably, and we are still excited to see that our buds continue to come out on top of reviews around the world. All in all, we are positioned towards healthy growing markets across our business areas, and in the years to come, we do expect that our addressable market or selected market segments will continue to grow close to 10% annually.

So let's move to Slide 20, where I can report that we have now launched Jabra Elite 85h into the market. This is a product we announced at CES in early January. Jabra Elite 85h is a new over-the-ear headphone with superior sound, market-leading battery technology and state-of-art active noise cancellation. The noise canceling is combined with artificial intelligence functionality to adjust the headset performance to a person's specific surroundings and preferences. This product is the first of its kind using the sound scaping AI analysis from audEERING in which we invested a year back.

We still need to see sell-out dates of these products, so it's too early to comment specifically on the expectations for the product, but you should not assume any major stocking effects or the likes at retailer level in the coming quarter. It will be a steady buildup as the products succeeds in the market.

So to round off, Q1 was a very, very good quarter for GN Audio. We managed to sustain and even further strengthen our momentum, and we managed to deliver very strong performance across business segments, geographies and channels.

And with that, I will hand back to Marcus.

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

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Yes. Thank you, René. That's going to leave me with the slide of the financial guidance for fiscal 2019. As René alluded, on April 12, 2019, we have been able to upgrade our fiscal year guidance based on the strong momentum and the fantastic execution of Audio. All these numbers are still in place, so we will have an expected organic growth rate in Hearing of around 7% and that is translating into more than 20% EBITA margin. On Audio, we're expecting now around more than 19% organic growth and around 20% profit margin and that is excluding the transaction-related costs based on the recent acquisition. And on Store Nord, we will remain around DKK 150 million on corporate costs and on the investments. And with an effective tax rate of around 23%, we will make for sure double-digit EPS increase again for 2019.

Before we go to the Q&A, I would like to say one more thing. Peter Justesen, who has been in charge of Investor Relations and Treasury for quite a while in GN and have been able to maneuver us through the rough sea in the markets and in the small smooth boat that we're seeing in GN extremely well, will take over in the summer months a new role within GN, and we're very pleased and happy that we were able to promote talents internal in the organization to bigger and greater opportunities. Therefore, it's his last call, and you all have been voting many, many years in a row for him as the best Head of IR in the sector, and we are very happy with this. So thanks so much, Peter, for that.

And as of July, Morten Toft, who is also in the organization, will take over the Head of IR and Treasury for GN Store Nord.

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Peter Justesen, GN Store Nord A/S - VP of IR & Treasury [6]

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Thank you for that, Marcus. Thank you, Jakob and René for the updates. Just following up on that, you will actually have a chance to meet Morten as he will be going on a roadshow with us shortly. Look forward to that. He is a fantastic person and resource in GN.

And with that, I'm handing it back to the queue for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Carsten Lønborg from SEB.

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

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The first question to Jakob here, it's just sort of in relation to your communication about the U.S. independent performance, which you assess to be very strong for Hearing. And if we look at the reported numbers adjusted for currency, then I think we end up with an underlying growth in the U.S. market for Hearing around 3% and you have some impact from VA, you have some negative impact from -- through Hearing and you seem very strong and how do you actually characterize this? Because the numbers will and are growing 4% to 5% in volume. It doesn't look that very strong. So maybe if you can clarify a little bit here. And then also a question to René. Just on the PanaCast system, when is the PanaCast 3 in the market? And will you need to do some modifications to the product before you actually launch it sort of not globally, but on a broader scale?

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

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Yes. Thanks for the questions. So we see a strong growth in North America, and it's driven by the VA channel, of course, as I think you know and have seen our performance there, but also the independent channel did very, very well for us in the quarter, offsetting from the loss of the account that you mentioned there. So the underlying growth in North America is really, really strong, and we are pleased with the performance there. As we announced last year, we said that the account specifically would impact 150 basis point on full year basis with most of it being Q1. And reporting the numbers we have done here, we're very pleased with how we see the development in North America.

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Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [4]

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Okay.

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René Svendsen-Tune, GN Store Nord A/S - CEO [5]

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René here. So thanks for the question. I mean, first of all, the PanaCast 3 is actually in the market in the version that is offered to the market and sold by former Altia Systems. So that continues, as we speak. We -- you may imagine that there will be a Jabra product coming to the market, and we have not disclosed exactly, for competitive reasons, when and what, but it's clear we are going to leverage the technology where required as fast and best we can, so -- but I can't give you exact timing and what we are going to do at this point in time.

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Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [6]

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Okay. Is it fair to assume that you will not sort of make a major marketing push before you have the Jabra product ready? Or are you also putting a lot of force behind PanaCast 3 right now?

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René Svendsen-Tune, GN Store Nord A/S - CEO [7]

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That's a fair assumption. No. So that's a fair assumption.

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Operator [8]

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Our next question is from Martin Parkhøi from Danske Bank.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Equity Analyst [9]

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It's Martin Parkhøi, Danske Bank. Also just a couple of questions. Let's start with René this time. And just that you gave the same slide as Q4, but you said to the -- where you presented the decision on the -- in the consumer base, because I think that at the same time last year, you said that this split was approximately 80-20 in favor of CC&O. How much of this changed in the first quarter because given the market growth and the position you already have seen in your CC&O, it's probably unrealistic that you have seen a seasonal grown faster than 36%. So how much of the split changed in broad terms in the fourth -- in the first quarter? And then secondly, also back to Altia. I know note that you in the report now call it a meaningful impact from -- meaningful positive impact from Altia in 2020. Could you maybe elaborate a little bit on your definition of meaningful? And then if you stay to GN Audio as well then on the leverage effect with 440 basis points improvement in the margin in the first quarter, you basically assume no improvement in the remaining 3 quarters. Could you elaborate a bit on that? And then finally, for Jakob on Hearing. Could you in broad terms give some split on the 8% organic growth in the first quarter on a volume and a value basis? That was all.

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

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Thanks for that. So on the split, we have not debated the split for quite some time actually between the 2, but you're right, we came from an 80-20. It is also correct that the consumer business has grown very fast in this quarter, but the -- I would also say, that the momentum in the seasonal business is very strong, as you can say, with the contribution that the consumer business could create, we would not have been able to deliver 36% organic growth without very strong momentum in the seasonal business. So you need to look at it like that. This will -- we're not going to give sort of a meaningful split, but I think you can see from the gross margin contribution and from the bottom line contribution is that the mix is actually sustained, it's very attractive mix for us as we speak and going forward. On the PanaCast in -- or the radio business in 2020, we have not given any guidance here. It's clear that, that is where we expect that the technology and the product launches will have real impact and be that strong meaningful or -- but it's not going to be light. We have done this because we want to run fast. So you can expect a real effect on the business in 2020. And we can't give a sort of product guidance or anything else like that because we would be speaking straight to competition, but it's clear that we're going to go into this market forcefully and it will have a real effect in 2020. And then on the leverage, I hear your question, please repeat again here that we want to reserve the right to invest into the business both in terms of technology and marketing and sales, and you can say we have a very focused approach to this. We have always a base plan and then we release money as we see the opportunities and it has worked extremely well for us over some time now. And clearly, we have gotten more back by putting money back in the business than letting it drop to the bottom line so far. And as long as we can see these opportunities, we will continue. So that puts a cap on the thing, but of course, at the same time, the Q1 showed us that there is levers in the business if we take it.

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Jakob Gudbrand, GN Hearing A/S - CEO [11]

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Yes. And on the other part of the question, the split between volume and value, we haven't historically disclosed how we perform in that area. But obviously, the 8% organic growth that we saw in Q1 was a result of both strong unit growth, but also ASP growth aggregated across the regions. So we are happy with what we see.

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Operator [12]

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Our next question is from Veronika Dubajova from Goldman Sachs.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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I will keep it to 2. The first one is can you give us an update on the performance of Beltone in Q1? Just curious what are some of the issues that you had seen towards the end of last year have improved? And where you are tracking in your Q for the rest of year on that specifically? That would be helpful. And then my second question is a bigger question related to M&A. I look at the business, you've been fairly active on the Audio side, but somewhat less active on the Hearing side. Given more leverages and the fact that you have announced the buyback, should we be anticipating any more activity from you on the M&A front? And if so, which of the 2 businesses is currently higher priority for capital deployment?

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Jakob Gudbrand, GN Hearing A/S - CEO [14]

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All right. So I'll start it, it's Jakob here, on the Beltone question. So as we mentioned, we saw a normalized growth as we expected in Q1. We reflected on that coming out of our fourth quarter that, that was the expected performance in Q1 and the team delivered to that. I spent quite a bit of time visiting our Beltone network and retail and high level, very pleased with how the network is developing and has developed. And obviously, retail, there's still work to be done there.

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Marcus Desimoni, GN Store Nord A/S - CFO [15]

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Veronika, on the M&A question, you see that the leverage currently is 2.3x net debt-to-EBITDA and therefore, we are limited as per definition from something. However, we are looking actively, of course, into all the different areas in the different segments that we are playing in Audio and Hearing and in the cross businesses. And we're always adding the one or the other smaller piece. We have been on the regular pace over the last 3 years, being active in buying something and being able to integrate it extremely well, so all the acquisitions that we have done over the last 3 years have been performing above business plans and that's why we are very, very happy. But we only communicate if we have done something and then also why we have done thing, but don't preemp that.

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Operator [16]

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Our next question is from Michael Jungling from Morgan Stanley.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [17]

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I would like to ask 3 questions, please. Firstly, on Hearing. For the VA, what are your expectations for VA market share developments post the May window? Question #2 is on FalCom, can you provide an update on how the tender process is doing? I believe that there may have been an award already. And then, thirdly, on Audio, can you comment on your growth momentum entering into the second quarter with comps being similar to the first quarter? And I'm just curious whether the sort of momentum of the third quarter is indicative of what the second quarter has started with?

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Jakob Gudbrand, GN Hearing A/S - CEO [18]

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Yes, so I'll start. It's Jakob, again. So on VA, we have had tremendous performance, as you know. We are #1 in the VA channel with 28% share driven by a really, really strong product. We don't sort of disclose how we think about share gain on a go-forward basis, specifically by channel. Having said that, we always welcome competition because it keeps us on our toes. And I think is one of the reasons why we've been able to come out with a fantastic product that we did last year, and we intend to continue to do that and think about driving share wherever opportunities exist.

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

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Michael, it's Marcus. On FalCom, as you correctly recollect that we have been announcing last year that we're looking into that space and that we believe that there are 2 bigger tenders out for us to chase down. One, we have said last summer, we have not been qualified because our product was not ready; and the second one, it was announced just a few weeks ago that, that will not happen because it disappeared as the Ministry of Defense in the U.S. reallocated the funds into the normal business. So therefore, these 2 tenders have not happened and will not materialize into revenue for us. In the outlook, we don't have any revenue in there and the cost to develop that product further is part of our guidance as well. What we are doing is, of course, we see an opportunity in that segment. That's why we entered it, and we will look for opportunities that we can participate in that area.

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René Svendsen-Tune, GN Store Nord A/S - CEO [20]

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So René here, so on the second quarter growth, as you appreciate, we cannot be exactly specific, but it's clear that the momentum is solid and very strong across the business. Still don't expect 36% again, but clearly it's going well.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [21]

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Okay. And then just a follow-up please on the VA. It's -- obviously, I appreciate that you like competition and so forth. But if I enter the second quarter with a number of very important products or competitive products coming to market, it seems to me quite hard to sustain at 28% market share. So while I'm not interested in precise market share assumptions by you internally. Is it fair to assume that internally you think your market share in the VA is more likely to go down than up post the May window? Just your view on that, please.

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Jakob Gudbrand, GN Hearing A/S - CEO [22]

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I think intuitively what we have seen in the past when products has launched into the VA, we are seeing a buying behavior where initially there is a desire to test and trial new products. That's a -- that is what we have seen historically. So if you go back in history and you plot that, you'll see that historically. I would say that it's likely going to be an effect, but it's going to be -- the way we think about it is more long term. We have made tremendous strides with a fantastic product, a range of products in the VA channel, and we are confident that the range of products and our engagement with the VA over time will keep us at a high degree of share. So that's how I would sort of frame that.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [23]

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And Marcus, for FalCom, and final question from me is on FalCom, now that you've missed out or the opportunity for 2 tenders didn't come to fruition. How do you from here on create a business out of this?

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

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As I said, we believe that we have a fantastic and very strong product and that is finalized in terms of development. We have been able to ship some test units, so it's in the field getting tested. And there is always tenders popping up that we also would like to participate now going forward, as you have seen from recent announcement from Scandinavian competitors in that area.

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Operator [25]

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Our next question is from Christian Ryom from Nordea Markets.

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Christian Sørup Ryom, Nordea Markets, Research Division - Senior Analyst [26]

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A couple of questions from me both to Audio. And so when you look into the next couple of quarters, René, can you please remind me how you view the comps and the timing of your key product launches last year? And then secondly, and related to that, can you put a bit more flavor to your expectations for the consumer business, vis-à-vis the enterprise business? And I'm specifically thinking also about how we should look at the gross margin trajectory for the coming quarters. And do you continue to see a mix effect with an adversive impact on the gross margin?

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René Svendsen-Tune, GN Store Nord A/S - CEO [27]

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So just on the first question and the base, you may remember that we launched -- we had 2 sort of major impacts in the market last. We launched the 2 wireless strong product in January and we sort of took it to market in Q2, and then ramped it through the second half on the consumer side. And then in early spring, we launched the Jabra Engage, the call-centric product line and ramped that throughout the rest of the year whereas we have had sort of smaller launches on the UC side in the second half of the year, but with less impact. So what you're seeing in the first quarter here is, in a sense, effect of all these launches. So now we -- they are all fully ramped and they are all successful into this year, whereas in 2018, we saw sort of gradual step-up with the strongest performance also very high growth in Q4, less so in Q3 and even less so in Q2. So there was a sort of acceleration going on that has continued into this year. But of course, now we are working ourselves into the pattern where actually we are building on top of these launches of last year. And I think you know, the launch cadence of our 2 businesses that we have a launch platform in Europe in September with the IFA Conference. We have a launch platform in -- globally with the CES event in Las Vegas. And then we have deployments into the market related. The launch platforms for enterprise are not sort of systemic in a similar way as it's not this kind of, you can say, reset, retail. So here, we have a more fluid approach to the market and more fitting the -- our own sale cycles. So that's -- I hope you can use that to make your conclusions. On the split between or the mix between consumer and enterprise, just want to say here, as I've said before, we are not going to discuss the split. It doesn't help anyone else than our competition. It -- I think Q1 showed us that we have a very attractive mix, strong momentum in all the segments. You can only deliver 36% growth if everything works. There cannot be detractors here, then you would have less. If you look at the gross margin for Q1 and look at the FX sort of the impact, you are at worse flat and actually, underlying perhaps a little bit up. So there was no gross margin effect really for the first quarter. If you look at the bottom line EBITA, a strong effect of the top line across the businesses. So you could say our big business, our main business is still the enterprise business. Consumer business comes along very nicely, and we still see this mix is actually very attractive for the bottom line. Will there be a sort of shift up and down on the gross margin quarter-by-quarter and market-by-market? Yes, maybe. So -- but it's then for us to secure that we have strong levers on the bottom line.

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Christian Sørup Ryom, Nordea Markets, Research Division - Senior Analyst [28]

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Maybe as a quick follow-up on the gross margin. Within the 2 product categories, the 2 product segments, enterprise and consumer, are you seeing improvements of the gross margins for the respective segments? Or is that more or less flat or what's the development there?

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

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I think you can -- if I sort of just say again here, given that we had negative foreign exchange impact that we actually had underlying improvement on the gross margin in the Q1, but it will sort of fluctuate a little bit with the markets as we go.

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Christian Sørup Ryom, Nordea Markets, Research Division - Senior Analyst [30]

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And also, in (inaudible) the impact?

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René Svendsen-Tune, GN Store Nord A/S - CEO [31]

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Yes. Sorry, we actually -- we missed the question at least here in this room. I don't know if it's on our end or if it's the other end. We couldn't hear the question. Can you please repeat?

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Christian Sørup Ryom, Nordea Markets, Research Division - Senior Analyst [32]

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(inaudible)?

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Peter Justesen, GN Store Nord A/S - VP of IR & Treasury [33]

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We're missing out on the final details of that question. So can we just maybe try next one in queue and then go back, sort of dial a bit later. Thanks.

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Operator [34]

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Okay. So our next question is from Oliver Metzger from Commerzbank.

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Oliver Metzger, Commerzbank AG, Research Division - Analyst [35]

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I have 2 on Audio and 1 on Hearing. First on Audio is basically you already clearly stated that the Elite 65t had a very strong positive impact on growth, as particularly we haven't had an adequate offering last year. Could you give us any rough indication about the growth momentum of the remaining business, so that means excluding this effect? My second question on Audio is about market growth. So I spotted that you mentioned you see underlying market growth of 10% compared, maybe it was some earlier comments that you saw underlying macro more on a 8% territory. Can you give us few versus what's -- what has changed fundamentally in the market for this growth upgrade? And my last question on Hearing, can you also comment on the performance at the big box accounts, excluding VA? What's the net dilutive to the organic growth in Hearing?

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René Svendsen-Tune, GN Store Nord A/S - CEO [36]

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So René here. Thanks for the questions. I think on the 65t, it is correct that it is a very successful product. And you can say across the market, it's sort of in the top 3 and has been there together with AirPods and Bose product, so the swingings in certain markets into position #2. So it is a strong contributor, but I don't want to sort of give a sort of clear response to how much space it takes, but it is a very good product and very successful in the market, so it's -- and contributes to the consumer business and overall growth in a very nice way. We should still remember though that the dominant part of the business is the enterprise business, and I repeat myself now that this strong growth could not have happened without very strong momentum in the enterprise business. Again, I can't tell you exactly what is what here. On the market growth, I think we have said that the seasonal business has grown by sort of 7%, 8%, up to 9% in over many quarters. And with the addition, we'll say, we are fishing now in a little bit bigger pond, and in that sense, we are now sort of active in some of these consumer market ponds where -- with Alta and also actually at least for now are growing a little bit faster, but -- so you need to understand, we are not trying to participate across the board in the consumer market. We are very focused in what we do and that somehow leads us to believe that at this point of time and sometime forward, we could have market growth up to 10%.

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Marcus Desimoni, GN Store Nord A/S - CFO [37]

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On the question earlier on big box accounts as you call them, outside of the VA, we don't usually comment on individual accounts, but I'll say broad-based across those strategic accounts for Q1, we saw a very consistent development to what we would have expected in those accounts and are pleased with the performance in them, so -- aligned with expectations, I would say.

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Oliver Metzger, Commerzbank AG, Research Division - Analyst [38]

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Yes. But you would say -- would you say it's organic growth dilutive or in line?

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Marcus Desimoni, GN Store Nord A/S - CFO [39]

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We -- it's a mix. I mean, we don't -- again, we don't comment on how the key accounts develop relative to the rest of the market, but call it broadly in line, but we don't usually split up that way, so...

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Operator [40]

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(Operator Instructions) Our next question is from Annette Lykke from Handelsbanken.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [41]

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First of all, congrats to Peter from my side. It has been a pleasure working with you. Disappointing that you and Søren are not going to join the amazing four rowing the Atlantic. And on -- you haven't said on hearing aids, I just want to hear a little bit about the German market. You haven't said much about it. So if you could just share what is happening in this fairly large market. And then also should we expect you to add any form factors or may be lower price points for LiNX Quattro as we enter into next year or maybe the later part of this year? And then, on GN Audio, just on the restructuring cost or the one-off of DKK 45 million, what do they cover? And as well as how much of additional cost should we expect in the remaining of '19?

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Jakob Gudbrand, GN Hearing A/S - CEO [42]

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Yes. So it's Jakob. I'll take the first 2 on Germany and new form factors. So I'm repeating myself a little bit, but again, we don't comment on specific countries. I will say on Germany specifically, you're absolutely right. It's a big market and significant opportunity. Our share historically in Germany has been sort of below the corporate share in other countries. So if you look at that, there is definitely opportunity in Germany as I see it. Specifically, we did quite well on Germany in Q1 relative to the aspiration we had set ourself and are pleased with the start to the year there. So I think that's all net positive and the momentum we aim to build there. On the new form factors, I think it's best to say that the R&D pipeline is rich and has been rich for a long time. It's actually as a new CEO, great to take over at this point in time, when the pipeline is mature and exciting new innovative products to be launched. We have a history of launching products over time, and we will continue that pattern of launching innovative products that are relevant for our users and driving the right experience for our users, so...

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René Svendsen-Tune, GN Store Nord A/S - CEO [43]

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So on the -- it's René here. So on the Altia Systems transaction-related cost, I mean, these are normal acquisition-related cost, legal banker's fees, and then here, we have some -- because of de-structure, we have some retention cost that also will be expensed over the P&L, so they are part of this DKK 45 million that we have. I think the important thing for us, of course, is that Q1 was of a nature where we could have solved it all and still deliver stronger bottom line.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [44]

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And do you expect additional cost for the rest of the year? Or is that it?

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Marcus Desimoni, GN Store Nord A/S - CFO [45]

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This is it for now. And now we're going -- of course, we are -- whatever cost comes now goes with product making and all the preparations for this new segment -- but the deal is done.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [46]

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Okay. Then final question for both of you. We have experienced a lot of flooding in the U.S. and it has been a surprise to most of the companies how it impacted negatively in regions of the U.S. Are you seeing any of that for either Audio or Hearing?

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Marcus Desimoni, GN Store Nord A/S - CFO [47]

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Yes. So I'll say from a Hearing perspective, no impact. I mean, in the end, weather is always to be expected. It happens every year in Q1 in the Northeast and the Central U.S. And we know that and we'll -- we have plans in place to mitigate and manage those when it happens. So no impact.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [48]

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Okay. And the same for Audio?

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René Svendsen-Tune, GN Store Nord A/S - CEO [49]

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I think this -- for us, the weather is something we read about and hasn't really impacted.

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Operator [50]

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Our next question is from Maja Pataki from Kepler Chevreux.

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [51]

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Two questions from my side as well, please. I'd like to start with Hearing. I've come across that you filed a patent in the U.S. for an upgrade of all software for your hearing aids. And I was wondering whether that is something that is just a patent nice to have or whether that's something that you will be integrating within a product in the coming 12 months? And then the second question is related to Audio. René, on the full year call, I believe you have stated that you have a very good visibility on contracts over at least 1 to 2 quarters. I was wondering whether that is still the case and whether the swing factor for you to come up with another guidance increase would be from the consumer perspective?

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Jakob Gudbrand, GN Hearing A/S - CEO [52]

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Yes. It's Jakob here. I'll take the Hearing first. So first of all, great find. The -- we don't comment on specific IP. We will -- we have super innovative organization, entrepreneurial organization. There's a lot of IP out there. We will continue to drive the R&D engine in the business, whether it's the one that you found out of those and there are a lot of those. So thank you. Thanks for the question, well done.

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René Svendsen-Tune, GN Store Nord A/S - CEO [53]

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So René here. On the visibility, first of all, I mean the guidance we've now given is what we haven't had and can see. On the visibility itself, it's -- you can say the run rate or the amount of customers we have, of course, has led over time and more and more to the professional business being a so many kind of customers type of business that we are not dependent on any major sort of custom-related swings. So we look at it as a portfolio and the run rate flow across the board. And your question on if we -- if there would be another upgrade from us, would it come mainly from consumer? If we -- we are always working to surprise ourselves, and if we succeed, it will be across the board.

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Operator [54]

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Our next question is from Michael Jungling from Morgan Stanley.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [55]

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I only had one more question about Hearing. And for the Costco KS9 tender, are you going for the branded opportunity only or are you also going to be participating or trying to participate in the KS part of the tender? And when do we get the announcements of who is the winner and the loser with respect to those tenders?

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René Svendsen-Tune, GN Store Nord A/S - CEO [56]

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Thanks, Michael for the questions. So we have had Costco as a customer for years, and we want to retain Costco as a customer. And we have generally very pleased with relationship with them, so. Okay.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [57]

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Listen, are you intending to offer to participate on the KS branded side?

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René Svendsen-Tune, GN Store Nord A/S - CEO [58]

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So we don't comment on that, Michael. That's very detailed in how we operate our commercial engine relative to how we engage with key accounts. So, yes.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [59]

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Okay. And then perhaps you can give us an indication when the announcement is expected on the tender wins for KS9, if you were -- when would you know?

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Marcus Desimoni, GN Store Nord A/S - CFO [60]

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We will know at the same time as you know probably so -- or close, all right. So we don't have any indication at this time.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [61]

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Because obviously, I mean, I don't know because I don't have insights specifically. So I was hoping you sort of know when the tender closes and from there on, I guess, we can work out ourselves when the announcement comes out. You know when the tender closes?

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René Svendsen-Tune, GN Store Nord A/S - CEO [62]

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We'll let Costco talk about Costco I think, and we'll talk about GN Hearing and how we drive our business there.

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Operator [63]

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And as there are no further questions at this point, I will hand the word back to the speakers for any final comments.

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Peter Justesen, GN Store Nord A/S - VP of IR & Treasury [64]

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Thank you very much, operator, and thank you everybody on the call. We appreciate your time today and your questions. And on behalf of Marcus, Jakob, René, Morten Toft and [Morten Jensen] and myself one more time, we will see you on the road. Thank you very much.