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Edited Transcript of GN.CO earnings conference call or presentation 7-Nov-19 10:00am GMT

Q3 2019 GN Store Nord A/S Earnings Call

Copenhagen Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of GN Store Nord A/S earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gitte Pugholm Aabo

GN Store Nord A/S - CEO of GN Hearing

* Marcus Desimoni

GN Store Nord A/S - CFO

* Morten P. Toft

* 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

* Christoph Gretler

Crédit Suisse AG, Research Division - MD in Equity Research

* 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 Analyst

* 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

* Sebastian Walker

UBS Investment Bank, Research Division - Associate Analyst

* Veronika Dubajova

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Morten P. Toft, [1]

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Hello. Welcome, all, to GN's Q3 2019 Conference Call, following our release this morning, Danish time of GN's Q3 report. Thank you all for dialing in. We are extremely excited to be here and to have you all on the call today. Participating on the call is Gitte Aabo, CEO of GN Hearing; René Svendsen-Tune, CEO of GN Audio; Marcus Desimoni, CFO of GN Store Nord; and myself, Morten Toft, Head of IR 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 Gitte 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 brief 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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Yes. Thank you, Morten, and good morning for everybody on the call. Great to have you on the call as we have just released this morning our numbers. And obviously, if you see the set of numbers as a CFO, you need to be very happy as well. So if you take a look on the group financial highlights. It is a strong quarter across all the line items.

Organic growth of 13% is just fantastic, 17% as reported. We've had double-digit growth across the line items: 15% on gross profit, 16% on EBITDA, 16% in EPS. And also, the free cash flow was up 61% so that the cash conversion was up 29 percentage points. So of course, I have to be happy.

And if you go a little bit deeper, then I have to say, the growth is driven by our highly efficient R&D machine. You have seen a very strong R&D pipeline across the company and what we've just have launched in the last quarter, in audio and in hearing, is just world-class. We launched, for example, the extension of our Quattro family with the ITE customs family in ReSound, and a Jabra PanaCast and the Jabra Elite 75t. The strong performance has also led to a strong cash flow generation with 105% cash conversion in the quarter, decreasing our leverage, which is still slightly above 2x NIBD over EBITDA. However, that was impacted mainly by the IFRS 16 effect and a little bit by our acquisitions.

Those of you who have been into our accounts, in more detail, you'll have noticed some different bookings below the line whole squad here, which is amortization, financial income and expenses. And I will take you through in a second on that one.

The point over here is basically that we have taken in the quarter, the opportunity of unwinding our Beltone retail assets that we have temporarily in transition how we always called it. And I mentioned that we've had to peak with more than 250 point of sales in Q1, and the target is by end of the year to be able to have it reduced by 1/3. That means handing it over to the network to the owners who drive the business. And we have been working extensively around the summer. And starting in spring, of course, to build a pipeline and to structure the deals. And when you structure the deals in order to hand it over, then of course, you have minority interest, you have majority investments in some areas as well as you have to write-off and write-on different valuations in order to structure the deal.

And therefore, for M&A, it's a very normal transaction. But accounting-wise, it is hitting different lines on the P&L and on the balance sheet, and that is what you see over here.

Give or take, it's netting off. But there have been several transactions, and we were able to book this all in a structured deal in this third quarter. If you take a look on the last point, then I would like to say that we, of course, are confirming again our full year guidance, and we are on a very good track to achieve that.

If you take a look on the next page, where we have our free cash flow, then I would like to highlight that we had, again, a very strong cash generation across the businesses in the quarter.

And already, we have seen a very strong development in net working capital on top of the strong top line growth, and that shows how efficient the business is managed. In GN Hearing, we were positively impacted by the investments in our noncurrent assets, as I just mentioned before, driven by the 2 noncontrolling interest mentioned on the prior slide.

All in all, this is leading to a very strong increase in free cash flow as we also expected, with 68% cash conversion achieved year-to-date.

And with this, I would like to hand over to Gitte, our new CEO in GN Hearing.

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Gitte Pugholm Aabo, GN Store Nord A/S - CEO of GN Hearing [3]

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Thank you, Marcus, and thank you, everybody, for attending our conference call today. My name is Gitte Aabo, and I'm honored and extremely happy to have taken over the position as the CEO for GN Hearing. Honestly, I must say that I'm having a lot of fun in my new role and that I'm learning as I go along.

I would like to start by telling you a little bit about myself and my background. I spent the past 27 years with Leo Pharma working in different positions in the past 11 years as CEO. For those of you who may not know, Leo, I can say that it's a Danish foundation owned to a pharma company, active within dermatology and with revenue of a little more than NOK 10 billion and operations in 130 countries around the world. So I think a strong similarity with GN Hearing. Leo was a growth story. And in my 11 years as CEO, we more than doubled the revenue of the company.

I have an MBA from Copenhagen Business School, and started my career on the finance side of business. From my time in LEO, I bring experience of building and transforming a global business to becoming more innovative, international and to drive strong customer focus to grow and outperform the market. I also have extensive experience within digital innovation in order to generate new business opportunities. Also, a thing that I'm looking forward to bringing into play in GN Hearing.

As a business, we need to constantly strive to better understand the needs and demands of our consumers and hearing care professionals, not only because this will increase our chances of being successful, but most importantly, this is where we can really change lives and deliver our company promise of making life sound better. And this is actually really why, I think, it's great to join GN Hearing that will bring innovation into the market that really makes a difference in people's lives.

With that, I would like to start with GN Hearing's key financial highlights from the third quarter of 2019. So on Slide 8, you will see that in Q3, we continue to deliver a strong performance across regions, driven by ReSound LiNX Quattro.

Organic growth in the quarter was strong at 8%, while revenue growth was 10% with around 2% impact from exchange rates and an insignificant impact from M&A in the quarter. The organic growth in Q3 reflects strong performance across our 3 sales regions, which I'll get back to in -- a little later in the presentation.

Gross margin in Q3 2019 was a bit down compared to Q3 2018, mainly due to a mix effect -- to mix effects.

The EBITDA margin reached 18.4%. This is slightly lower than in Q3 2018, which reflects, among other, the lower gross margin, increased R&D activity as well as ongoing infrastructure investments, in particular, into IT, which I know the team has talked about for some quarters now.

Free cash flow, excluding M&A was very strong as Marcus already mentioned. Cash conversion in the quarter ended at 102%. And year-to-date, we are now on a cash conversion rate of 63%, which is higher than the same period last year. All in all, we are very pleased by this development.

Turning to Slide 9. I would like to give you some additional color on the strong organic growth in the quarter. Overall, Q3 was a strong quarter for GN Hearing across our 3 sales regions, which position us well for the remainder of 2019.

In North America, growth in Q3 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 up to 150 bps for the full year 2019. The negative impact in Q3 was slightly less than experienced in the first half of the year. In North America, we continued also to see strong sales in the VA channel.

In Europe, we continue to see solid growth across the region, with particular strong performance in the U.K. and the Nordic region. In the rest of the world sales region, we delivered strong growth yet again in Q3, with particularly strong performance in Japan, Brazil and India.

Some of you may have noticed that we haven't included China on this slide. In the quarter, China was not a tailwind to the growth in Rest of world. With that being said, China has still grown double digit year-to-date, and we do not see any structural challenges in China.

On Slide 10, I would like to give you a bit more color on the recent developments in Beltone. And Marcus already spoke a little bit about Beltone. As you probably know, there are around 1,500 point of sales in Beltone in North America. And the Beltone brand is one of the most recognized hearing aid brands in the U.S.

During 2019, we've done a number of strategic initiatives to turn around Beltone. We have a new leadership team in place with strong backgrounds in the hearing aid and MedTech industry. And as you know, we do not wish to own retail. But when you operate a network of around 1,500 stores as we do in Belton, you need to own a certain number of stores to test concepts and to smoothen the succession process for those of our long-term network owners that wish to retire. We call this ownership in transition. We are in the process of optimizing our ownership and transition portfolio, and we have seen a general decrease in ownership of owned stores since the peak in Q1 2019.

Furthermore, as part of our commercial turnaround of Beltone, we've been upgrading our practice management system, and we are also in the process of driving our commercial excellence transformation through best practice sharing. This also comes through a general stronger business culture that we're continuously building at the moment. All in all, we are seeing the right initiatives being executed across Beltone.

And let's turn to Slide 11. During the quarter, we presented another technological industry breakthrough. We launched 4 new custom devices for the ReSound LiNX Quattro portfolio. Most notable the first complete in the canal device in the industry with full direct streaming in stereo and ear-to-ear connectivity. All 4 custom devices include the same benefits as the rest of the ReSound LiNX Quattro portfolio, namely the brilliant sound experience with layers of sound that includes the highest input dynamic range in the industry. And this is really important because at the end of the day, the reason why you get a hearing aid is because you want to be able to hear the people around you speak. So this is really crucial.

The new custom devices naturally also include the direct-to-Android streaming capabilities, which brings me to Page 12 in the presentation, where I'm happy to mention that Google has now launched Android 10, which means that our complete family of ReSound LiNX Quattro hearing aids now have direct Android streaming in stereo.

With that, I would like to hand over to René for an update on GN Audio.

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

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Thank you, Gitte, and thanks to all of you for taking time to attend our call again today. So now it's my pleasure to take you through the GN Audio's results for the third quarter of 2019. And let's move to Slide #14. The third quarter of 2019 was yet again a very strong quarter for GN Audio, and we achieved 20% organic growth.

The growth continues to be driven across our CC&O and consumer businesses. Here, we have seen comparable growth rates in the quarter delivered by our teams and partners around the world. They continue to do a truly excellent job. Revenue growth was 25%, including around 3 percentage points impact from foreign exchange, and it's around 2% impact from M&A.

Gross margin was flat compared to Q3 of 2018, and this was due to a good positive mix on top of a negative impact from foreign exchange.

EBITDA increased 29% in the quarter. The EBITDA margin was thereby 60 basis points higher than Q3 of 2018. This is reflecting solid leverage in the business, and this is on top of a slight headwind on the margin from foreign exchange rates and continued investments in future growth opportunities.

Free cash flow was, again, very strong in the quarter. And this was driven by strong operating cash flow and a strong development in the net working capital as Marcus also stated.

If we move to Slide 15. Here, we dig a bit deeper into the development in our CC&O division. In Q3 of 2019, CC&O continued to develop very favorably with strong organic growth across all 3 regions. As a consequence, we have once again taken market share and strengthened our position in the global seasonal market. In North America, we continue to deliver 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 a solid range of countries across the region. And in a similar way, as last time, in our Rest of World region, we delivered very strong organic growth. And also, this growth was broad-based across countries in the region.

If you go to Slide 16. So I would like, once again, to use this opportunity to take a step back and look at the overall market structure and the related drivers. As a 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 in line with our expectations. I'll not spend too much time on this specific slide, but just turn your attention to the bottom of the slide, where we show our assumption on market size and the expected growth rates across the CC&O and consumer space. All in all, we think we are exposed to healthy growing markets across our business areas.

If you go to Slide 17. Here, I would like to spend a little time talking to the attractiveness of the CC&O market and the drivers behind our market expectations. As a starting point, the total CC&O market is today worth roughly USD 1.4 billion and has been growing with around 7% annually in the past few years.

Today, the call center part of the market and the UC office market segments are roughly equal in size. But the growth projections in the coming years are very different in the 2 market segments.

In the call center part of the market, we expect a slight decline from current levels going forward, whereas we expect strong double-digit growth in the office part of the market. We, therefore, expect a market growth of 9% to 11% in the CC&O markets in the coming years.

If you move to the lower-left side of this slide, the strong growth in the office-based headset is driven by increased penetration, meaning the percentage of office workers who have a headset. Today, we estimate that the global penetration is roughly 15%, which we have based on input from Frost & Sullivan, expect to double by 2025, driven by the continued adoption of Unified Communications technologies.

On the top right hand on the slide, we have included some key trends behind the continuous adoption of Unified Communications, including the general requirement for work flexibility, general technology improvements and a constant focus on cost efficiencies and productivity gains. All in all, some very solid and tangible megatrends that are driving the CC&O market growth.

At the bottom right hand of this slide, we have included general barriers to the headset market as we see them. This is about integration -- or strong integration with software giants ecosystems, it's a matter of technology leadership and, last but not least, the distribution of our products. All in all, we think the CC&O market is a very attractive place to be with very tangible and robust barriers of entry to the market.

On Slide 18, let's go there. I would like to spend a few minutes on our recent launch of Jabra PanaCast. As you know, we acquired ITE assistance in March this year and driven by strong efforts across our teams, we have been able to start shipping the first Jabra PanaCast products by end of August in Q3.

Our current solution contains leading-edge cameras and microphones, combined with fourth-generation stitching technologies, allowing us for this 180-degree field of view that we have, an intelligent vision software. The solution is completely plug-and-play, and it works with all major technology platforms. In the quarter, we experienced revenue of around DKK 25 million from PanaCast as we had expected.

This is still early days, but we are very confident that the Jabra PanaCast technology will offer us very interesting growth opportunities for the years to come. Further, as we have stated, we still expect that this acquisition will be accretive to our financials already from 2020.

And finally, if you go to Slide #19. Let me give a little color on the initial feedback we have received from Jabra Elite 75t. The product we announced at IFA in September in the quarter. Elite 75t is our fourth-generation true-wireless earbud, which has taken the very best from our Elite, very successfully Elite 65t to a completely new level. It comes with a notably longer battery life and a smaller, more secure and comfortable fit. And for those who will try soon, I can tell you, it plays fantastic. As you can see from the product reviews on the right hand of the slide, the initial market reaction is very strong, and the product has now started shipping.

With that, I would like to hand back to Marcus.

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

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Yes. Thanks, René, and that will bring us to the financial guidance 2019. As you see on the slide, broken down with 3 pillars, on GN Hearing, you're going to expect a growth rate for the full fiscal year of around 7% organic. Please bear in mind that we've had an extremely strong Q4 last year, where we have launched the Quattro family and the Engage family. And the absolute number will be high. But of course, it will drive down slightly the organic growth within Q4, and that's why we feel very comfortable with around 7%.

The EBITDA margin is expected to be slightly above the 20.0% number. And in GN Hearing, we will continue to invest, of course, into further future growth opportunities. In GN Audio, we have given upgrade during this fiscal year, and we expect to be around the 24% organic growth rate, and the EBITDA margin is also expected to be around 20% before the transaction-related costs associated with the ITE acquisition. GN Audio is expecting to continue operational leverage as you have seen in the quarter.

In GN Store Nord, we expect, as guided, to be in the segment of others, the level of around DKK 150 million. Year-to-date, we have DKK 150 million so right spot on with our guidance on that segment. The effective tax rate is expected to be around 23%. And on Store Nord, of course, we expect, like in previous years, again, an EPS increase in the double-digit territory.

And with this, I'll hand over back to Morten.

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Morten P. Toft, [6]

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Thank you, Gitte, René and Marcus for the updates. With that, I'm handing over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So the first is over to the line of Martin Parkhøi at Danske Bank.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Equity Analyst [2]

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Martin Parkhøi, Danske Bank. One question, I assume it must be 2, so I'll ask 2. Firstly, René, on GN Audio, you say 9% to 11% for the CC&O business for the next 7, 6 -- 7 years or so. Is that independent on the macroeconomic environment, either it should be which -- in which good shape and form that should be in? And in that context, would you seem to still assume that you will be gaining market share in this environment? And then also on the GN Audio, can you explain about the jump in administration costs in the third quarter?

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

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Thanks for the question, Martin. So on the 9% to 11%, which, of course, as you'll notice, is up from the current 7% to 9% that we have talked about for a while. And the phenomena here is that we have a shift between the 2 market segments, the call center segment, which is flat, and units in the CC&O office UC segment, which is high growth.

Now they have become equal-sized. And of course, with the fast-growing part becoming bigger, all in all, it has bigger influence on the overall growth. So this is on an assumption that the penetration of UC keeps growing, as I said here. And as regard the macroeconomy, I think the way -- the best way I can talk to this is that the products we are selling are efficiency driving and productivity enhancing in the sense that if you have a certain headwind, the natural thing for you to do is actually to drive these software systems into your execution; build a video-conferencing system, so people travel less; and make sure that you have the teams, infrastructure and so on and so forth. So from that perspective, we have an opportunity to counter cycle.

If you talk about a very severe macro environment. Of course, we are not a resilient company, neither is any other company. But I mean the way we see it now in the market as we speak. We don't see any signal of any sort of deterioration of the market. It is strong and the demand we have from the market as we speak is equally strong. So in that sense, the assumption that UC will continue to grow, I think, is a solid one.

On the admin cost, I think this is a timing matter, we are booking the costs as they occur. And therefore, it goes a bit up and down. There is nothing unusual to that aspect.

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Operator [4]

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So the next question is of the line of Veronika Dubajova at Goldman Sachs. (Operator Instructions)

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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I will keep it to 2. And actually, they're both Audio related, so for René. If I look at the performance in the third quarter, on the gross margin, it would suggest that there's not been a lot of difference in the growth rate between the enterprise and the mobile business. So I wanted to check, is that the right way to think about it?

And I guess, looking forward for enterprise, in particular, how much help did you have this quarter from Plantronics and the issues that they're seeing? Or do you think that this sort of 20-ish-percent growth rate is sustainable as you look forward?

And then if you can comment a little bit on tariffs. One, what the impact was in the quarter and how we should be thinking about that into 2020? That would be very helpful.

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

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Thanks for the questions. So on the gross margin, you're correct in the sense that this is a mix issue and represent a situation where you can say the professional business has a bit higher impact than we saw in the first half of the year.

On the growth rates, they are comparable in the sense, we have not guided exactly what is what. But they are in the neighborhood. So we have equal growth on both sides, meaning the mix of the business is a constant.

On the Plantronics situation, I don't have a lot to say. We try to play our own game, and it has worked for us for quite some time now. As we said here, the market seems to be intact. 7, 8, 9, we have to see when we calculate, if all the market is a constant, we have taken very significant market share again. So we have been growing 2x, 3x the market now for many quarters. Is that help or is it because we're doing well? I prefer to use the latter part, we are playing our own game. So that's what -- where it comes from.

As regard to the future growth, we haven't guided for the coming years, yet. We will do that early next year. But it's clear that we are doing everything we can to position the company in the growth pockets out there. And we have done that very successfully. With UC, we have found the next gross pocket on the video side for the small meeting rooms and we're investing into that. And we will keep trying to find these pockets where we can build faster than the competition and drive the market forward.

Sorry, yes. my colleague just reminded me of one question. So I mean it's hard to say anything about the tariffs. It is what it is. It has very little impact on the quarter we just left because it was a short time. It is in the guidance for the rest of the year. And whatever will happen next year, I don't want to speculate. You have the same news as I have, and we don't know. But it is in the guidance for Q4. And of course, the last thing I want to say about that. This is a bill sent to many different parts of the value chain. And we have to pay some, other people will pay some and the supply chain will pay some and the channel some. So it also depends on how we managed to play this through over the coming months.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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And René, are you able to quantify at all sort of what the annualized headwind would be from the tariffs based on how you've seen the impact shared so far? Are we talking -- is it 10 basis points? Is it 100 basis points? Is it 300 bps? What is it? Where in that ballpark is it?

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

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I think for the quarter we're left -- it's very little point. For the -- if you have full impact, I think we have said -- if you have full impact and we paid, it's a short of 1 percentage point. In fact, it's all paid by us on an annualized basis as it is today, right?

So -- but of course, we're speculating on many parents will there be tariffs or not, what will they be and what categories going in and out. But if it is just now and we would pay it all, it is short of 1 percentage point.

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Operator [9]

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Next question is of the line of Annette Lykke at Handelsbanken.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [10]

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First of all, thank you for a very interesting update on the CC&O business. Can you share with us how you see your competitive position? Also looking forward, are you continuing to expect taking market share?

And then also, maybe you could share a little bit on how you see your product offering within the consumer segment this year compared to last year? Of course, in particular, thinking about Black Friday and Christmas sales effect here?

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René Svendsen-Tune, GN Store Nord A/S - CEO [11]

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Right. So starting with -- René back here. So starting with the market share question on CC&O, I mean it's clearly our ambition to keep taking market share. I think we have technology in hand, and we have also succeeded to roll out development products that not only somehow compete with competition, but actually, they expand the market. And that's the way we want to work going forward. And I don't see any reason why we could not keep advancing our market position in the CC&O space.

On the consumer side, sorry, what was actually the question.

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Marcus Desimoni, GN Store Nord A/S - CFO [12]

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Yes. Product offering and...

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René Svendsen-Tune, GN Store Nord A/S - CEO [13]

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Product offering. I mean you can see we just launched -- we just launched the 75t into the market. We think it's a very strong product. The big difference from a year ago is that the listings, I mean, our presence in retail is way, way stronger today. If you look at some of the brand's impact also on the consumer side, if you go and check how many people Google Jabra every day, it's more than twice today than it was a year back. So of course, also the brand effect helps us. So -- and we have, you can say, for the market development, very relevant products out there. The true wireless, we were very early out there. We have continued to somehow be the leader. And I think we still are with very, very strong capabilities in the market. So we have relevant products. The presence in retail is much stronger and online, and the brand is developing slowly the right way.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [14]

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So just looking at the Consumer segment then to follow-up on this, it looks like you have a stronger position ahead of this Q4 than you had ahead of last Q4?

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René Svendsen-Tune, GN Store Nord A/S - CEO [15]

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Yes. I think that's simply what I said. I think we have very strong products. We have very strong resale presence, and the brand is improving, so we are in good shape. We think it's all in the guidance. So there is nothing to read from that beyond what we have already there.

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Operator [16]

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Next is over to the line of Christian Ryom at Nordea Markets.

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Christian Sørup Ryom, Nordea Markets, Research Division - Senior Analyst [17]

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I have 2, please. So the first is just to clarify your comments on Beltone. So can you please confirm that you have -- said that you have around 250 Beltone stores in transition by a peak in Q1? And if I understood you correctly, you said that you wanted to reduce this by 1/3 by the end of the year. Exactly how far along are you in this reduction?

And then the second question is also to the consumer business. So if I understand you correctly, you say that the comparable growth rates for both CC&O and consumer suggests roughly 20% for both, of course. And that -- would that imply that the consumer business have actually seen a sequential decline in sales from Q3 into Q -- sorry, from Q2 into Q3? And would you expect the launch of the 75t to reaccelerate the year-on-year growth rate for the consumer business in Q4?

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Marcus Desimoni, GN Store Nord A/S - CFO [18]

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Christian, it's me, Marcus. Thanks for the question. Yes, you basically heard it 100% correct. In Q1, as I said, we've had the peak with retail in transition, and we have had more than 250 point of sales in our ownership. And at the end of this year, we expect to have -- hand it over back to the networks, roughly 1/3 out of that.

And as I said, we're on a very good way. But structuring a deal and signing it, there's always some timing effects. And that's why I don't want to give you the numbers for September, October. But I think for the fiscal year, that's important. Therefore, then you have the balance sheet reflections, as I also highlighted in the beginning of the year. And that is part of what Gitte have said, the roughly 1,500 point of sales that we have in the Beltone network in the U.S.

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René Svendsen-Tune, GN Store Nord A/S - CEO [19]

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So René here. So on the consumer business, I mean, what we have said all along is that we turned around the consumer business second half of last year and created some very strong -- 2 very strong quarters and the comp is tougher. So as we had expected, the growth rates on the consumer side would be lower but still very strong relative to the market. So I think it is as we had expected. And the way we are looking at Q4 is exactly in line also with our guidance and the expectations.

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Operator [20]

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Okay. We'll now go to the line of Carsten Lønborg at SEB.

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Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [21]

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Also for René here on PanaCast, we can probably calculate something like DKK 25 million in sales for the quarter you had despite the product only being available for a little bit more than a month. So as analysts, should we just multiply this number by 12 and then we get to full year sales? Or do you have any other uptake considerations that you would like to share with us?

And also, whether you are -- how many markets have it been launched in and what would be the trigger points for 2020 in terms of new launches here for PanaCast?

And then second question, also for René on selling and margin cost in this quarter, you actually present a lower number than in Q3 -- Q2, sorry, in absolute terms. And also in December sales, there's a small decline. I had probably expected you to maintain the push here and continue to reinvest in the business, as you also said we did in Q2. Is there anything to pay to attention to here?

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

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René here. So on the Panacast, as you say, you said, I mean, it's the first number we have been able to present here. You shouldn't take this number and multiply it by 12 because this is what it requires to fill the channel in the first round, basically. So what it reflects, of course, is we have a very broad distribution from the start. The channel partners have been very eager to come along with us. We are just opening, as you can say, our ways into the market with the channel and, of course, also with our direct sales force. So the sell-through is -- I mean we are 8 weeks into the -- so the market is limited.

And it is exactly as we have tried to say that we want to take a thorough sort of approach to launching this product this year and then make the business happen mainly next year. But the business is on. And of course, we're very happy with that. This reflects broad distributions, mainly.

On the sales and marketing cost, I think it is, again, a sort of a timing issue. We are investing certainly into building the business, indeed. It was sometimes in the way that when we push -- we try to push as early in the year as we can. And in that sense, some of the expenses may fall earlier, so we get the full effect through the year. It doesn't mean that we will not invest now and rest of the year for whatever is supposed to happen in the beginning of next year. But -- so there are some timing effects in exactly when we pay the bill.

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Operator [23]

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We are now over to the line of Kit Lee at Jefferies.

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Nyeok Lee, Jefferies LLC, Research Division - Equity Analyst [24]

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My first question is just on Hearing, the Hearing business. Because if I look at the North America numbers, we don't have the moving parts. But I guess, if we strip out FX, the organic growth in North America was around 5% to 6% or so. So I'm just wondering if there were any other areas, which you would like to highlight in terms of softer growth or performance? I think you've got good Hearing. But I guess were there any other areas that there was slightly softer in Q3?

And then the second question is on Audio. Just looking at Plantronics again, I think they are planning to refresh most of their UC and video portfolios. Do you see that as a meaningful change or development for the market? And how do you see that playing out over the next year or so?

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Marcus Desimoni, GN Store Nord A/S - CFO [25]

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Kit, It's me, Marcus. Let me start with Hearing. So with North America performance overall, we are super happy. Obviously, you know the different channels, you see the VA numbers, that was a massive growth driver. We're also very pleased with Costco. And I can confirm that organically, North America was, give or take, close round where we have been with the quarter.

That said, it also means, of course, the commercial market or the independence, how we want to call them, have had been impacted by the loss of the account of true hearing, but it's part of our numbers. And when you see what was not performing towards the average of our group that was clearly Beltone. But I think we highlighted it for several times already that Beltone is not outgrowing the rest of the group.

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

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So René here. On the competitive situation, of course, we do expect our competition to somehow stay competitive or trying to stay competitive in the market. So we do anticipate that new products will come from different sources, including Plantronics. We have our own road maps. And at least, we feel very confident that we have technology and the plan that will match what comes out there. So I don't think the situation is any different than it has been over the recent years, where we have taken market share in a very consistent way.

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Operator [27]

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We now go to the line of Michael Jungling at Morgan Stanley.

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

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I have 2 questions. Firstly, on strategy. And I think your next update is due very soon, given that your 3-year periods up towards the end of this year. Have you said the time for the communication? And when it comes to Hearing, is it conceptually feasible to think that the next 3 years will be a period of margin expansion versus flatlining over the past 3 years? And as part of the strategy, do you see that the next 3 years is more of an investment year or more of a yielding the benefits from the investments that you've made during the current strategy period?

And the final question is on Audio. What are your thoughts around the new product launches in consumer from Amazon; from Microsoft; Apple, launching a new form factor? Do you expect this to take some share away from you? And how you're thinking about the future profitability trend of your consumer Audio business?

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Marcus Desimoni, GN Store Nord A/S - CFO [29]

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Michael, it's me Marcus. Let me start with some general remarks to the setup of the company, and then my colleagues will jump in and give you more details on your questions. I mean the company is coming from different status a decade ago, and we've had now 4 waves of clear strategies. You should basically read into our current setup, and it's a way of how we think about the future is that we are extremely well-performing asset with different waves we have around the asset. You see the different quarters. And we believe that we're in a very mature status now and, therefore, having different investments, doing different M&A activities and bring the company to the next level.

That shows that we also said we don't foresee that we need to give any different strategy updates this year. And this is why we pull forward the fiscal year announcement to the week #6, February 5, already where we report on the outcome of fiscal '19 as well as how have we performed in the current 3-year strategy period.

Going forward, I would not say that we do a 3-year strategy, but I also don't want to rule it out. And I don't want to open up any speculation over here. But I think when we talk about the businesses. And if you've heard René talking today, it's more about the mid-cycle across in all the different businesses. And therefore, we have different momentums in terms of how is the business from the outside impacted as well as what kind of launches do we have. And then we might also think about that maybe narrow band of whatever year it is might not necessarily reflect the cadence of the businesses that we are operating in or the different industry segments that we are operating in.

And now to your specific question, I hand it over to my colleagues.

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Gitte Pugholm Aabo, GN Store Nord A/S - CEO of GN Hearing [30]

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Thank you, Marcus. It's Gitte speaking. Well, concerning the profitability of GN Hearing, I actually think that the guidance we're giving for this year in terms of an EBITDA margin above 20% is reflecting a healthy profitability level for GN Hearing because what is worth noticing is that we have consistently outgrown the market that has -- on our top line, that has been the case for a long time. And the reason we've been able to do that is because we've invested heavily into research and development. And I think that's the formula for success in this business, and that has to continue going forward that we invest in R&D with the aim to outgrow the market on the top line to bring better innovation into the market, and maintaining a profitability level around where we are today.

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

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René here. On the competitive launches, especially the launches from the last of the tech giants, I think you should look at the history, especially in the true-wireless market, which is a very vibrant place. We were very early. And in the very early days, we had very high market share in a small market. Then Apple entered the market, the market exploded. And while our market share was shrinking a lot, our business was growing dramatically. So you can say there's 2 elements to this: there's the market size and the market making happening and then our place in that market.

Obviously, we have a lot of respect for what is happening out there and the launches that are coming from several places as we speak. We also noticed that when Apple, for instance, launched into the high end of this market. They also launched a higher price. And in that sense, the market seems expandable and healthy. The launches we have made into this market so far have been very successful. We have high hopes and high expectations for what we've just done. We think it is smack on what the market expects, and we'll take forward. And then -- so in that sense, we think we can -- we have enough firepower to sustain a solid position and further develop our position in the consumer market.

On the profitability, of course, this is -- we are in a scale business next to sort of a -- well, 2 things, after the pricing power, we can drive; and the scale, we can drive levers forming the business. And right now, with the growth rates we have, of course, we are able to offset -- first of all, we have actually been driving ASP increases nicely across the business but also we have scale benefits that can offset presence as we go-to-market cost and so forth.

So as you have seen, we have invested in market-expanding opportunities consistently, and we still drive levers in the business, and that's our plan going forward.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [32]

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Great. So if I hear you correctly about your hearing aid comments. Did I understand correctly that you're thinking about the future more in terms of stable margins and aiding formula to successfully drive market share gains? Is that the message that you're sending today?

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Gitte Pugholm Aabo, GN Store Nord A/S - CEO of GN Hearing [33]

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Well, I think I don't want to guide about the future until now. But I certainly think that the formula for success in GN Hearing so far has been maintaining a good balance between profitability and investments into R&D and, thereby, bringing new innovations into the market, allowing us to consistently outgrow the market. And it's certainly our ambition to continue outgrowing the market also going forward.

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Operator [34]

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We are now over to the line of Sebastian Walker at UBS.

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Sebastian Walker, UBS Investment Bank, Research Division - Associate Analyst [35]

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I actually just got one, which is on the consumer business. So I just wanted to understand how the pricing dynamic is here. We've seen Apple discount their AirPods, and it seems like looking online at Amazon pricing, you and some of your competitors have also cut prices. So could you confirm whether that's the case and whether you think there'll be any further need for discounting until the end of the year and the beginning of next?

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

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René back here. So I think there are 2 elements to the pricing: there is the price and then there is the promotion that is ongoing out there at any point of time. It is typical when you launch new products into the market, that existing product, they are not necessarily taken off, but they are giving a sort of surely low price. We have just launched a new product into the market with a strong price. We believe that has a strong place out there. As I've just been speaking to, there are promotions on and off. But if you look across -- back a couple of quarters, actually, the pricing power of these segments has been very strong. So yes, there will be promotions coming, I'm sure about that, and prices will come back to normal again. So it is -- as it used to be, in a sense. There is no difference out there, as I can see it right now.

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Sebastian Walker, UBS Investment Bank, Research Division - Associate Analyst [37]

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Great. And just given all the launches that Michael was referencing, I mean, do you feel the need for a higher rate of promotions going forward? Or do you think you'll stick to the existing pricing strategy?

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René Svendsen-Tune, GN Store Nord A/S - CEO [38]

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This point in time, we have no plans or ambitions of changing our sort of promotional strategies. We are playing the retail game as everybody else. Black Friday is coming, and we are part of that in a different -- a more comprehensive way than ever before. And if you look at the holiday season, you will find Jabra products in more catalogs and Christmas books than ever before.

So in that sense, of course, we are playing the retail game, but not in a -- you can say, I talk to the distribution we have today, which is very different to what we had 1 year or 2 years back. And that, of course, helps us as we want to reach the customers without driving hefty promotions.

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Operator [39]

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We are now over to the line of Patrick Wood at Bank of America.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [40]

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I have 2 left, please. The first one, a bit boring but historically, you gave us a little bit of an insight, and I know it's the distributors, but into the end customer segment within CC&O. And what I mean by that is, nowadays, how material are, I don't know, investment banks versus other kind of business models. I'm just kind of curious to get a sense of how you view the end markets there roughly. What the top 3 industries would be on that side?

And then the second one, a little bit more technical. Just I'm curious if you have any thoughts on the final order in the federal register Bose's deliverable products, anything that has any read-through to what next year's OTC legislation might look like, can we get a little bit more details from the FDA there? It would be helpful.

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René Svendsen-Tune, GN Store Nord A/S - CEO [41]

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So Rene, again, here. So on the CC&O side, I mean, there are 2 destinations for our products actually. On the call center side, you find there is a shift from in-house call centers, very often outsourced to India or similar countries. These are, to some extent being back-sourced or sourced to North America and Europe in that sense. But the destination is the same.

What is happening now is that there is an increasing sort of not offshoring only, but actually, also, that large companies take over the call center dynamics, call center business from large companies who usually run themselves. So you can say our customer pattern is shifting a bit in the sense that we sell call centers products, not only to call centers in-house but more and more to specific call center businesses who are doing that business for a living.

So as regard the UC product, you can say the end customer is everyone. So it started exactly in -- you can say, to do technology enterprises, banks and so forth, they're going to utilities. Now we see UC being adopted by not only large enterprise, but also small enterprise, not only private enterprise, but also public sector to a large extent. So we have seen a lot of UC deployment in Europe governments, different sorts in different countries this year. And we expect that trend will go on. But UC is a phenomenon for everyone. It's not distant from specific sectors anymore.

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Operator [42]

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Okay. So we now go to the line of Chris Gretler at Crédit Suisse.

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Christoph Gretler, Crédit Suisse AG, Research Division - MD in Equity Research [43]

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I had actually 2 questions with respect to mix. First, on the Audio side, you mentioned that underlying gross margin was due to mix, yet kind of professional and consumer grew apparently about the same rate. So where is exactly now this positive mix coming from? Because within Professional, I guess, the call center business is probably kind of now declining and the office now going up. And at least my historic understanding was that call center has no higher margin? And also, maybe could you enlighten me on that? And then I have a mix question on the hearing device side as well.

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Marcus Desimoni, GN Store Nord A/S - CFO [44]

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So on the mix comment right now. You can say there are 2 different mix: one is across the professional side, we have little bit margin differences with some regional mix, but also the fact that the mix between the professional business and the consumer is a bit more in favor of the professional business this time. And that drives higher gross profit. We presented it as we have talked to. So it is among the businesses and but also, of course, inside the businesses.

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

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Yes. Chris, on the question regarding the gross margin impact on hearing, maybe just start from the year-over-year impact. Last year, we've had 69.5% gross profit, this year we had 68.5% gross profit. There are basically 3 different levers in there. So the first one is, as I have said, we are in the process to unwind our temporary ownership of Beltone retail and normally retail has a little bit of higher gross margin with higher OpEx associated to that. That has a minor impact.

The second impact is, of course, our huge success in Quattro and Engage families with rechargeability. And as friendly competitors also commented on that, I don't want to shy away from this as well. That, yes, we are super successful. Yes, it's driving top line, but the packaged deal out of that is impacting, of course, also the gross margin, and therefore, it's not expanding the gross margin. Even though in absolute terms, it's extremely helpful.

And then the third one is a normal -- what we always call the mix. I mean we have had very great success, as we mentioned, for example, in the U.K. And you can imagine that in the U.K., you're shuffling a lot of units, but not necessarily a lot of value. And then you also have, of course, an impact in the mix.

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Marcus Desimoni, GN Store Nord A/S - CFO [46]

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Can I just say we missed the question on OTC. Actually, sorry for that. So just want to say here that, I mean, the view from GN is the same. We think this is a market-expanding opportunity. We think we are well positioned, but we need to see the regulation. There's nothing new about what exactly is going to happen, what will it all look like. So there isn't anything new we can say on that until we know more.

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Operator [47]

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So we now go to the line of Maja Pataki at Kepler Cheuvreux.

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [48]

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Actually, all of my questions have been answered with the exception of one, Marcus. I would like to double-check whether I got you right. Did you say that you're not necessarily going to present us with the strategic plan come next year and that it might be that you just start giving us annual guidance without giving us an indication in which direction you go?

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Marcus Desimoni, GN Store Nord A/S - CFO [49]

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Hi, Maja. Good catch. I clearly said I don't confirm nor deny that we give a 3-year strategy, but of course, we're giving a strategic update and outlook.

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Operator [50]

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We now go to the line of Oliver Metzger at Commerzbank.

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Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [51]

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The first one is on the task-based headsets penetration rate. So it's still a level of 15%. Your target's double this rate. And I think that's realistic. But apart from penetration rate, there are the columns in this chart, very small. And could you disclose your view about the underlying market growth until 2025?

Second question is on your new ITE devices. The segment is still a niche now with your ear-to-ear connectivity, it becomes at least more attractive. So where do you see the potential to expand the segment of ITE? And if this is successful, which segment would suffer from that?

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René Svendsen-Tune, GN Store Nord A/S - CEO [52]

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So Rene here. On the market growth assumptions we are now laying out is -- I mean, we are using data from an external party, Frost & Sullivan here. It is a combination of the two. We are not disclosing our view on the split on the call center and office markets. But as you can see from the figure and, of course, also the commentary I made, we expect that the call center part will be flat to slightly declining, whereas the UC part will have -- show significant double-digit growth rates. And the combination of that is simply because the UC part is getting bigger, relatively bigger. It drives an upgrade of the market size by the analyst there.

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Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [53]

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Basically, I mentioned the chart below. So the number of office workers globally, how that develops? Sorry for this misunderstanding. So chart -- Slide 17, chart #2, the gray columns.

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René Svendsen-Tune, GN Store Nord A/S - CEO [54]

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I apologize. So I thought you asked the other question. I think the -- I mean, actually, I don't think we have a very strong sort of guidance on how the amount of office workers will evolve. They are more white-collar people in -- across the world every day. I don't have a percentage to actually offer here at this point in time.

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Oliver Metzger, Commerzbank AG, Research Division - Equity Analyst of Life Sciences [55]

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But could you disclose the number for 2025 from this chart?

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

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I don't have it. We -- I mean this is indicative. I think what we're trying to display here is there is a shift in the market driven by the UC phenomena versus the call center, driving higher market growth, the absolute numbers and what we could drive for that. We don't have that. So then, of course, you can calculate from the growth rates where we would land in a sense.

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Marcus Desimoni, GN Store Nord A/S - CFO [57]

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Oliver, it's me, Marcus. Thanks for the question regarding the customs family. As we have said, we have just launched new form factors now in the custom based on the Quattro chipset in September. And for us, it is a very important category. We believe that the market in value terms is roughly 15% to 20% of customs, 65% to 70% is the rig segment. So therefore, it's a category, of course, you need to be in and you want to play in. And if you have refreshments, upgrades, new products coming in there to become a meaningful player. And we are not there where I want to be with our penetration of that segment. The customer base is extremely sticky. You see the numbers from VA. And I think we have some opportunity in the customs segment to increase our presence and our footprint. So yes, in a nutshell, it's a great segment. I really like it, and we continue to want to play a bigger role in there.

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Operator [58]

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Okay. We have a follow-up question, and that's back to the line of Veronika Dubajova at Goldman Sachs.

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Veronika Dubajova, Goldman Sachs Group Inc., Research Division - Equity Analyst [59]

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I just have one follow-up question, which is on the gross margin for Hearing for the full year. I think you've previously guided to sort of flattish gross margin. I'm just curious, should we still be expecting that given how margins evolved in the third quarter or not?

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

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Hey, Veronika. It's me Marcus. Like-for-like base, I would see it. And also with the guidance that we are flattish year-over-year. However, the impact of the divestments of the Beltone shops might have a minor impact. And if that would have something I would call this out, but I can't, of course, really predict the buying behavior of our last customers. And if our British friends are loving our products and buying it like hot potatoes. That is, of course, driving the top line, but not necessarily the gross margin. So if there would be a change, of course, I would also call this out for you guys.

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Operator [61]

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Okay. Final question for today is another follow-up question, and that's back to the line of Michael Jungling at Morgan Stanley.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [62]

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A question for Marcus. Marcus, If you look at the previous 4 strategy releases, the market took great comfort in providing the visibility and a path forward. And I'm quite surprised that you're not willing or maybe not thinking about doing it this time? And I'm trying to understand whether this is in relation to your visibility not being good enough for the next 3 years as a result of OTC legislation?

And secondly, predicting the consumer audio business is quite tough, I suspect. It's a fast-moving market. Are these the 2 things which are causing you to think twice about giving a longer-term strategy update?

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Marcus Desimoni, GN Store Nord A/S - CFO [63]

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Michael, very good content of the question. The answer for me is in contrast. So because, as you said, this is a cycle. There are different momentum in the macro environment happening. This is why I'm saying, I don't want to confirm or deny that we're saying something about the 3-year strategy. I'm just saying that because of the different cycles in the different segments we are playing in and be thinking more to get a little bit more specifics around that. And that could end up in whatever it is. But of course, yes, we need to talk about the strategy in terms of the length of -- across cycle that we see in the businesses. And therefore, you have on the Audio side, different momentums, different launch cadence, and it might be that in the hearing side, it might also move into a different broader range of cycles. And this is what I just wanted to hint. So actually, it should give you much more comfort instead of more worries.

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Operator [64]

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As that was the final question for today, can I please pass it back to you for any closing comments at this stage.

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Morten P. Toft, [65]

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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 Gitte, René, Marcus and myself, we see you on the road. Thank you very much.

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Operator [66]

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This now concludes the call. Thank you all very much for attending, and you can now disconnect.