Hello, and welcome to GN's full year 2023 conference call. Participating on the call today is Group CEO, Peter Karlstromer, Group CFO, Søren Jelert, and myself, Rune Sandager, Head of Investor Relations. Today's presentation is expected to last about 20 minutes, after which we'll turn to the Q&A session. You can find the presentation uploaded on gn.com. During the presentation, Peter will provide an update on the group performance for the year, after which Søren will provide a deep dive on the key financials and guidance for 2024. With that brief introduction, I'm happy to hand over to Peter and the group highlights.
Thank you, Rune. Starting on slide four, I'm happy to say that we've been delivering very well, thanks to strong execution across our business activities and functions. In GN Hearing, we gained significant market share, leading to 13% organic growth, driven by the very successful ReSound Omnia portfolio and the early uptake from ReSound Nexia, which I will get back to later. In Audio, we executed well in stabilizing markets and delivered a 8% organic growth. We have successfully maintained a market-leading position in Enterprise, and throughout the year, gained significant market share with SteelSeries. On a group level, we reached 10% adjusted EBITDA margin and delivered a very strong cash flow of DKK 1.1 billion for the full year, ultimately reducing adjusted leverage to 4.5 x. Moreover, we have successfully taken the first steps towards our One GN integration.
This more streamlined and customer-focused organizational setup will enable GN in the years ahead to further expand our competitive positions in attractive markets, returning to growth and increasing margins. Overall, in line with our ambitions, 2023 was characterized by strong execution across the company, on top of a continued focus on the broader ESG agenda, where I think it's relevant to mention that we reduced our combined Scope 1 and 2 emissions, which an impressive 34%, while the Scope 3 emissions were reduced by 24% compared to 2022. This work is ongoing, and we expect more improvements over the years to come. With this high-level summary, let's move to the performance in GN Hearing and GN Audio. Starting with GN Hearing.
In 2023, we gained significant market share and delivered 13% organic revenue growth, supported by strong commercial execution and important product launches in healthy Hearing aid markets. We did, however, see some different market patterns. The U.S. market was very strong, whereas there were some difficulties in Europe, especially in France and Germany. But we did see improving trends for these countries towards the end of the year, so we assess the overall Hearing aids market to continue to be healthy. As a consequence of the strong top-line development and cost control, the adjusted EBITDA margin increased with 2.3 percentage points. The adjusted EBITDA margin in the core business was 14.7%. The EBITDA in the emerging business was -DKK 152 million in 2023, which is an improvement of DKK 35 million compared to last year.
We remain committed to bring this fast-growing business into profitability by end of 2025 or early 2026. Let's move to slide seven and the early data from our ReSound Nexia launch. As you know, we started shipment of ReSound Nexia during October, and the launch of the new product family will gradually be finalized across key markets during Q1 2024. Well, it's still early days. Let me share a few data points that gives us comfort on continued strong performance in 2024. First of all, the return rates of ReSound Nexia are, as we expected, lower than what we've seen in earlier product launches. This has been driven by an increased focus on quality that started some years ago. We are now seeing the positive impact from these initiatives. Secondly, the innovative edge of ReSound Nexia has clearly opened up new doors.
As an example, our points of sale in the U.S. independent market has increased by a double-digit amount compared to 2020. This is a testimony to the success of the Omnia family, but something we believe Nexia will continue to drive. Thirdly, the initial unit uptake is even stronger than what we saw with ReSound Omnia, now three months into the launch, which is a combination of the increased points of sale, as well as better share of wallet in the existing points of sale. Finally, we're now expanding the ReSound Nexia family with BTEs and ITEs, making the product portfolio competitive across countries, price bands, and also new form factors. With this positive early indication from ReSound Nexia, we remain confident that we can keep our strong growth momentum into 2024. With these highlights of GN Hearing, let's now move to GN Audio on slide nine.
Starting with the financials, in 2023, we delivered a solid execution in challenging market conditions, leading to a -8% organic growth for the year. The Enterprise business defended its global market share position, resulting in organic growth of -13%. Towards the end of 2023, we started to see some stabilization of the market development with stable sequential growth. SteelSeries delivered significant market share gains and grew 16% organically in an estimated flat market. The Consumer business was impacted by the narrowed product portfolio in order to drive a better future profitability, which led to an organic growth of -13%. Despite the negative business mix and promotional activities to reduce legacy inventory, we delivered a healthy gross margin of 33% for the year, supported by easing freight cost and price adjustments in Enterprise.
Continuous strong cost control led to a reduction in underlying OpEx, while we continued to invest in IT. The adjustment of our cost base also meant that we had to say goodbye to many valued employees across the company. However, following the organizational adjustments, we remain confident that we have the right team to capture the growth ahead. As a result of the top-line development, the adjusted EBITDA margin ended at 10.6%... Moving to slide 10 on the development of the Enterprise business. As mentioned earlier, 2023 was a challenging year for Enterprise business, but with some encouraging stabilization towards the end of the year. We have brought new innovative products to the market across categories. The highly successful Evolve2 headset range was expanded with Evolve2 65 Flex, which is an ideal headset for office workers on the move.
We also launched a completely new premium line of speakerphones, the Speak 2 series. Lastly, we strengthened our video portfolio to small and medium-sized meeting rooms with the introduction of the PanaCast 50 VBS solution. Let's move to slide 11 for an overview of our Gaming and Consumer business. In our Gaming business, we observed an estimated flat Gaming gear market in 2023. In this stabilized market, SteelSeries continued to take advantage of its premium and innovative product portfolio, supported by a strong software suite, allowing us to expose our brand to a wider Gaming audience. Thanks to this and continued strong channel execution, we gained a significant market share in 2023. In 2023, we narrowed the product portfolio of our Jabra Consumer business in order to lay the foundation for improving margins going forward.
Our true wireless portfolio was updated during the year with the launch of two new premium products, the Elite 8 Active and the Elite 10. These successful product introductions were the main reasons for the positive growth of our true wireless portfolio for 2023 as a whole. Additionally, we had a strong focus during the year to reduce our excess inventory in a controlled and disciplined manner, which was concluded successfully by the end of the year. With that, I'm happy to hand over to Søren.
Thank you, Peter, and hello to all of you. Summarizing on a group level, GN delivered a -1% organic revenue growth and an adjusted EBITDA margin of 9.9%. Free cash flow, excluding M&A, came in strongly at DKK 1.1 billion, delivering a solid earnings levels and a positive impact from working capital. The operational cash flow was naturally a very important part of our new capital plan, with the execution during 2023, reducing debt by DKK 4 billion. I think it's fair to say that we are now ahead of the plan, with an adjusted leverage ending at 4.5 times by the end of 2023. And most importantly, all debt maturities are now fully funded until the Q3 of 2026. Let's move to slide 14 for an overview of the free cash flow generation.
As mentioned, group cash flow, excluding M&A, was strong at DKK 1.1 billion in 2023, with a very strong finish to the year, as we delivered almost DKK 800 million in free cash flow in quarter four alone. The cash flow generation reflects a stable development of operating cash flow and a strong positive change in net working capital. The main drivers of the positive impact from working capital were the material inventory reductions of almost DKK 1.1 billion, compared to quarter three of 2022, and a positive contribution in trade payables, driven by the new commercial agreement with a major manufacturing and logistics provider. Even though 2023 was an important year for the cash flow in GN, the relentless focus on cash naturally continues and will be important to drive continued deleveraging in the years to come.
Moving to slide 15 and the progress on our One GN integration. As communicated previously, as part of One GN, we have identified around DKK 600 million in cost synergies from moving to a one-company setup. Approximately two-thirds of these cost savings will be achieved in 2024. The synergies are centered around three main categories: operations, organization, and finally, efficiencies and processes. All three categories are expected to drive around DKK 200 million each in total synergies. Our operations teams were merged in the spring of 2023 and have been focusing on driving synergies through joint sourcing across core products, components, commodities, and accessories. The degree of implementation across many of these subcategories have come far, while these cost savings are expected to fully be achieved during 2024.
As for the organization category, we have executed these initiatives by now through our reorganization by the end of 2023, while these synergies will come into force quite fast. Lastly, in the efficiencies and processes category, we have identified synergies across indirect procurement, a new finance operating model, as well as a broad set of other minor initiatives. Many of these initiatives are process-driven and includes a longer time horizon to implement, while the positive cost effects are expected in 2025 and 2026. Overall, we are in good control of these synergies, and as earlier mentioned, they will be an important driver for our expected margin expansion in 2024. That leads me to slide 16 and our financial guidance. Going forward, our guidance will reflect our new governance structure, focusing on key parameters across sales, profitability, and cash flow generation.
For 2024, we expect an organic revenue growth of 2%-8%, driven by continued strong execution across our three new divisions. As a result of the announced One GN synergies, as well as underlying market expansions, we are guiding for a reported EBITDA margin of 12%-14%. The healthy absolute earnings levels should also turn into healthy cash flow levels, while we are guiding for a positive free cash flow, excluding M&A, of more than DKK 700 million. All in all, the financial guidance allows us to return to growth while delivering a significant margin expansion and continued deleveraging of our company, positioning us strongly over the years to come. This guidance is based on a wide range of assumptions across markets and own execution, which leads me to slide 17.
Although we continue to see market uncertainty across our business areas, I think it's fair to say that the uncertainty is narrowed compared to the same time last year. For the Hearing aid market, we expect 2024 to be in line with historical growth rates, with a global volume growth of 4%-6% and an average selling price decline of 1%-2%. In this healthy market, we are assuming that we can continue to significantly gain market shares driven by our strong product offering and channel execution, while we are assuming an organic revenue growth of 8%-12%. Due to an assumed strong organic growth, the Core Hearing aid business is projected to contribute with an EBITDA margin between 18% and 20%, illustrating a return to historic profitability levels.
For the Enterprise market, we continue to assume that the market will return to positive market value growth during sometime during 2024. The timing of the market recovery is difficult to estimate at this point in time, but it is based on continued supportive and constructive data points on PC shipments and IT equipment spend in general, as well as our own discussions with larger customers and partners. In this market, we assume that we can continue to defend our global market share position in headsets. As a result, we are assuming an organic revenue growth of -3% to +5%. For Gaming and Consumer, we expect a slightly growing value market in 2024, mainly supported by the low comparison base from 2022 and 2023, as well as a reduced promotional activities in general.
In this market, we are assuming continued market share gains in Gaming while defending our position in true wireless category. That translates into an organic revenue growth assumption of 2%-10%. Moving to slide 18 and our financial disclosure framework going forward. As part of One GN integration, we are updating our reporting structures to reflect our enhanced focus on group profitability and ultimately how GN is operating internally. We will continue to have a strong focus on delivering value to our customers, driven by our three dedicated business divisions. To drive internal performance, the three divisions will be measured on what we define as divisional profit, which equals gross profit, less sales and marketing costs. Functions of scale will be consolidated under the group P&L to better drive capital allocations decisions while optimizing synergies and drive stronger cross-functional collaboration.
Fundamentally, we believe that this internal performance measurement is the ideal structure for GN, which we want to reflect in our external financial disclosures. While group profits and margins will be the guiding star for GN going forward, we also understand the need to be transparent towards the financial markets. Consequently, we will also provide you with an EBITDA margin for the Core Hearing aid business, at least through 2024. With that, let's move to slide 19. We are excited to invite you to our 2024 Capital Market Day on May 7. This will be an opportunity for us to introduce you to our new leadership team and to share more of our company progress and which opportunities the new setups allows us to pursue and execute.
More information will follow over the coming weeks, and we hope to see as many of you here in Ballerup in May.
Thank you, Peter and Søren, for the updates. With that, I'm handing over to the operator for Q&A. Please limit your questions to two at the time.
We will now begin the question and answer session. To ask a question, you may press star and one on your toucht one, telephone. If you're using a speakerphone, please pick up your headset before pressing the keys. To restore your question, please press star then two. Our first question comes from Martin Brenøe from Nordea. Please go ahead.
Hi, Peter and Søren. Thank you. I have two questions as a starting point, if I may. The first question would be on GN Hearing. Could you maybe elaborate a little bit on the underlying costs that happened in Q4, which seems to be a sequential worsening? Was that a matter of a phasing from Q3 to Q4, or have you taken any upfront investments or upfront costs prior to going into 2024? That's the first question. Then on the second question is on the guidance of GN Hearing. Can you maybe also put some color on why you feel so confident that you'll be able to take such significant market shares as you are, and well above consensus expectations? Would be very helpful to also understand. Thank you.
Yeah, just to take the outset in the fourth quarter, in our mind, we continue to see an improvement of the Hearing core margins also coming into fourth quarter. But it's of course also clear that we are in launch mode, so as such, we are trying to prime, of course, our best possible outset to 2024 when it comes to especially something like sales and marketing. So it is something, of course, that's driven, that, and then of course, comparing it to the year before, it was a little different Q4 of 2022 at least. So I think in that matter, I probably also have challenged you a little bit in guessing exactly where quarter four, 2023 would land.
But overall, I think you should see this as a step in the right direction for Hearing, and definitely an investment to harness the potential of next year.
I can continue with the guidance and the growth. I mean, as you know, 2023 has been a very good growth year for us also in Hearing, and we're leaving 2023 and entering 2024 with what we believe is a very good growth momentum. And when it comes to 2023, it was supported a lot by the Omnia platform, and now, of course, Nexia is taking over that leadership. As I briefly shared here in the introduction, the initial data we have on Nexia both in terms of uptake in the U.S., where we launched first and other launch metrics, we think they look good, and that is building the confidence for what we can do with this platform.
As such, we believe that we should be able to grow faster than the market, basically.
Okay, thank you very much. Just one quick follow-up. Can you maybe tell a little bit what happened in Rest of World with the organic growth down 16% in Hearing? That would be my last question. Thank you.
Yeah. No, that I think is a bit of an anomaly, as you highlight. I think a few things to note. I mean, a year ago, we had a very strong Q4, and I think that, I mean, our teams at the time pushed on all levers they could to finishing the year well. I think it's. So quite a lot of the explanation is in the comparison base. Then I would also say that, this year we have, I mean, or no, I should put it like that, last year, we had support from Cochlear, and this year we have not. So that is also adding a bit to that.
And lastly, we prepared a lot for the next year launch in Q4, but the actual volumes were not really coming into the Rest of World, also factoring in a bit. But we believe as we move forward, we will see a continued healthy growth in the Rest of World as well.
Okay. Thank you so much for taking my questions. I'll jump back in the queue, please.
Our next question comes from Martin Parkhøi with SEB. Please go ahead.
Yes, Seth, Martin Parkhøi, SEB. I will continue a little bit again, because if you could look into your guidance of a midpoint of 10% in Hearing, I know that, of course, you would like to be cautious. You have argued with this 20% EBITDA margin in Hearing for some while now, so 18%-20%, despite that you actually guide the double-digit organic growth in the business. Could I read anything into this, like that you maybe have insert some more low price change that makes strike some deal here in the fourth quarter, which will impact your sales next year, this year, but maybe not so much on the margin side?
And then, in the relation also to the GN Hearing margin, because obviously you state that your return rates are much better now, which should be quite positive for the gross margin, which then collapsed in the fourth quarter compared to the fourth quarter of last year. So maybe you can share some details on that. And then my second question, if I can call you that, but just on Audio, can you tell me about the phasing, how you see the quarters develop? Because you're looking at a midpoint of what? 1%, but how do you feel like going into the first couple of quarters of 2024?
Thank you for your questions. Let me start here, and I maybe start from the end and then, leave over to Søren here, for the final part. For the Audio, kind of quarterization sequencing, I think it's very much linked to the market behavior. And as we talked about, during the, towards the end of 2023, we saw some gradual stabilizing markets. In Q4, we saw also that, with that said, it was not the market in growth. So I think the pattern we enter 2024 with is still gradually healing markets, and as such, I think it would be fair to assume that, we will perform better in the second half of the year than in the early parts of the year.
Exactly how that plays out, though, I think there is some uncertainty around, and we believe that the market will turn back into growth sometime during 2024. And if that happens early in the year, that will, of course, support in the year better; if it happens later in the year, a little bit less so. And I think it also explains a lot of the guidance range we have on Enterprise. So if I then move over to your question on the 18%-20% on Hearing and what is driving that, so to say? I think it's a multitude of factors. As you know, we've been talking about getting to the 20% for quite a while, and it's been very important for us to stay firm on that as a target.
Our teams are very much working toward that. I think that now we have it in the upper end of the guidance. I mean, clearly, still, that is what we're aiming for, but, I think we're giving the range here to guide you in terms of where is the likely outcome coming. I think that might be a little bit of what you're talking to in terms of mix, but there are other factors as well, so I would not read too much of other type of chains and so into the range.
When it also, I think you, Martin, rightfully so, asked the question on the gross margin also. I think a couple of factors here. I think first and foremost, it is also the one-offs that is impacting the gross margin here, and I think you are one of the ones really vouching for we should get out of this one-off pattern, and we here in management also of the same opinion, because of course, it derails sort of the reporting sometimes. But part of it is actually the one-off, that's the reason why it's taken down. And then also, bear in mind that we sold off BelAudição, where there was a high gross margin on BelAudição.
And of course, it's not the main reason, but it adds, of course, to a lower gross margin when it comes to quarter four. So from our side, there's nothing you should read into whether we are not focusing on gross margin, neither that we are not focusing on getting the uplift. And as you would also remember, coming into 2024, we've said part of that change is driven by the Omnia and the synergies. And the synergies before they're routed through the balance sheet into the actual cost of the goods, of course, there's something there, and in addition to that, we haven't fully launched, you could say, in all markets the Nexia. So I think we are following the plan, but I fully appreciate and understand your question for quarter three gross margin.
Our next question comes from Robert Davies with Morgan Stanley. Please go ahead.
Yes, thank you for taking my questions. My first one was just around the 18%-20% margin guide in Hearing. I guess, what changed in terms of your conviction around getting to that 20% margin? Is it sort of additional OpEx or costs that you expect to be running through the business over the next couple of years? Because you seem to have sort of stepped back on that a little bit. And then my second question was just around, sort of, I guess it's a broader question around sort of supply chain strength and resilience, given some of the disruptions in the Middle East at the moment.
I was just kind of curious, more broadly, kind of looking into next year, if there's increased tariffs, on China, for example, how resilient or how sensitive do you think your business would be to that, particularly on the Audio part of your, of your sales? Thank you.
Yes, I think on the gross, sort of on the margin, we tiptoed into that already in the previous question. I think we are definitely focused, and we can see the abilities to get within the range. We are now reporting out of close to 15% here, closing the year for Hearing core. So we have this somewhere between 3%-5% uplift to the guidance given. And the levers there remains to be the synergies, the next year, the gross margin improvement on next year, while keeping our costs, so creating leverage in our business on the OpEx side.
That's actually what we've spoken to so far, and that's actually also what we reflect in the guidance here. So in that matter, we are definitely still hunting the target we were out for, but of course, appreciating there is a range around that.
If I take a few comments on the supply chain, we have a large supply chain and a team that is very much dedicated and, of course, observing all these changes you speak to. If I make a comment first on the Red Sea situation, that is, of course, impacting us and many other companies. I think that it's worth to note that it's only part of our business volumes that, before this went through the Red Sea. I mean, good parts of the world are having other routes, and also we are leveraging also air freight for quite some of our business. Still, it has some impact, and that impact is a little bit longer lead times, but that is today less than a week for us.
And then there is some minor impact on the inventory as well as cost, but we think it's manageable without calling out those as a bigger risk. We can manage them today. But we are, of course, observing this, and if it gets significantly worse, we'll get back to you. But the current situation, we believe we're able to handle well. Then the question about tariffs and so, and there is, of course, an increased worry in the business environment around this. We have a fairly flexible setup, where we have a significant part of our supply chain outsourced. And we have the readiness to also move around volumes over time. You cannot do it overnight, but certainly within 6-12 months.
If things will take turns that are unexpected, we are ready to react, and I think so, that we can do that well.
... Our next question comes from Hugo Solvet from BNP Paribas. Please go ahead.
Hi. Hello, thank you for taking my questions. I have two. First, on the 20% margin for Core Hearing that you initially aimed for, should we expect that to be achieved maybe then now in 2025 or later? And, secondly, Enterprise, you mentioned markets expected to return to growth in value in 2024. Maybe can you expand a bit on the confidence that this will happen? Have your confidence increased in the past weeks? You mentioned some examples, but if you can add to that. And, should we expect volume to be more muted and that to be offset by more price increases? Just keen to hear your thoughts on that. Thank you.
So again, on the Hearing aid core, we are still with the guidance range of 18-20. Of course, having the aspiration to go for the 20, we think we have the products, we think we have very good performance on the products we have in the market. I think we have the levers, as I spoke to just before, on improving gross margin, and we have actually also shown that we can leverage our business, yielding these higher margins. So in our mind, no, we are not—we're not stepping down from the, the opportunities to get to 20. We're just giving a balanced view on where the guidance for the Hearing core should sit in 2024.
And then, of course, we will, as we go along, increase the output of report out on that. So in our minds, no, we're not stepping down from it, but I think it's a balanced view of what it is.
If I can add then with the Enterprise view, I think our comment can, I think, probably both be seen as volume and value. Don't think there is a major discrepancy between the two, for this way of thinking. And back to our confidence levels, it is always difficult to speak about the future, and in particular, the market future. But, it's encouraging what we're seeing, the level of stabilization in Q3 and Q4. We also talked about, I mean, adjacent industries like PC shipments and so on, how that correlates to our business. And PC shipments have now started to turn slightly positive, which is good to see as well.
So, I think that the way to think about this is that our main planning assumption, base planning assumption, is that the market, sometime during this year, will return back to growth. The timing is still a bit uncertain. Then, of course, you never know about the future, but that is our main belief and main planning assumption, and that is what's behind the range. And the range is, as I mentioned, a bit explained also by the timing of then the market turning positive, if that's earlier or later in the year or so. But I would say, in... The way which we can say for sure is that our read of the market is better today, definitely, than a year ago, and the uncertainty of market have come down also compared to a year ago.
We are going through some level of healing process here, still with some uncertainties around it, of course.
Okay, thank you. I go back in the queue.
Our next question comes from Maja Stephanie Pataki from Kepler Cheuvreux. Please go ahead.
Yes, good morning. Thank you for taking my question. I would like to circle back to the Hearing organic growth guidance that you have provided of 8%-12%. If we just look at your Q4 numbers, where you have 7% organic growth, and, you know, I know you're up to, compared to, to a tough comparison in Q4 2022, but the comparison base is not gonna be significantly easier in the first three quarters, and on top of that, you have two larger competitors launching products this year. So where do you take the confidence from that you can still grow so much above the market? Is there anything from a customer, larger customers that you have gained, that is going to provide you this growth?
Then the second question is: should you not be able to achieve the 8%-12% organic growth range, are you still able to deliver your 18%-20% EBITDA margin guidance? Thank you.
Let me comment a bit further on the growth. I think that the overarching explanation is the Nexia platform and our confidence in that. We agree with you that this year will be a bit more difficult year to grow than last year, given the comparison base, but we still assess that that should be possible. And this year, I think we're seeing a good momentum across many parts of the business, but we actually believe we can continue to grow on top of that base. We're, of course, well aware of the competitive launches and so on, and there's always some uncertainty around that, but our assessment is still that this are the right planning assumption.
I can also say that there are no kind of new major customers of very large significance that we have not announced, that you're not aware of, that is behind this, so to say.
Then, to your Martin Brenøe, so to speak, evidently, the way we give the guidance, of course, also mirrors the top line of sort of the 8%, 18%.
... margin, right? Of course, mirrors the 8% revenue growth and equivalent for the 12%. I think it's also fair to say that if we come closer, of course, we will be capable of taking mitigating actions. And also here, bear in mind that we actually delivered 14.7% margin in 2023 alone. So I think it's definitely reasonable to assume that we can close the gap, but in our minds, we think that there is a well-balanced sense around the 8% on the top line and the 18% EBITDA core, and equivalently on the 12 and the 20. That's the way it's balanced.
Thank you very much.
Our next question comes from Veronika Dubajova from Citi. Please go ahead.
Hi, guys. Thank you so much for taking my questions. I'll keep it to two, I think predictable themes. First one is just on the Nexia uptake, and I'd love to hear from you, Peter, what are the types of customers that you're winning market share with? Where do you think the product has made the biggest difference in terms of your traction? Is it independence? Is it larger chains? Is it in the U.S.? Is it elsewhere in the world? If you can kinda give us some flavor for that, that would be very, very helpful. And then my second question is on Enterprise, surprisingly, and curious, obviously, we are, you know, through January, we have seen some data points. You will have seen some data points.
Just, just curious if you feel that the stabilization that you observed in the fourth quarter has continued. And, and maybe, Søren, you can just jump in and remind us, all of the comparison base for Q1 in Audio in particular, and what that might mean for what your expectations for the first quarter might be specifically. Thank you, guys.
Thanks, Veronika. So first on Nexia, most of our real sales data is from the US market, where we launched earlier. It's a little bit too early for us to draw a firm conclusion for Rest of World, where we launched a bit later. In the U.S., the success is broad-based, so it's across channel, which is encouraging. I think it, in our mind, speaks to the appreciation of the platform. So we actually believe that broad-based support is also what will help us with this growth for 2024. Then for Enterprise, I think what we see is a continuation of what we saw in January, I should say, to your question, is a continuation of what we saw in Q3 and Q4.
We of course know our own business in January. It's hard to speak to any market data yet in January for us. But we see a continued healing of the business and stabilization. I think it's a little bit difficult to draw a conclusion of one month alone, so to say, but put it like that, there is nothing counter to it. We have observed anything like that. And for the comparison base, I think we this year, we probably have a fairly balanced comparison base for Enterprise, so I don't think there should be any quarter that is significantly more difficult when it comes to the comparison base than other quarters, so to say. So fairly balanced across the year.
Excellent. Thank you, guys.
Our next question comes from Julien Ouaddour, from Bank of America. Please go ahead.
Hey. Hi, good morning. Thank you for taking my questions. So the first one is the follow-up to Maja's question. It's right that you're the third Hearing aids player is targeting market share gains in 2024, and probably the fourth one is likely to launch a new product as well and guide for share gains. So hence our focus on the guide. But I just want to check with you. I think you were the more vocal about the potential reentry for a key competitor in, like, a large U.S. retail accounts. But do you see this risk happening in the near future? And can you let us know maybe if your guidance for Hearing include this potential headwind? The second question is also a follow-up to Rob's question.
Also, just to confirm, does the guidance range for the profitability include a potential impact from the Red Sea that you mentioned, and also the tariffs impact? I remember it was around 100 basis points on the gross margin for Audio back in 2019, 2020. So, is it already backed in the guidance or that's just potential risk to the guide? And a third one, really quickly: Could you guide for financial items in 2024? Thank you.
Okay, I think there were three questions, right? It was large customers in Hearing, it was Red Sea, and it was financial items, if I got them all right. I think, as such, on the Costco side, we have said that we are very pleased supplier to Costco, and I think our teams have done really well with Omnia and now Nexia. And it's our team's firm opinion that we have stayed extremely close to deliver to quality and with the right product, and as such, we've earned our right to be with Costco. And that's, of course, also part of what's in our guidance. And of course, also, if we have challenges on that, that's, of course, also what is part of the lower end of the guidance.
So in that sense, yes, it is in, but we are razor-focused on delivering the good quality, and I think Costco is also complimenting us for that. Then when it comes to the Red Sea, Peter spoke to it earlier. I think we have our arms around it, and in that sense, it is included in our guidance here. Peter also spoke to that it is not material.
... the way we look at it now, in many ways, so you can consider it being in the way we look at Red Sea currently. And when it comes to financial items, we are on approximately DKK 600 million for 2024 on that. And actually, if you go back and read out on second quarter, I believe we said back then, probably DKK 125 million a quarter, that would yield DKK 500 million, so it's a notch up. I don't believe long term it's a notch up, but in all fairness, when we gave that last outlook, the interest rates were probably at 1% lower. So that's, that's what you should say. So longer term, absolutely the same number. 2024, a little up.
If interest rates come down and we also deliver a little quicker, then we probably closing the gap back to the 500, but that's too early to say as we speak.
Perfect. Perfect. Thank you. And just regarding the tariffs, U.S., China, so that's really not in the low end of the 12%-14% guidance at the moment?
I can comment on that. What we know about tariffs and what has been kind of announced and so, that's absolutely in the guidance. If something would change and, of course, speculation about what the U.S. election and a possible regime change could mean, that will then come in the later part of the year, likely. And if something materially change, I mean, that's not in our planning assumptions. But as I mentioned before, we would be ready to react to it, but exactly what we mean is probably a bit premature to discuss today in that case.
Perfect. And just, if I may, on your, like, on your last comment, so ready to react, it just seemed that in 2019, 2020, it was quite, I mean, quite tough and especially for like GN Audio to react. So, should we have anything in mind that has changed since, since 2019, 2020, which give you a bit more flexibility on, on that?
I think it depends, of course, a lot on what there is to react to, so to say. But I think what has changed compared to 1920 is the setup of our supply chain. We have a more diversified supply chain today, with more capabilities outside of China and Asia. So if it, for instance, would help with more local manufacturing in the U.S., as an example, that is something we should be able to react to.
Perfect. Perfect. Thank you very much.
Our next question comes from Niels Granholm-Leth from Carnegie. Please go ahead.
Thank you for taking my questions. First question is on your expected net effect of R&D and software capitalizations. They contributed approximately 4 percentage points to your EBIT margin in 2022 and 2023. How do you see the effect of these accounting principles affecting your EBIT margin for 2024? And my second question would be, do you anticipate to present new long-term financial targets on your CMD? Thank you.
Thank you, Niels, for the questions. I mean, overall, and I think I also spoke to that last time, fundamentally, we believe that the capitalization and the rate of the capitalization is probably more relevant to speak to whether or not we are controlling the spend of the R&D, and it backs the right products. So that's where Peter and my and the leadership team's focus is, so that we ensure that there is an adequate control of the projects we spend money on, essentially, and essentially also launch longer term.
In terms of the capitalization rates as such, they're probably at the same levels as what we have seen, with, of course, quarter four of 2022 was really spiking, and it's come down, and it was lower here in quarter four of 2023. But as such, we will follow the same path. But I think more importantly, we will stay focused on, also under the new One GN structure with R&D and ensuring that the spend we do have has a meaningful impact on the business. So that's a fundamental principle of Peter and mine. And then, when it comes to the long-term guidance, here, we have also here committed to the Hearing Core, as we said, and Aspiration 20, and that's including in our guidance.
And then, we have had a midterm on the Audio side, the 20%, again, bearing in mind that it was set in a different currency environment, and also under the assumption of a growth path that was 10%, and we are of the opinion that if that growth comes to that levels, that is still our standing guidance, and that's also what we are committed to. We will, at the Capital Markets Day, go through our business, and as Peter and I also said, meeting the management and actually projecting what is the plan and what is it we can do to execute well in GN and create shareholder returns. So in many ways, that's our focus and our comment to the midterm guidance as it stands.
Should I read into your commentary that you would expect to see a less of a positive effect from R&D and IT cost capitalizations going forward?
I think you should expect us to be very focused on the spend, absolute spend in R&D. And then, under the capitalization, I think the rates are probably going to be more or less the same, maybe reducing a little bit, but not material in your cases.
... Okay, thank you.
Our next question comes from Christian Ryom with Danske Bank. Please go ahead.
Hi. Hello, Peter and Søren. Thank you for taking my questions. I have two. First one is to the gross margin outlook for GN Audio. And yeah, your expectations there, and whether we should anticipate an impact from less promotions here in 2024, or any potential other factors to keep in mind. And the second question is to you, Søren, on the scope for further working capital reductions as you look into 2024. Thank you.
Thank you. First, on the gross margin on Audio, and as you know, we will gradually report in a different way. So I think that when it comes to the promotional activities and so, that's a lot related to Gaming and Consumer. And yes, we believe there will be less promotions next year. As I mentioned in the opening, we had quite a significant excess inventory that we now have been able to bring back into more normal levels. There will still be some inventory refinement going forward as well, but not in the same way with those level of promotions. So that should definitely support the gross margins.
I also think that for the Consumer business, I mentioned also the Elite 8 Active and 10 that we launched, our high-end products that also are supporting the margin well. And then lastly, the synergies which we talk about in One GN will of course support many parts of our business, but I think it's fair to assume that around half would be on the Audio. And then the other headwinds and so, I mean, we talked about Red Sea, and just to reiterate that, I mean, we do not think it will impact us materially negative from what we know today. I mean, if things materially change, that can of course be different, but not from what we know today.
Then essentially to your net working capital, I mean, it's clear that we were quite pleased with our development in the free cash flow in the fourth quarter, and landing a full year of free cash flow of DKK 1.1 billion, a key contributor to the reduction in debt, right? And what we're also pleased about is that we told you that we will focus on inventory. That for sure we have delivered on also, reducing inventory significantly, so that net working capital now is probably DKK 500 million down, if you look 2023 over 2022. We will continuously focus on bringing net working capital further down, but it will be a mix more between the inventories and trade receivables and payables.
I mean, that sounds a little obvious for many, of course, but I think actually we have, we have, definitely managed to get it meaningfully down during 2023. We will continuously optimize on the three parameters, and I still think there is some to be harvested in the inventories for sure. But again, it's a little interesting. Here we are sitting discussing Red Sea, right? And supply chain, and where are the inventory levels. So of course, there's also a cautiousness on where are the positions on your inventories by when. But that's not saying that we're not going to focus on, because we are. So you should think of it as it is, actually across the three classical ones, with receivables and payables and inventories. So every...
All of these are in the mix. But we can improve further. That's, that's our intent.
Okay, and then maybe just to clarify my understanding of this: So when you guide these above DKK 700 million free cash flow for 2024, is there an assumption in that of, say, working capital tailwind to that number?
No, not necessarily. I think we also need to be mindful of that we are a growing company, right? So that should consume a little more cash also. So there's... It's a balanced view, the DKK 700 million, and a commitment, you could also say, so that we create cash on the top line, we create. And then, of course, if we yield more margin and we improve even working capital further, that can probably increase or go above the DKK 700 million, but one step at a time.
Great. Thank you.
Our next question comes from Hassan Al-Wakeel, from Barclays. Please go ahead.
Hi, good morning. Thank you for taking my questions. Two follow-ups on Hearing, please. So firstly, on guidance, on the top line, particularly given 2024 looks to be shaping up to be a more competitive year. Specifically, how are you thinking about pricing this year, as well as growth by region, particularly any improvement in Europe? And related to the question on comps in Hearing, do you expect growth to be more back-end loaded in Hearing or consistent across the year? And then secondly, can you help us understand the margin bridge in Core Hearing from the 14.7 achieved in 2023 to the 18%-20% guide? How should we think about phasing in margins, and are there any one-offs such as launch costs or FX? Thank you.
... Okay, so I can start here on the Hearing guidance. I think when it comes to the assumption first for pricing, there is of course a benefit from the new platform, and as such, it will have a positive effect on the pricing, but we do not have any major price adjustments planned at this time. Then, in terms of the sequence throughout the year, we believe it will be fairly even based throughout the year. So not in a material front-end loaded or back-end loaded. And then a comment also on the geographic distribution. This year, as you know, we've been driving strong growth in the U.S. and a little bit less in the Rest of World.
Still good, but U.S. has been the outperformer. In the plan for the coming year, we believe that will play out a bit more even. That's our planning assumptions.
Yeah, and when it comes to the gross margin, also here, reiterating what I said before, what will have the positive impact on the Hearing gross margin will be, it'll be Nexia. It'll be the unit cost on Nexia in this case. It will also be the quality costs that Peter spoke to as well. That's definitely also assisting that. And then, of course, there is the synergies in general in terms of our procurement also assisting our gross margin.
So you should probably expect a good part of the uplift is, gross margin driven, and then the remainder is on the leverage on the OpEx, where that's a combination also of the synergies, whether it's, this indirect procurement or it's actually our ability to maintain, good OpEx control, which I think we have demonstrated during 2023. So it's, it is really a combination, but I think it is fair to assume that gross margin is a key part of, the uplift.
Perfect. Thank you.
Our next question comes from Susannah Ludwig, from Bernstein. Please go ahead.
Hey, good morning, and thanks for taking my questions. I have two. I guess just first on the Nexia launch and the comparisons that you showed versus Omnia, One on units. I was wondering if you would have still seen the same pattern if you had adjusted for the very different market environments, you know, one was launched in 2020 with COVID, Omnia in late 2022, which was a very weak U.S. commercial market, and then 2023, when Nexia was launched, has been very strong? And then, I guess, second, just, following up on the questions on the midterm guidance, in terms of will you guide sort of separately on growth, I guess, for the different segments of Audio?
Talking about, you know, long-term growth in the Enterprise market versus long-term growth in Gaming and Consumer, as well as sort of differences in divisional profit.
So let me start with Nexia. When it comes to the uptake, it is the data we have is mostly from the U.S., and we are comparing that to Omnia. I appreciate there's a lot of things that are different between the years. We see a quite healthy uptake on top of Omnia, so makes us confident in that effect. And there are also other things we looked on as interest in launch events and traffic in different way, and the broader set of parameters we looked at to assess the launch has pointed in the direction of it's a very strong, healthy launch. So we feel good about it.
So, I mean, our comments here is that Omnia was a very good launch, and we believe Nexia is at least as good from what we can observe today.
And then when it comes to the new, you could say, reporting here, what we will do, we will report out on divisional profits. Again, this is the gross margin, less sales and marketing. But we will also stand firm on that it is the group profitability that we will guide more firmly on, longer term. And then, of course, we will do our best to share with you what can be positive and negative profit drivers within the different segments. So that's the way we'll focus on, and then we'll report out quarterly on the divisional profits. So that should give you some comfort in where the business is going.
All right. We have a follow-up question from Martin Brenøe from Nordea. Please go ahead.
Hi, thank you very much for letting me sneak in a follow-up question. I was just looking at the GN Audio business in Q4, and I noticed that Denmark actually saw quite a significant drop, and that actually explains quite a significant part of the Audio slowdown. So I was just wondering what that is. Is that Enterprise business that you've lost in Denmark? And would you maybe just help me out with the math? Because if I take out Denmark specifically, which is a kind of small market, I would actually get to organic growth in Audio only being down 2%, and I would get the Enterprise business actually only being down 6% on an organic basis.
Just wondering if you could help me verify whether that is correct?
... That is a good question. I must admit, I do not fully have the answers to that. The way we work is that, I mean, some customers are larger, and some years they buy in one way, or another year in a different ways, and we also have the channels in there between. So, we would be happy to look into it, but I think the overall direction is that there is not like a single big event that's have happened that is an outlier of any kind. Not to our knowledge, so I think that's fair to assume.
Okay, that's very clear. Thank you very much. Just maybe one follow-up on the Hearing. Can you just tell me, because you have alluded to quite a few times during this call, that the comparison base was tough due to very, very strong, and maybe to some excess extent, sales in 2022. Have you been impacting during 2023 by, let's say, lower sell-in to the channels because they might have been a little bit stuffed? And just trying to understand if you will have a sell-in tailwind this year from more normalized channels in the Hearing business? Last question for me. Thank you.
No, we do not believe there are any material kind of channel effects like that for us. I think that the effect that's probably is there is more the Nexia launch, which, the timing is, of course, in 2023, we benefited from the Nexia in the U.S. towards the end. We have not really benefited from the Rest of World. The Omnia launch was timed slightly differently, so towards the end of last year, we were more benefiting from the whole global footprint, so to say. That, that's probably what we can guide here.
Okay, thank you so much, Peter.
Gentlemen, this was our last question. Back over to you for any closing remarks.
Thank you very much, operator, and thank you, everybody, on the call. We appreciate your time, and we'll see you on the road.