Hello. Welcome all to GN's Q3 2020 conference call following our release this morning, Danish time. Thank you all for dialing in. It's great to have you on the call. 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, Peter Gormsen, CFO of GN Audio, and myself, Morten Toft, Head of IR and Treasury. Today's conference call is expected to last about an hour, where we will go through the presentation 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 go back to Marcus for a financial guidance update. After that, we hand over to Q&A with questions from the queue.
With that very brief introduction, I'm happy to hand over to Marcus.
Thank you, Morten. Good morning, everybody, and thanks for joining our call today. I'm very pleased to see the company performing so well, especially during these challenging times. Once again, we are demonstrating the clear benefits of having GN Hearing and GN Audio under the same roof. During the quarter, GN was affected in two very different ways of COVID-19. GN Audio experienced a very strong demand as enterprises continued to invest in employees working from home. While GN Hearing experienced emerging recovery, however, still impacted by COVID-19 restrictions around the world. We have once again launched fantastic products across our two businesses, and the CEOs will get back to you in a second. We have seen a very strong market in GN Audio and a market recovery in GN Hearing.
The combination of our strong products, the receptiveness of the market, and our focused execution, have led to 29% organic growth. 29% organic growth. It's fantastic. The growth, combined with continuous prudent cost focus and a one-time gain of DKK 114 million from legal settlements and litigation, led to a reported growth of EBITDA of 48% for the group. Reported EPS grew 84%, while excluding the one-time gain, EPS still grew very strong by 58%. We were also able to generate a significant positive cash flow of more than DKK 600 million, and thereby decreased our net interest-bearing debt. This resulted in a leverage of 2 times 2x, including the gain from legal settlements and litigations. I'm very happy to see this development despite COVID-19. Our balance sheet remains sound, and we have ample sources of liquidity.
As such, we continue to have a solid foundation to face the financial challenges ahead of us. Turning to slide five and the cash flow development of the businesses. GN Hearing's lower free cash flow compared to Q3 2019 reflects the lower revenue level. Prudent cost control and the positive development in working capital counter that effect. We also continued to work very closely with our customers and have prudent investment into the channel during the quarter, fully in line with our strategy. In GN Audio, we saw a strong development in operating profits, reflecting the very strong revenue and the one-time gain from legal settlements and litigation. While we continue to increase our investment activities to drive further revenue growth, the strong top-line growth led naturally to a buildup in working capital.
All in all, we delivered a very strong cash flow generation in Q3, and our focus on prudent management of cash naturally continues. With this, I'd like to hand over to Gitte.
Thank you, Marcus. Starting on slide seven and our Q3 financial highlights. In Q3, I've been very pleased to see an emerging hearing market recovery, of course with great variations across regions, countries, states, and channels. The emerging recovery has led to an organic growth of -11% compared to the -54% we saw in Q2 2020. The gross margin in the quarter was down compared to Q3 2019 due to the fixed part of our production costs and mix effects. As a result of the emerging market recovery, our superior product portfolio, as well as our strong commercial execution and our continued focus on costs, we realized a positive EBITDA of DKK 169 million. I would like to stress that we continue to be prudent on the cost side, and our operating expenses are down 10% compared to Q3 2019.
While we clearly take a prudent approach to the cost side, we remain agile and can quickly adapt to the changing market dynamics. Finally, I think it's important to highlight that we've generated a positive free cash flow, excluding M&A, of DKK 47 million. That leads me to slide eight and the emerging market recovery that we are seeing. After the low point in April with a run rate in the 20s of percentages to last year, we've seen emerging improvements. In July, sales were at around index 90 versus last year on a relatively easy comparison base. August was impacted by our announcement of ReSound ONE in the middle of the month, driving some normal delay in sales. This resulted in a strong September and October, driven by the launch of ReSound ONE. October sales were at around index 90 to last year.
In the latter part of the month, the momentum softened. As mentioned, the market recovery continues to vary across regions, countries, and channels depending on local restrictions. In North America, the recovery has been slower than in Europe and Rest of World. The commercial market in U.S. has recovered faster than VA, but with large differences across states. All in all, that has resulted in a negative organic growth in North America in Q3 2020. In Europe, we saw a strong recovery in especially Germany and Southern Europe in Q3 2020, while the U.K. remained heavily impacted by continued restrictions. In our Rest of World region, the picture continues to be scattered. We saw growth in, among other, Australia, China, and South Korea in Q3 2020, while we are still negatively impacted in countries like India and Brazil due to COVID-19 restrictions.
With that regional commentary, I'm thrilled to give you some color on the initial sales performance of ReSound ONE, which started shipping on August 27th. I'm now on slide nine. Although it is still very early days, the initial feedback from ReSound ONE is very encouraging. To give you some flavor, we have compared the ReSound ONE share of the total revenue for the first 45 days to prior launches. The share of revenue is up three percentage points compared to the launch of ReSound LiNX Quattro, which clearly shows that the product is off to a good start. On the slide, we also focus on three of the larger hearing aid markets in the world and the early unit uptake of ReSound ONE.
To illustrate the initial performance, we here compare the unit uptake for the first 45 days of ReSound ONE with ReSound LiNX Quattro, which was launched in Q3 2018. Starting in the U.S. commercial market, we've, despite the current challenging market conditions, experienced a unit uptake of ReSound ONE at least on par with ReSound LiNX Quattro. As U.S. is our most important market, I'm naturally very happy to see the initial uptake, and we are certain that ReSound ONE will contribute strongly to our performance in the U.S. going forward. As you know, we also started to sell ReSound ONE into the important VA channel as of November 1st. In Germany, the uptake has been fantastic and significantly above the unit uptake seen from ReSound LiNX Quattro a couple of years back.
The same goes for Japan, where the uptake of ReSound ONE has continued to outperform the uptake of ReSound LiNX Quattro, despite the fluctuating market conditions in Japan. All in all, I'm very encouraged by the initial performance of ReSound ONE, and combined with the feedback we receive from our customers, I do believe that ReSound ONE is a breakthrough in the hearing aid industry, which lead me on to slide 10. I would like to highlight two things which we continue to get questions on from the investor community. First, ReSound ONE can be fitted just as broadly as any other RIC product. In fact, 80% of our users choose a ReSound ONE with M&RIE, which illustrates a wide fitting range for this solution.
Second, we are very proud of the M&RIE solution, and with ReSound ONE, the users also get the benefits from the All Access Directionality and the Ultra Focus functionalities, which truly makes a difference, especially in a noisy environment. All in all, ReSound ONE gives significant benefits to users compared with ReSound LiNX Quattro and competitors, and the feedback we receive from our customers around the world is just great. These are all key reasons for our strong initial unit uptake. With that, I would like to turn to slide 11, where we've included an overview of key paths of our strategy execution. What I would like to mention here is our ability to bring new technology into the market with flawless commercial execution, as described on the earlier slides.
Q3 has been all about execution, and we were positively surprised and proud that our ReSound ONE global launch event had 10,000 participants enrolled. With that, I would like to hand over to René and an update on GN Audio.
Thank you, Gitte, and hello to all of you. It's now my pleasure to take you through GN Audio's result of the third quarter of 2020. Let's move to slide 13. Q3 of 2020 was again a very strong quarter for GN Audio, and we delivered an outstanding 72% organic growth. This is on top of the 20% organic growth we achieved in third quarter of 2019. The growth was driven by continued strong enterprise demand for office and home office products across regions. Demand was positively impacted by enterprises who continued to invest into supporting their employees as they are still working fully or partly from home due to the COVID-19 situation.
Let me just underline here that while the significant growth in the quarter is obviously very much affected by the work from home phenomena, the successful outcome is first and foremost reflecting the strength of GN Audio's innovative and world-leading product portfolio, which now includes the recent launch of Evolve2, and this product has been very well received in the market. Also, in the quarter, we have seen a very robust execution in the supply chain, where we have been able to ramp up our production significantly. This is partly due to investment decisions made earlier this year and before, and partly due to excellent implementation. All the work done in the supply chain over the last years is now paying off, and it has been crucial for our very strong performance.
In summary, across all regions, North America, Europe, and our Rest of World region, we delivered again strong organic growth driven by our strong commercial execution and market-leading product portfolio. This has again resulted in market share gains in the global enterprise market. Having mainly spoken about enterprise revenue, I want to say also that in the quarter we saw our consumer business returning to strong growth as offline retailers again opened for business after they had been locked down during the spring. Let me move from revenue to gross margin. The gross margin was down 1.8 percentage points compared to third quarter of 2019, but roughly in line with the second quarter of this year. The decline was driven by increased freight and production cost due to COVID-19 and tariffs related to the U.S.-China situation.
EBITDA increased by 129%, which is, as Marcus mentioned, including gain from legal settlements and litigation. Excluding the DKK 114 million gain, EBITDA grew 90% compared to third quarter of 2019. This corresponds to an EBITDA margin expansion of 2.9 percentage points, which does reflect the continued leverage in our business. Free cash flow, including the gain from legal settlements and litigation, was at an impressive level of DKK 592 million in the third quarter of 2020. All in all, we think a very strong financial performance yet again in GN Audio. Let's go to slide 14, where I am excited to put some words to our recently announced Jabra Elite 85t. 85t is the latest addition to our strong-performing Jabra Elite true wireless family.
We are now introducing our advanced active noise cancellation into our true wireless portfolio, and we do that without compromising the size nor the signature design. The new earbuds come with a semi-open design and thereby remove the potential occlusion effect. On top of the Elite 85t announcement, we are now also building in active noise canceling into our existing Elite 75t series. This essentially means that current users today can update their firmware using our app, and with this have active noise cancellation available. The initial feedback we have received after this update is very encouraging, and it does illustrate our efforts to always continuously improve the customer experience. With the recent announcement, we have now expanded our strong portfolio true wireless earbuds across price points and technology ranging from Elite 65t to Elite 85t.
For the sake of good order, I shall say that the Elite 85t is now shipping. If we turn to slide 15. Here I would like to return to some of the commentary on the changes in behavior that we talked about also when we were here three months back. First, the amount of people using UC platforms like Microsoft Teams or Zoom in their daily work and life has dramatically increased over recent nine months during the pandemic. The use of video is becoming the norm rather than the exception, as people now really value this virtual interaction. Second, we hear from our customers and partners that more and more enterprise customers across the world consider or prepare for flexible work from home initiatives to support their business and their employees also after COVID-19.
We see a coexistence of flexible living and working in a new normalized world. Last, as people are working in more flexible ways, the need for privacy and removing local noise is increasing, and people do acknowledge the benefits of high-quality professional headsets, speakers, and video equipment. We have received over recent days questions related to our outlook after the positive news about the COVID-19 vaccine. Seen from here, it's a fact that flexible living and work has accelerated rapidly during the pandemic, and around the world, people have adopted ways of working and engaging that we believe are here to stay. As I mentioned, the amount of people using UC services every day has dramatically increased, and with that has increased also the amount of target customers for us.
The number of endpoint devices like headset has grown, but far from the level as we have seen the growth in UC users. Consequently, we believe that we are operating in a sustainable, larger market with significant room for growth, and we will continue to invest into our business to capture this present and future growth. Let's go to slide 16. Here let me give a quick update on Audio's strategy execution for 2020 and beyond. In Q3, we continued to execute on our strategy with focus on individualized customer experiences. We have sustained investments into innovation at a high level. It is our aim to keep our cadence of launching world-leading products and experiences high, which is also evidenced by our announcement of Elite 85t and the upgrade of Elite 75t. These continued investments also reflect the market opportunities I shared on the prior slide.
We will continue to make the needed investments in innovation, supply chain, and commercial execution to sustain our market-leading position. With that, I'll hand back to Marcus for financial update. Thank you all.
Thank you, René. Let's turn to slide 18 and the financial guidance. It is important for me to stress that our guidance for 2020 still comes with much greater uncertainty than usual due to the continued COVID-19 pandemic impacts. The COVID-19 situation has and will not only strongly impact GN's operational performance in 2020, but it will also impact predictability, visibility across all GN's markets, channels, and supply chain. Please also bear in mind that this financial guidance is contingent on no further retightening of COVID-19-related lockdown restrictions or new supply chain constraints. The guidance upgrade, which GN issued on October 9th, where the financial guidance for GN Audio was upgraded and all other parameters were unchanged, is confirmed today. We expect an organic revenue growth for GN Hearing to be better than -3 0% and an EBITDA margin that is better than 0% for the full 2020.
GN Audio expects organic revenue growth of more than 35% and an EBITDA margin of more than 21% for full-year 2020. The EBITDA margin expectation for GN Audio is before any extraordinary items related to the legal settlements and litigation. EBITDA and other is expected to be around -DKK 180 million for full-year 2020. Based on the expectations for GN Hearing and GN Audio, GN Store Nord expects to deliver a positive EPS for the full year. This positive EPS expectation is before any extraordinary items related to legal settlements and litigations. I would like to take the opportunity to thank all of you for your and my close cooperation with you over the last five years. As you know, I have decided to step down by the year-end, so this will be my last call with GN.
Before I hand over for the Q&A session, let me use the opportunity to shortly introduce Peter Gormsen, the new CFO of GN Store Nord as of January 1st. I have been working very closely with Peter for the last five years, I can assure you that he is a great and fantastic guy. Peter has been instrumental in the turnaround and growth journey which GN Audio has performed over the last five years, including the significant and successful supply chain expansion. Congratulations, Peter. You are with us on the call today, you will be available for Q&A. Thank you all. With this, I would like to thank Morten for his loyalty and outstanding performance over the last five years, as we have been also working extremely close together. With this, happy birthday, because it's also the birthday of Morten today.
Now finally, we can go to the Q&A session.
Thank you, Gitte, René, and Marcus for the updates and the kind words, Marcus. With that, I'm handing over to operator for Q&A. Please limit your questions to two at a time. Thank you.
Thank you. If you wish to ask an audio question, you may do so by pressing zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, it's zero one on your telephone keypad if you wish to ask an audio question. There'll be a brief pause while we wait for questions from the registered. First question comes from Martin Parkhøi from Danske Bank. Please go ahead.
Yes. Martin Parkhøi at Danske Bank. Two questions. First one, maybe it's three. I'll call it two. The first one is on regional growth, first regional growth on the GN Hearing side. That's of course for Gitte. If I look at your performance in North America and adjust for VA and also adjust for FX headwind in the third quarter, we're looking at a decline at the tune of 16%-17% sales. According to statistics from here, growth are basically flat outside VA and units. I know you will talk about Beltone a little bit, about differences in exposure to states. It's still a big difference.
I would also, in that context, say that if we actually look back to the last four quarters, then it looks like that you have had a substantial underperformance compared to the commercial market, which means outside VA in the U.S. market. Maybe you could try to address that. Included in that question is a regional question, which then are for René on GN Audio. Again, we saw in the third quarter Europe outperform U.S., not as much as in the second quarter, but still outperform. As I recall it, in the second quarter, you had prioritized Europe with respect to on the order backlog. What is the difference between the growth rates we are seeing on a regional basis in the third quarter, and the comment on the backlog on these? I guess that my second question, that's just for Peter then.
I guess that on the R&D capitalization in GN Audio in the third quarter, that was a significant headwind isolated for the third quarter, as I calculate a 1.3 percentage point, 1.8 percentage point if we compare with Q3 last year. When I go back to the last eight years, it's only twice before you have had a headwind in a quarter, and that was very small. Why are you seeing this significant R&D capitalization headwind in the third quarter?
Thank you for that. Let me start out commenting on the regional growth, and then I'll deep dive into the U.S. market, as you asked about. In terms of regional growth, we obviously see differences across the three regions. If we look at the U.S. market, official statistics is showing that the U.S. market was down 6% in Q3, but obviously a significant variation from one channel to the next. The VA channel being down with 34%. Europe has, in general, seen recovery in the quarter, still there's obviously big variation from country to country that I just also spoke to. As an example, we see strong recovery in Germany and the opposite in the U.K. that has still continued to be quite impacted by COVID-19 restrictions.
In the Rest of World, it's also a blurred picture with the countries like India and Brazil still being significantly down, whereas we see other countries with good recovery such as China, Australia, and South Korea. Let me come back to the U.S. market. As you pointed out, we do see the VA being down with 34%, and in addition, as it's also evident from public statistics, we have lost share in the VA channel. However, what I do want to point out is that in the independent channel, which is our strategic focus, we do see very strong momentum from ReSound ONE, as I've also just shared data on, and that is obviously our key focus. Our U.S. performance is also impacted by exchange rates. It's impacted by the divestment of retail in Beltone, as you pointed out.
Again, let me underline that in terms of the independent channel and our performance of ReSound ONE, we are actually seeing really good momentum. Also, we have just launched ReSound ONE into the VA channel on November 1st. Obviously, with that, we expect to gain share in that channel again.
René here. Thanks for the question and digging deep in the numbers. On this, in North America, EMEA, you can say EMEA outperforming North America once again. Actually, the rationale is a little bit different than last time, but it's there. From our supply capabilities, we have had, you can say, hardest time supplying the lowest price points. As it has been, what we've seen during the pandemic is actually, especially U.S. and to some extent, Asia-Pacific, has had a preference for lower price points compared to Europe. When we then allocate products, then Europe gets more on average. That's the simple solution. It also means that if you look at the backlog, we have the highest backlog on lower price points for now.
Hey, Martin. This is Peter. Thanks for the question. First of all, of course, we follow IFRS, and that means we capitalize our development costs, and then we start amortizing when we launch the new products. There will always be some timing of the investment, so you'll see quarterly fluctuations in the cost and the impact in the P&L. On an ongoing basis, we of course look at our development projects, and we look at our balance sheet in general and look at areas where we need to clean up a bit. This time we have redirected some R&D programs to make sure that the roadmap is also prepared for the new reality post-COVID-19. That's why you see slightly higher write-downs on the balance sheet this quarter.
Okay. Thank you. Gitte, I will not let you get off the hook that easy. As again, my numbers that I said in the beginning was adjusted for FX naturally. 16%-17% growth outside VA in the decline outside VA in Q3. As I said that, you say you're doing tremendously in independent, for the last four quarters, you have seen a significant lower growth outside VA than what we have seen in the market. When I say significant, we're talking double digits and more. Independent are going good, you're saying. I cannot validate that. What is going wrong? Are you seeing a significant smack down in Costco or what is actually the reason?
Thank you, Martin. I kind of didn't expect you to let me get off the hook. I'm sure you understand, I won't comment on a specific customer, but I do want to repeat that in the independent channel, which is our strategic focus, we see a strong momentum with ReSound ONE, and obviously, we are thrilled about that. I'm also pleased that we are now putting ReSound ONE into the VA channel, and we did that the 1st of November, so basically last Monday, so that is obviously still early days.
Okay. Thank you very much.
Our next question comes from [Michael Jüngling from Morgan Stanley.]
Thank you, and good morning, all. The questions I have are as follows. If there was a change in approach by the incoming U.S. president with respect to tariffs between the U.S. and China, and we assume that those changes were to take place on the 1st of January 2021, what would be the benefit to your business in totality on each day if these tariffs started to fall away? Some sort of quantification of what that number would look like. Question 2 is on audio, and the question is, can you comment on the magnitude of the Christmas orders that are coming through for the consumer products versus where we were roughly last year? Are these orders growing, or are the orders flat, or are the orders relatively in decline compared to last year? Thank you.
Hey, Michael, it's me. Good morning. On the question with the U.S. and tariffs on the Hearing, there's obviously no impact at all, and on the Audio side, Peter's giving you the answer.
Hey, Michael, this is Peter. As Marcus said, we are today impacted by the tariff, and if your hypothesis truly came through, which would be good, then we would see approximately a 1 percentage point favorable impact to our numbers.
René here. I guess on the Christmas sales, on the consumer side, well, we have to see how the sell-through is going. What we have said is that the Q3 brought our business back to growth. There's nothing that would indicate that we would not be growing in Q4 on the consumer side as well, as we had planned to do. In that sense, but exactly how much, we haven't said that for quite some time, actually, where the growth rates are. We saw solid double-digit growth in the consumer business in Q3, and you can say the machinery is set up for the same in Q4.
Can I just clarify, when you said previously, sorry, on a tariff side, you meant probably 1 percentage point to margin. Is that right? The margin would be one percentage point higher if the tariffs would fall away for Audio.
Yes, that is correct. That is a GN Audio impact if all tariffs were taken away. Correct.
Okay. Great. Maybe I can sneak one last question in, is do you have any sense of what the OTC situation is with the FDA? I believe there was meant to be a decision coming out at the end of autumn, and there's not many days left in this month. Do you have an update as to what the FDA is thinking on the OTC side, please?
Well, you're absolutely right that we are still waiting for the FDA to share their opinion about OTC in the U.S. They were actually originally supposed to come out with a potential new regulation in August. That was delayed, and I guess we now assume that they will come out with something in November. Whether that will be a kind of a new deadline or the actual regulation, I guess the verdict is still out on that. Obviously, it can also just be another delay.
Yeah, we are all still waiting to see what the regulation looks like, and obviously, depending on that, and assuming it's as we think, we actually see this as a big opportunity in the sense that it could potentially open up a new market segment for us, if you think about the more sort of occasional use where you maybe in between needs a device to amplify your hearing. If the regulation turns out like that, we actually believe that GN is really well-suited for such a market, given the fact that we have audio and hearing under the same roof.
Great. Thank you.
Our next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead.
Hello, thanks for taking my questions. I have two, please. My first one is just following on some of the questions around the U.S. and your relative share momentum. Can you tell, when I look at the chart that you presented on ReSound ONE, I think the uptake in Germany and Japan looks really impressive. In the U.S., it seems fairly comparable to what you saw with Quattro, which I think given that this is a broader product launch in terms of form factors and price points, is a little bit surprising. Is there something going on, you think, in terms of ReSound ONE and how that's being perceived in the market? Is this just a Question of time.
I was quite surprised by that chart, and just given how important the U.S. is for you as a market, it's a little bit concerning that you're not seeing stronger momentum with the ReSound ONE in the U.S. That would be my first question. My second question is for René. Looking into 2021, and I appreciate that there's a lot of uncertainty, but just curious how you're thinking about, given the very strong performance that you have seen in 2020, in particular on the enterprise side, how realistic is it to expect double-digit growth for the audio business as we move to 2021? I guess, what are the building blocks in your degree of confidence in that? If you can talk to that would be great. Thanks so much.
Well, thank you for that question. On ReSound ONE, across the board, both from audiologists and users, we are getting really great feedback on the product. Also, as I spoke to, and just to be very clear on that, ReSound ONE is as suited for users as any other RIC products. We actually see the M&RIE, our special solution with receiver and microphone in the ear, being fitted for more than 80% of the users. It is a broad usage. When you look at the uptake in the U.S., I think it's important to, and compare it to markets like Germany and Japan. I think it's important to keep in mind that here we are launching a completely new product in a completely new category, or in a category of its own, if you like.
The U.S. has probably been a little bit more in a lockdown situation than other markets in the terms that we have not, until in October, have our reps out in the field. This is a new fitting experience for the audiologist. Now that we have our reps out in the field, we actually expect that to have the same impact in the U.S. as we've seen in other markets.
René here. On 2021, as you can say, the next phase for our business, I guess there are three angles to look at this, the way we look at it. Now, one is what I tried to speak to is the number of people using the digital platforms. There has been a very significant digital acceleration going on through COVID-19. People have said we accelerated about a couple of years. There are many views on that. The fact is that a lot more people are using these digital platforms today than was the case nine months ago. Along with that, you can say we have adopted video conferencing. It has been democratized, so to speak, because it's affordable. These platforms are very scalable. People actually use it a lot.
There is this target amount of users out there that forms one dimension to the way we look at this. The second, of course, is the amount of segments we cover now. Until now, we can say a lot of our business and the business of this industry has been around call centers and office workers in private enterprise. What we have seen recently is triggered by the pandemic, and of course, what will stay and what will not, we don't fully know, like education. If you take our video business, we ran a bit into a wall when people were sent home from work back in spring because we were trying to sell into small meeting rooms, which was the last place you wanted to be in a corona pandemic.
What we have seen in the second half, over summer, is a massive increase in cameras, video equipment, and audio equipment sold into universities, high schools, ordinary schools across the world. Segmented opening for this digital approach, now forced because a lot of students or kids are working, are being lectured remotely. Of course, we have to assume that some of this will stay. Also, we see in the healthcare sector, remote doctoring, and so on and so forth, happening, and people find different ways of coming together also in these public sector domains. That's the second domain for us. The third, of course, is the categories we operate in. We started with call center headsets. We expanded to UC headsets. We're expanding to video. For us, it's about covering the market best possible.
You can say we don't have explicit guidance for next year, and we are not going to give it today. We have a midterm guidance out there that talks about 10% market growth, which was the case before this happened. I have to say, I don't see any reason why on a higher platform that would not be the case in 2021.
That's very helpful. Thank you both. Gitte, can I just ask a follow-up on sort of the U.S. dynamics? When you look at November, are you seeing better share momentum if you look at where you are now that you have sales force out in the field?
Well, I think it's really early days in November still, but what we do see is a strong momentum with ReSound ONE. We launched in VA channel 1st of November, but it is still early days. Initial feedback, very positive, but I guess that's all I can say for now.
Thank you, guys. I would be remiss not to say thank you to Marcus, and all the best. It has been a real pleasure.
Thanks, Veronika. Same here.
Our next question comes from Carsten Lønborg Madsen from SEB. Please go ahead with your question.
Yeah, thanks a lot. Two questions for Audio. First of all, I'd like to hear a little bit more about the performance of the PanaCast and your expectations for the year, maybe also into 2021. I know it's still a challenging segment to be in the high-end huddle room video collaboration here, but I'd still like to hear what the contribution has been in Q3. Also on the P&L for R&D costs, so actual reported P&L cost of the DKK 181 million in Q3. What will the going rate be from here? Is this a function of both sort of, say, 85t and the new Evolve2 product line being launched at the same time? Did you also have some, I couldn't really hear you, Peter Gormsen, whether there was a write-down in these numbers as well?
My two and a half question here is on just quickly on Hearing, Gitte, how confident are you that this is the right strategy that you have in the U.S. market to be so focused on the independent? This massive underperformance we are seeing, it is a little bit odd seen from the outside that you are not able to focus on both segments, for example.
Thanks for this. On the first question, as many of you know, we launched into this meeting room segment and the market was the highest growing segment out there. As we also just spoke about, this has not been a great place to be. What we did with the PanaCast earlier this year is we sort of took a step back. We repositioned it up against the COVID situation. This is about distancing. We have this 180 degrees view. We went back into enterprise with that positioning, also we expanded into other segments and here on the education. The reality is that if you take the PanaCast business as we have it today alone, we will actually exceed our original target after all when the year is gone. You can say the technology is strong.
We have found ways to come back into the market, that our market's opening that we had not really been with so far. On the video business, we are completely committed. I guess many people are expecting us to expand the portfolio. It's no secret we are working on that. When and what exactly will happen, I can't say here, but it's clear that we are very committed to this space. It is growing, and it will be a growing space also next year and the year after that. We are very convinced about that.
Hey, Carsten. This is Peter. Thanks for the question on the R&D. There's no doubt that the R&D spend is at a higher level if you compare two years back, and we do that, of course, by design because it's really important, and we see that's part of the growth that we're able to deliver. If you look specifically at this quarter, every quarter, we review development projects. We review our R&D programs. This quarter, we decided to redirect some of our investments, and that led to a write-down of some of the projects we have on the balance sheet.
How much was that? What type of products are we talking about?
Well, we close some projects, and then you redirect some of that spend into other projects. There will be these swings that you can't really put too much effort on in one quarter. We will continue to invest at a higher level. Of course, we follow the market, and we also pay very close attention to how the market will look post-COVID-19.
René here. We're not going to tell the competition exactly what we're doing. Trust us, this was not a bad decision.
I'll take your word for it.
Thank you. Our next question comes from Nyeok Kit Lee from Jefferies. Please go ahead.
Morning, and thank you. I have two questions on audio, please. Firstly, on the enterprise side, what's your capacity level today, and would it be enough to meet the demand coming from a backlog in 4 Q? My second question is around your opening remark about the number of headsets grown is still far below the number of new UC users. How realistic would it be to convert the rest of people who use Zoom or Microsoft Teams to start using headsets? Do you need to overcome some barriers, or is it more of a natural adoption story here? Thank you.
Thanks for that. There was a little bit of a noisy line. If I understood you right, you asked about the backlog end of year. Was that correct?
Yeah, just in terms of your capacity today, whether it's enough to meet the demand from the backlog.
Yes.
In Q4.
We ran into some of the storyline, is we ran into a significant backlog after Q2. We reduced it some after Q3. There will be a backlog actually when we end Q4, but less so. I spoke a little bit to it, we have large part our products are actually in supply today, but we are sort of backlogged on certain categories here under the low-end products. We are increasing capacity, but there will be some backlog. I think on the adoption and the amount of users out there, of course, the fact that we have had so many users pick up these platforms, many of them, of course, they are using the PC sound and the PC camera or their mobile phone or the smartphone and so on and so forth.
Experience is that, as you become sort of a let's call it regular user, or you use it in a noisy environment and so on, you will, over time, pick up a professional device of some sort, to help you get the good quality communication or deliverance of these platforms. It is, you can say there are two steps here. One is that get the amounts of users. Second is the adoption rate of these kind of devices. Of course, as I spoke to a little bit, is that there are new segments in the market that seem to also start adopting these platforms who were not there really here on the public sector to a larger degree. As you can say, the user volume is there, now is our job to drive the adoption.
That's great. Thank you.
Thank you. Our next question comes from Maja Pataki from Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Thank you for taking my question. First of all, Morten, happy birthday. I hope you're having a fun day despite results. I'd like to ask two questions for GN Hearing. Gitte, if we go back to slide nine, I'm still not quite entirely sure whether we're really comparing here apple to apple. First question is, you've been talking about the U.S. market being in some sort of lockdown, you're not able to have all salespeople in the field, until more recently. Is it actually fair to compare U.S., Germany, and Japan, given that we have the different kind of situations there?
The second question is, if I look at the illustration of the ReSound ONE share of total revenue, LiNX 3D, LiNX Quattro versus ReSound ONE, given the fact that we had some ASP increases with all those launches, one could argue that there hasn't really been much change because it has been driven by the ASP lift and not by the volume lift. Could you comment on that? Thank you.
I'm happy to do so. I appreciate that maybe it is difficult under these circumstances with COVID-19 and the different impact it has on the market to compare. I just wanted to be transparent about the performance we see of ReSound ONE compared to ReSound LiNX Quattro in three of the major markets in the different regions. Obviously the impact of COVID-19 and the restrictions, both in terms of the hearing clinics and, if you like, our workforce is different in the different markets. Maybe that also gives me an opportunity to address the earlier question on whether or not we have the right strategy in the U.S. or overall. I really strongly believe that our strategic direction of not owning retail is the right strategy. That has not changed.
It is still our focus to win in the independent segment, I'm convinced it should continue to be so, again, we see really good momentum with ReSound ONE in the segment. I guess, underlying that question is also, if you like, was this the right time to launch ReSound ONE, given that we are still in a market that is impacted by COVID-19? I know you didn't formulate the question like that, maybe it's me reading between the lines. I really think it was the right time to bring a new technology into the market. The underlying need to hear is obviously still intact, I think we also have seen as markets open up, we also see the business come back. In the U.S., the circumstances have been slightly different in the sense that our field force have not been out there in September.
They are now out there in October and certainly also now. Maybe to give you a flavor, since everything is new about ReSound ONE, which is what make the hearing aid so great, it actually takes on average three virtual interactions with an audiologist before they feel fully ready to fit ReSound ONE, where it's only taking one physical meeting. Obviously having our field force out back in the street in the U.S. market is going to make a difference.
Your last question was about the overall uptake. Again, please keep in mind that this is out of our total revenue. I guess the point I wanted to make here again is that when I look at it overall, ReSound ONE has been a very successful launch and actually stronger than our, before ReSound ONE most successful launch, ReSound LiNX Quattro. We actually see an even stronger momentum of ReSound ONE when we look at our total sales today.
Okay, thank you. It's probably a bit difficult to read the slide given a very different situation, so, but appreciate your efforts in trying to explain. Thank you.
Our next question comes from David Adlington from JP Morgan. Please go ahead with your question.
Yeah, morning guys. Thanks. One for each of the businesses, please. Just on the Hearing business, obviously Eargo just recently IPO'd. It would be great to get your thoughts on that business model and how you're thinking about that as a, well, I say additional competitor, but more visible competitor. Secondly, just on Audio, René cited the additional freight costs. I was wondering if you were anticipating whether they would normalize as we get back into a sort of more normal situation post-COVID, and how we should be thinking about that particular cost item. Thanks.
Obviously we have also noticed that the IPO of Eargo, and when you look at the overall market, we still have a lot of people out there with a hearing loss that is not getting a hearing aid. The adoption rate is really low. I guess we just welcome another competitor.
Hey, David, this is Peter. Maybe I can answer your question on the freight. It is still a very tight freight market we're looking into, and we're trying to get as much insights as possible. What we can look into, at least for Q4, is a continued very tight market. All the domestic airlines are still shut down, so that means higher freight prices, and that's what we need to absorb.
Thanks.
Thank you. Our next question comes from Patrick Wood from Bank of America. Please go ahead.
Perfect. Thank you very much. Bye Marcus, and it's been great. Morten, your birthday plans so far suck. Just one more left from me, please. On the audio side, I'm just kind of curious. The penetration of all those users who've gone home and converting the rest of the people to that hybrid working, selling them a headset or selling them whatever, a Jabra Speak 710 or something like that. Is this a function of new products that we want to push into the home? Is there innovation on the product side that needs to happen? Is it more marketing? Do you not need either of those and as you said, it's just a conversion over time, sort of culturally? Thanks.
I guess it is all of that actually. Over time is that, of course, you will have to offer people better, more all the time. That means that we have to anticipate over time that the work from home station will be fitted better than it is today for home. There will be product innovation coming. I think the underlying machinery is the same, right? Teams is evolving as we speak. Zoom is evolving as we speak. People are getting used to these platforms. Obviously, you can say people need to know that there is a better answer than listening to the PC or the smartphone speaker. We have to be out there educating the market with our partners and with the platform owners, and of course, we are working on that every day.
It is important for us that we are central in the ecosystem like we have been. We are a very key partner to these platform providers, and we need them, and they need us, being the leader out there. Of course, we need to work with the ecosystem on educating the market that these solutions are out there. Then, of course, you can say the channel will have to do its work beyond that when it comes to reaching customers where they are. Right now, we can see we have a very strong channel to the large enterprise, small-medium enterprise, and of course, when this is sort of acquired by individuals, we have to be sure we are available on the platforms where these people shop, and we are to an increasing degree.
Got you. Thanks for taking my questions, guys.
Our next question comes from Jannick Denholt from ABG. Please go ahead.
Hi, guys. Thanks for taking my questions as well. One for Gitte then one for you, René, as well. Just on your October numbers, you stated that you'd seen a softening in the second half of, or latter part of October. How do you see this evolving also going into November? Also with respect to your comments on you now having, you can say, your field force back on the street, could we expect even a reversal of that? Then to you, René, a little bit on the Evolve2. Appreciate that you're a backlog, as you stated, it's more reliant to the lower price endpoints. How is it on the Evolve2? Do you still carry zero inventory on that? Is that basically just shipping out of the factories, or are you capable in your capacity now to build up something there as well? Thanks.
Thank you for that. When I spoke about a softening in the October numbers, it's related to the second wave or third wave of the pandemic, I guess, depending on where you are, and the different measures we've started to see being taken, for instance, across Europe. I guess in most of our European countries, we still see the clinics being open, but the measures are still very different. If I take France as an example, the hearing clinics are open, but they cannot do any advertising towards customers. Also, again, in France, the restrictions on leaving your own home are quite severe. Obviously measures like that will lead to a softening in our sales.
I'm not at all suggesting we are back at what we saw in April, because I think both societies and individuals, we have learned to live with COVID-19, but it will have some impact on our sales. I don't want to be speculating about this. I think what we are doing in GN is focusing on what is within our control and ensure that we have sufficient agility in terms of being prudent on the cost side and able to compete in the market with ReSound ONE.
And-
Is it fair to assume that your current run rate would be below the 90% that you've seen on average for the month? You'd be below that maybe at 85% or something now?
I don't want to give specific guidance on that or speculate around that. I just want to re-emphasize that we're doing our utmost to be competitive in the market, and is so when it is to the fact it's open.
To the Evolve2 question, it almost sounds like you've been out checking, because the honest answer is that on the high runner part of that, we are actually out of stock right now. It's selling straight through when we have something. We are increasing, or we have increased capacity on the Evolve2 side beyond what we had expected from the business case. Apparently not exactly enough. We're getting there.
Okay, thanks. Happy birthday, Morten, and all the best, Marcus.
Thank you.
Our next question comes from Chris Gretler from Credit Suisse. Please go ahead.
Yes. Thank you, operator. Good morning, team. I have two questions left, actually. The first was on the share buyback. Actually, under what circumstances now would you resume that? Secondly, just coming back to this hearing device business. Now if I look at the last conference call, you indicated that now basically in July, you were running at index 90, and now basically September, October, still running index 90. Some of your competitor have now had substantially improved momentum in this now time period. Can you help me to understand why your business has been materially differently affected here over these now past months and has not seen the same momentum increase?
Chris, hey, it's me, Marcus. As the CFO of the company, I have to say that the share buyback is a prudent instrument to trim the balance sheet. As we have extremely healthy business on the audio side and underlying very healthy on the hearing side, I wouldn't foresee that there is in the midterm a change in our strategy. Personally, I love it because it boosts the EPS and I'm a capital market guy, as you know.
Yeah.
Given the strong cash flow.
Back to the question on how we see markets opening up. In terms of July and being on index 90, I just want to point out that our comparison in July 2019 was probably a little bit soft. We have actually seen an increase month-over-month equally to our competitors. Also in August, as I've alluded to, we had an impact from the fact that we announced the launch of ReSound ONE in the middle of the month, and therefore that led some audiologists to hold back because they wanted access to the new product. I guess it's also a case that markets open up, then they are impacted by COVID-19 again, and so on. It's also a little bit of mixed picture throughout.
Finally, I just want to mention that we have half of our sales in the U.S. and as the U.S. is overall still has been a little bit slower to open up than Europe and Asia. That is obviously impacting our overall numbers when you do the comparison to our competitors.
Okay. Fair point. Maybe just now to follow up, also now touching quickly on your guidance now for the full year that remained unchanged now in Hearing, now I'm talking about. What would really need to happen that basically touching towards now the points now you mentioned now like no flat operating earnings, kind of no zero operating earnings or zero margin and kind of sales down close to 30%. If I look at things now, I mean it would require something like high 20 negative, no sales for Q4, which would be, coming from the base we are right now, a huge decline and also on profitability. Basically, we are running at a slight operating loss for the first nine months. It looks very dull picture. You retain here. I was just trying to understand the background here now. Thank you.
Chris? Yeah. I thought with your "thank you," you concluded your own statement, but my colleagues obviously said there was a question implied. As we have six weeks to go through the rest of the year, of course, we have our own outlook. With the guidance given, we feel comfortable in the current environment to come home. That is, of course, including the one or the other uncertainty. With the magnitude of change that we also see in the market, there's also a bigger volatility out there. In France, the dispensers are open, but they're not allowed to do marketing and push, so you can imagine which direction the revenue goes. In Germany, the German government runs in a direction of basically closing also down the markets, while in Asia, you're moving forward.
We see every day in the rest of the world, across the regions, different pictures. That is also what we have to take in consideration. That makes it very unpredictable to be very precise. Therefore, our theme was always describing to you what we see and how we act, then have the conclusion to numbers instead of just putting out a number because we thought that's much more helpful.
Okay. I appreciate your comment. Thank you.
Our next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead.
Hey, guys. Thanks for squeezing me in at the end. I just have two thoughts, if that's okay. Just around the, you've given us a bit of color on how the markets are performing or sort of where you're seeing the restrictions. I'm just curious if you can actually comment in a little bit more detail what that practically means, I guess, in France, if you can't advertise. Are we talking about the market being down 20%, 30%, 5%? Just any kind of your best guess of what you're seeing from a market perspective, not necessarily for you, for the countries that have put a lockdown in place. That was just going to be my follow-up. Thanks, guys.
Well, thank you for the question, and I also completely understand your desire to know. We really don't want to speculate about how this impact the individual markets. I guess if we look to what happened in Q3, we really saw very different performance from one market to the other. I guess one extreme would be India, where we saw a complete close down, and countries like China and Australia coming back strongly. You could also, if you look to Europe, you see huge differences between Germany on the one hand, with a very strong momentum in Q3, and then you have U.K. still heavily impacted by COVID-19 restrictions. It is really hard to give a specific view to what will happen in a specific market over the next weeks. Again, looking at Q3, I guess we should expect very different momentum from market to market.
Understood. Thanks, Gitte.
Thank you. There appears to be no further questions. I'll hand back to the speakers for any other remarks.
Thank you, operator, and thank you everybody on the call. Before we close the call, I would like to take the opportunity to thank all of you for the collaboration during the past year and a half. It has been a real pleasure to get to know all of you as head of IR. I am happy to hand over the IR baton to Henriette Wennicke. I know Henriette for four years now, and I promise you that you are going to be in good hands with her. She is super sharp and very knowledgeable about GN. With that, we appreciate your time today, your questions, and on behalf of Gitte, René, Marcus, Peter, and myself, we will see you on the virtual road. Thank you very much.