Hello. Welcome everyone to GN's Q3 2022 conference call, following our release this morning. 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, Peter Gormsen, CFO of GN Store Nord, and myself, Anne Sofie Staunsbæk Veyhe, Head of Investor Relations, Treasury and M&A. Today's presentation, which can be found on gn.com, is expected to last about 20 minutes, after which we will turn to the Q&A session. The agenda for the presentation is that Peter will start off with group highlights, then Gitte will provide an update on GN Hearing. René will then provide an update on GN Audio, after which we will go back to Peter for a financial update and financial guidance. After that, we hand over to Q&A with questions from the queue.
With that brief introduction, I'm happy to hand over to Peter.
Thank you, Anne-Sofie. Good morning, everybody, and thanks for joining our Q3 2022 call today. Starting on slide four with a snapshot of the performance in the quarter. We delivered revenue of DKK 4.7 billion, which was organically in line with Q3 of last year, but 24% above in reported terms driven by SteelSeries and FX. Adjusted EBITDA ended at DKK 548 million, equal to an EBITDA margin of 11.7%. As a result of the recent M&A activities, the adjusted leverage ended at 5.9 times in the quarter. During the quarter, we have launched multiple new products across the company, which Gitte and René will get back to later. All in all, we are very pleased with our current product portfolio across the company, but even more is lined up in terms of innovation in the coming quarters.
As we announced last Wednesday evening, we revised the financial guidance for GN Audio to reflect the impact of the worsened macroeconomic environment, which I'll get back to later. With this quick snapshot, I'm happy to hand over to Gitte for an update on GN Hearing.
Thank you, Peter, and hello to all of you. The key messages I want to leave you with are the launch of ReSound OMNIA is progressing as planned, and we are right now seeing the strong momentum we had expected. Our fully updated product portfolio, as Peter also alluded to earlier, is starting to pay off with solid market share gains observed in October, leading to solid double-digit sales growth in October. Based on the encouraging current product uptake, we are on track to deliver a historically strong Q4 in terms of growth and profitability. Let's start by looking at GN Hearing's Q3 2022 financial performance. GN Hearing delivered flat organic revenue growth in the core business and 64% organic growth in the emerging business, which I'll get back to later in my presentation.
Total revenue increased with 15%, reflecting the consolidation of Lively and BelAudição and the tailwind from exchange rates. The gross margin was broadly in line with Q3 2021, but significantly up compared to Q2 2022, largely driven by better product mix and exchange rates. The EBITDA margin in the core business ended at 11%. This is a reflection of the gross margin improvement, offset by investments in launch activities. The EBITDA margin in the emerging business was DKK -40 million, which is a sequential improvement versus Q1 and Q2 as expected. Non-recurring items of DKK -38 million was booked in the quarter, primarily related to the closure of our U.K. distribution center, as we announced in the last quarter. The closure is part of our supply chain transformation program.
Free cash flow was positive at DKK 60 million in the quarter, driven by the lower reported earnings level compared to last year, and also last year, we had a gain from a channel investment. Let's move to slide seven and some more color on the regional development in the quarter. Beginning with North America, we delivered - 2% organic revenue growth in the quarter in a declining market. We experienced solid performance in the independent market, but offset by the development in Costco. Up until recently, the KS part of Costco has increased, thereby negatively impacting our volumes. To build on the short-term opportunities in Costco following the removal of KS 10, we launched an updated version of Jabra Enhance Pro in the beginning of November, building on the technology platform of ReSound OMNIA.
The impact of ReSound OMNIA in the commercial market in Q3 was limited with some wait-and-see buying patterns observed after the product announcement in mid-August. However, this was followed by a strong product uptake in September, which has continued into October. Moving on to Europe, we delivered an organic revenue growth of 7% in the quarter, with particularly strong performance in Germany, driven by ReSound OMNIA, which was launched in Germany by end of August. In our rest of world region, the organic revenue growth ended at -3% compared to Q3 2021 in a generally soft market. As for the rest of world region, we are happy to announce that we'll be the main supplier for Hearing Australia for the next five years with an extension option for a further five years.
This is a tender we've been working on for the past many months, and we are very excited that we have won the Hearing Australia tender, and will start to supply from 2023 and onwards. To put it into context, Hearing Australia distributes more than 100,000 hearing aid units per year, and the new design contract is expected to come into force from Q1 2023 and will ramp up during the year. Moving to slide eight and an update on ReSound OMNIA. As you know, the product has only been commercially available for a couple of months by now, but to give you some data points on the initial performance, we've pulled out some data from our US business. First of all, ReSound OMNIA is driving a better product mix.
We've seen a five percentage point improvement in our overall premium share compared to the most recent months prior to launch. Secondly, we've seen ReSound OMNIA opening up new customers. Compared to July, our points of sale have increased by close to 10%. Thirdly, we've seen an even better reordering pattern than we saw with ReSound LiNX Quattro. In the first nine weeks into the launch, the percentage of HCPs who've placed more than 10 orders is three percentage points higher than the same period for ReSound LiNX Quattro. Finally, we've seen a double-digit increase in ASP for ReSound OMNIA compared to the year-to-date ASP for ReSound ONE. As a result, we've seen solid market share gains for ReSound OMNIA since the launch, which is boding well for a very strong finish to the year.
As I've already mentioned, we have seen solid double-digit sales growth in October. Let's turn to slide nine and our rebranding of Lively. First of all, I'm very happy with the strongly performing Lively team, who are continuing to outperform the online market, driven by their relentless focus on providing a superior online hearing care model for their customers. To drive further synergies, we are now rebranding Lively. Going forward, our superior online hearing care platform can be found at JabraEnhance.com. Same experience, same team, same benefits, but utilizing the synergies of our Consumer brands. The rebranding of Lively and our product introduction into OTC is a clear testimony to our group synergies, combining the best areas from our hearing aid business with the best areas from our audio business.
From the beginning of next year, we will also distribute our OTC product, Jabra Enhance Plus, through jabraenhance.com. Speaking of the OTC category, it is naturally still very early days, but our Jabra Enhance Plus is now widely available across U.S. retailers, including Best Buy and Amazon. Although we are only a few weeks into the new category, we are positive about the current momentum of Jabra Enhance Plus. Moving to slide 10 and our financial guidance for the year. Our organic revenue growth guidance for 2022 is confirmed at 5%-8%, which means a double-digit organic growth in the fourth quarter. Based on what we've observed in October and in the beginning of November, we are comfortable with the guidance. As for the EBITDA margin, we are guiding around 14% for the year, with a very strong end to the year.
With the double-digit organic growth in Q4, we should see better mix, better pricing, and thereby better gross margins. On top of this, we've executed strongly on our supply chain initiatives, driving a decrease in OpEx in the fourth quarter. Finally, we will also experience a significant tailwind from foreign exchange rates. The emerging business is on track to deliver strong revenue growth and an EBITDA of DKK -200 million, as communicated earlier. With that, I would like to hand over to René and an update on GN Audio.
Thank you, Gitte, and good day to all of you. It's now my pleasure to take you through GN Audio's results for the third quarter of 2022. Let's move to slide 12. In the second quarter of 2022, we continue to see solid Enterprise performance with 7% organic growth. As we all know, the consumer sentiment across sectors and markets is currently very low, and as a result, our Consumer business in the quarter delivered -34% organic growth. While the growth in Enterprise is still constrained by the global supply chain situation, we are generally seeing an improving trend. As a result, we are leaving the quarter with an order backlog, but with fewer SKUs than compared to earlier.
With the current supply chain trends, we are expecting to be able to fully eliminate the backlog by Q1 of next year. While the gaming gear market continues to see a significant year-over-year decline, SteelSeries performed strongly in the quarter, resulting in significant market share gains driven by product introductions and the easing of the supply chain. Compared to second quarter of 2022, SteelSeries grew revenue sequentially by an impressive 22%. Adjusted gross margin ended at 42.6%, which was 7.5% below Q3 of 2021, and can mainly be explained by three factors. One, the significant appreciation of the US dollar, driving a negative impact of around five percentage points compared to last year. Second, the elevated freight cost and material cost in general, and third, the consolidation effect from SteelSeries.
As earlier discussed, we did put in place pricing initiatives in the beginning of the year, and we saw a meaningful to significant impact in Q3 as expected. Due to strict focus on operational cost, the adjusted EBITDA margin ended close to 15%. Non-recurring cost amounted to DKK 21 million, following the SteelSeries acquisition and ongoing integration initiatives. The free cash flow entered at DKK 21 million, which is reflecting a strong operational cash flow, but also a continued inventory buildup, especially in SteelSeries. At the beginning of the year, we were focusing on sourcing as many critical components as possible due to the global chipset supply chain challenges. That resulted in very long lead times of certain components, creating the need for long-term commitments and planning.
As the consumer-oriented markets experienced a demand shock, there's a short-term mismatch between inventory buildup and revenue, why we are currently running on a higher inventory level than normal. During the coming quarters and years, we will focus on reducing these inventory towards historical levels. Due to the current sentiment related to a potential recession, we are taking necessary measures to defend the agility of the company. In the last five years, we have demonstrated a high degree of scalability and agility of the business. With the significantly declining Consumer business and general uncertainty driven by macroeconomic environment, we are now making sure that our investments and costs are and will be aligned to market demands. Consequently, we are reducing our operating expenses for the coming years while we are going to take costs out immediately.
This will drive run rate savings for 2023 and beyond of the magnitude of DKK 200 million-?DKk 300 million per year. To execute these savings, we will experience a further DKK 100 million in non-recurring items in 2022, on top of the already communicated DKK 400 million. However, it is important to stress that we will continue to invest in areas where we see strong growth potential in the short and long term. With that, let's move to slide 13 and the regional performance. In North America, we delivered a negative organic revenue growth of 26%, driven by significantly declining Consumer business and an Enterprise business which experienced some softness in the quarter. Compared to third quarter of 2019, we have seen more than 24% organic revenue growth in this region.
In Europe, we delivered strong organic revenue growth of 16%, driven mainly by U.K. and Germany. Compared to third quarter of 2019, Europe has doubled in size from an organic perspective. In the rest of the world region, the growth was flat year-over-year, but with strong performance observed, especially in India. Compared to third quarter of 2019, we have delivered in this region organic growth of 74%. Let's move to slide 14 and the innovation engine. The third quarter was very busy from an innovation point of view, with several important product launches across GN Audio and SteelSeries. It's important for me to stress that we in Q4 this year and Q1 of next year will maintain this strong launch cadence.
This will result in a situation early spring, where we will have the strongest pro-product portfolio in the market ever in the history of the company. In our contact centre business, we launched some important headset additions to our strong lineup of Engage products. Additionally, we have launched our very first software as a service solution, where we are exploiting tools developed by audEERING, an investment you may remember we made a few years ago. The new software solution will provide real-time benefits for call agents, while at the same time providing managers insights into their team's performance to further improve on customer services. Finally, we have further expanded our true wireless business with new products, both for the Consumer market and engineered for remote working, targeting the Enterprise market. Let's move to slide 15 and the recent product launches in SteelSeries.
Here, the Q3 was another busy quarter for product launches in SteelSeries, with new keyboards, new headsets, and not the least, the launch of a new product categories, the product category expansion with the new Arena series of gaming speaker systems. SteelSeries innovation engine is clearly one of the main reasons for the continued strong market share gains across product categories and across countries. With that, let's move to slide 16 and the financial guidance. During the quarter, we did see a further worsening of the Consumer markets, which resulted in negative organic growth of 34% for our Consumer business. Retailers have generally continued to significantly reduce their channel inventories to adapt to the new environment. However, it does seem that the inventories have been reset by now.
On the Enterprise side, we continue to see solid underlying demand and growth, but slightly lower than expected a few months back. To reflect these market changes, we have updated our market growth expectations for 2022. We now expect the Consumer markets to decline around 30% compared to last year. Consequently, we are lowering our internal expectation on our Consumer business to reflect these new market conditions. SteelSeries has performed stronger than expected from a relative perspective, and this is why we have kept our guidance on SteelSeries. Moreover, we are now expecting the Enterprise market to decline slightly in 2022, purely as a consequence of the supply issues in the first quarter of this year. However, we continue to believe in positive growth in our Enterprise business again in the fourth quarter.
As a result, we are now expecting an organic growth for GN Audio of -7% to -5% for 2022. Due to the continued appreciation of the US dollar and the reduced top-line growth, we are now expecting an EBITDA margin between 14% and 15% for 2022. When all this is said, let's just remember that the total GN Audio business is now twice the size it was in 2019. Let's move to slide 17 and further color on the Enterprise market. First of all, it's important to stress that the long-term growth drivers are fully intact. The world continues to adapt to hybrid work, and enterprises globally are continuously deploying productivity-enhancing tools. This will be a medium to long-term underlying growth driver for GN Audio.
Whereas the potential of a recession is deemed high, we continue to see solid trends in our sellout data related to our Enterprise business. In Q3, the sellout growth was stronger than our 7% reported sell-in. Nothing in the current sellout data is pointing towards a significant negative impact from a potential recession at this point of time. However, we need to acknowledge the risk. A potential significant increasing unemployment rate and general cost-cutting exercises could impact our installed base negatively, and thereby the short-term growth prospects. On the other hand, there continues to be drivers supporting growth also in a recession scenario. Taking all these factors into account, and with the knowledge we have today, we are proactively planning for different scenarios.
We are taking a prudent view on cost to ensure that we are ready to quickly adapt, and we will continue to be agile in the marketplace, which has been our winning formula in recent years. Now before I hand back to Peter, I guess many of you have seen our announcement this morning that our board of directors have appointed Peter Gormsen as new head of GN Audio. After 16 years at GN, first eight years as a board member, and now soon eight years as a CEO, the board and I have concluded that it's the right time for me to step down. My retirement has been on the table for quite some time, and the decision has been postponed a number of times during the last couple of years.
Now the board has a very capable successor in place, and GN Audio has a very strong management team in place. Here I welcome the opportunity to focus on my board career and other interests. I will stay on well into 2023 to ensure a smooth transition, and therefore, we will see you all on the road. With that, I hand back to Peter.
Thank you, René. Let's move to slide 19 and the group financial highlights. At group level, GN delivered -1% organic revenue growth and an adjusted EBITDA margin of 11.7%. Total non-recurring items were DKK 59 million, driven by the SteelSeries integration as well as the supply chain initiatives in GN Hearing. Adjusted leverage ended at 5.9x. Let's move to slide 20 and our cash flow for Q3 2022. GN Hearing's positive cash flow was driven by slightly lower reported earnings and a positive impact from working capital. In GN Audio, we saw a continued high level of operating profits while the working capital was negatively impacted by inventory buildup, especially in SteelSeries. Compared to Q2, the total inventories in GN Audio are up DKK 700 million, which is naturally impacting our short-term cash flow negatively.
Let's move to slide 21 and our mitigation plan to protect margins and cash flow. As René and Gitte mentioned earlier, we are currently exposed to several external headwinds impacting our business. The FX environment, and especially the US dollar, is significantly impacting our margins and cash flow, particularly in GN Audio. With the current US dollar level, we are looking into a yearly four percentage point structural headwind to the EBITA margin compared to 2021 level. At the same time, it is naturally worth mentioning that GN Hearing will experience a structural tailwind from the US dollar appreciation, although the magnitude is much smaller than in GN Audio. The current inflation level is both impacting our cost side negatively, but is also driving higher interest rates impacting our cash flow.
While we see some positive data in relation to the freight market, we are still at an elevated level compared to pre-pandemic, and the uncertainty in the supply chain continues to be high, not least driven by the unpredictable COVID-19 outbreaks. We cannot just assume that everything returns to normal. We need to be proactive and adapt to the environment and the challenges we are facing. That's why we're executing on a very detailed mitigation plan across many levers to protect margin and cash flow and make sure that we as a company will come out of this current situation much stronger. In the Enterprise business, we have communicated a new round of price increases effective January 1, 2023 to mitigate the current inflation. Secondly, we have enforced a general hiring freeze across the company.
Thirdly, we are reducing all discretionary spending that is not directly associated with short-term growth opportunities. Also looking into our organization to make sure that we have the right size and a more future-proof cost structure. Moreover, we are also looking at more detail into our R&D roadmap to make sure we are aligned with the current and future market conditions. As we have been building up inventories lately, we also need to work on reducing this to normalized levels, and thereby releasing a lot of cash that is now sitting in working capital. With that update, let's turn to slide 22 and the current debt maturity profile. By the end of September, we finalized the earlier communicated EUR 520 million loan.
This effectively means that the M&A bridge and bond that are maturing in 2023 will be fully repaid by this new loan maturing in 2025, with the option of extending one more year. In October, GN received formal project approval from EIB and KfW concerning new combined R&D loans of EUR 110 million. The terms and conditions of the loan agreements have been agreed in principle with the two banks, but execution of the loan agreement is subject to final approval from the bank's credit committee, which is expected end of November. GN continues to have ample sources of financing and a fully undrawn RCF of EUR 350 million. That said, we are currently carrying out a comprehensive review into the appropriate capital structure for the medium term, as well as our cash generation.
We will update the market together with the release of full year 2022 results next year. Let's turn to slide 23 and the financial guidance for 2022, which we revised last Wednesday evening. Gitte already went through the guidance across hearing and audio, so I will just keep this short. Due to the revised guidance in audio, we are now expecting an adjusted EPS growth of around -30%. With this, I'm happy to hand back to Anne-Sofie.
Thank you to Gitte, René, and Peter for the updates. With that, I'm handing over to the operator for Q&A. Please limit your questions to two at a time.
At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may withdraw yourself from the queue at any time by pressing star two. Once again, that is star and one for your questions. We'll pause a moment to allow any questions to queue. We'll move first to Martin Parkhøi with SEB. Please go ahead.
Yes. Thank you very much. I think I have a question for Peter and then from Gitte. Just Peter, just on the capital structure, can you give some kind of guidance where you expect the net debt to land at the end of this year? Also, when you do this review, what kind of non-core businesses... I know, of course, you have addressed your retailer in Portugal as a non-core, and I also know that you have been trying to sell your Danish hearing care centers in Denmark for quite some while.
What businesses are you able to maybe get some money in from? On Gitte, just to understand that of course you obviously expect double-digit growth in the fourth quarter on the top line. Compared to last year, how much is that in volume, and how much price impact? I saw that. Your numbers on September, but what do you expect year-on-year? Sorry, I will just squeeze in one little question because, you know, the question should probably be to your chairman of the board, but he's not really picking up the phone.
Maybe I can ask you have recently got a new shareholder, last week. Are you in dialogue with this shareholder, and do you expect this new shareholder to get a board position?
Hey, Martin. This is Peter. On leverage, first of all, we will not come out with guidance where we land full year. You can rest assured we are looking into this. Of course, it's first and foremost about improving the business. As both René and Gitte talked about, we are spending a lot of energy and time and focus on improving the margins and cost out and then certainly focusing on the working capital. In this, we also look at the balance sheet to your second question. Yes, we have mentioned that we have assets on our balance sheet where we've openly communicated that we will look into divesting that, but I cannot comment more on what other options. We'll come back and share more details next year on that.
Maybe if I just take the last question. Of course, a lot of speculation on that. We're always happy to see investors come in and take a good share, but we really can't comment more on that. Rightfully, as you said, that you should address that to the chairman. Thank you.
Hi, Martin. Thank you for the question on sales growth in Q4. Obviously, it's a mix of price and volume. I'm sure you also understand I will not be commenting on it in detail. I think one way to think about it is that in the data we shared, we see a 10% increase in point of sales, and that's obviously an important indicator in terms of growth in the business. Also, we see a significant uptick in our price compared to ReSound ONE, as we've taken a price increase with the launch of OMNIA, which is another important data point. As of first November, we are launching ReSound OMNIA and our rechargeable customs into VA, and we've also launched our OMNIA technology into Costco.
Now, that also improves our mix, picture going forward. It's all that combined that means that we see both an improvement in our ASP, but also improvement obviously in our volume growth as we move forward. You are right that we do expect this double-digit sales growth in Q4, as we've also seen a strong start in October.
Thank you.
We'll take our next question from Maja Pataki with Kepler. Please go ahead.
Yes. Good morning. Two questions as well. Gitte, first to you. Can you please talk a bit more in detail with Costco and how you think you can turn that around? Because it has been an endless failure over the last two years, if we wanna, you know, put it very bluntly, and the annualization of the price cuts doesn't seem to really drive or turn things around. What do you think you can do to turn that part of the business around? And at what point in time are you just gonna say, like, "Well, you know, it's a real pain and it's not worth it"? My second question is with regards to the refinancing when it comes to 2023.
Peter, can you talk to what kind of interest expenses you expect for 2023 now that you have refinanced, your balance sheet or the short-term obligations for 2023? Thank you.
Thank you, Maya. Let me start on Costco. Late September, Costco decided to suspend KS 10, and that's obviously meant that in the last days of September and going into the fourth quarter, we see a much stronger position for the brands. That obviously also benefits us. In terms of price, we have actually decided to keep our price also in this period even despite the suspension of KS 10. I can easily talk to that 'cause that is also what is visible on the homepage or if you go into Costco. We've decided to keep our price, and we've done that also knowing that we would put our OMNIA technology into Costco as we've done here first of November.
Currently we actually see strong performance in Costco.
Right. You know, I mean, KS is gonna be back at some point in time, whether it's gonna be, you know, KS 10 is gonna be Sonova or somebody else. KS is going to be back. What makes you confident that you're not going to see a further crowding out of the branded segment in favor of KS 11, and therefore an ongoing difficult situation for you?
Well, I think that the branded part of Costco continues to play a significant role. I believe with our new technology, the OMNIA technology, we are in a strong position because with OMNIA we've also improved our fitting software to make it more efficient and more intuitive to use. That is very important, I guess for all audiologists, but especially in a channel like Costco, where you also see an improvement in or the importance of driving efficiency.
Understood. Thank you.
Hey Maya, this is Peter . Of course we don't normally share the commercial terms of our loan agreements, but the new R&D loans are fixed in that sense. The current level of financial items in this DKK 80 million-DKK 90 million is a fair assumption also next year.
Thanks.
We'll move next to Veronika Dubajova with Citi. Please go ahead.
Hi, guys. Good morning, and thank you for taking my questions. I'll keep it to two for now. One, Peter, just wanna come back to the hearing guidance. Look, I appreciate we're not even half of the quarter in, but obviously the 5%-8% does imply two quite different growth rates in the fourth quarter. I'm just curious if there's. Do you feel more comfortable at the lower or the higher end of the guide? Do you think the whole range is still in play? Especially given some of the commentary that we've had from your peers around the market dynamics at the moment. My second question's on audio and the gross margins. Peter, René, just wondering what you can do to deal with this dollar strength.
Maybe if you can comment on the price increases that you're taking in Enterprise? Sort of if spot rates hold at this point in time, where would you expect the gross margin to end up at as we move into 2023? Thank you.
In terms of the guidance range on the top line, obviously, we are off to a strong start with our October numbers. As you point out, we are operating in a market that is flattish, and that obviously also has an impact on our numbers. We are probably in the mid-lower range of the guidance right now, if I should come with my best evaluation. Having said that, I do really wanna confirm our guidance.
René here. Thanks for that question. Obviously the FX impact is very material as we have talked about. I guess in reality, of course, this is something we have to work ourselves through. And you know the tools, I mean, price is one. We have increased prices by first of January across the portfolio, the Enterprise portfolio. And then there's a longer term sort of set piece of work where we have to go through, I mean, product cost-cutting and perhaps some margin work in the channel and so on and so forth. There's no magic bullet here where you can just fix this kind of currency impact.
It has to happen through both on the innovation side, and, of course, also the go-to-market side. We are working on that.
Okay, understood. The price increase in Enterprise, sorry, René, are you able to quantify that for next year?
We have launched a 10% increase across the portfolio, but. Last time, like we can be open about this, last time it was across everything, and the same, this is a more sort of focused approach.
Understood. Thank you, guys.
We'll move next to Hugo Solvet with BNP Paribas. Please go ahead.
Hi guys, thanks for taking my question. Just coming back on the capital structure review. Can you help us understand what the options are and maybe at this stage whether or not some have already been ruled out? Second on the hearing business and the margins, which is implied for Q4, which is quite a significant step up to say the least. Can you help us understand where exactly you would expect it to land given your comment on the previous question on the fact that now you will be more targeting the mid to low end of the guidance range? Thank you.
Hey, this is Peter. On the capital structure, as I said before, first and foremost, this is about improving the business, and we are working on a lot of initiatives. Improving the margin, taking costs out, it's improving the cash. We talked about working capital, so we are digging into all of those initiatives. Then we need to take a close look at where do we expect the market to be next year? What options do we have? We look at the various opportunities for financing. We are exploring all those areas. Of course, at this point in time, we cannot comment on either what we decide for or what we ultimately do not decide. We'll come back and share more about that next year, I said earlier.
In terms of the margins for the hearing aid business in the fourth quarter, again, here we expect to see a significant step up. What is driving that? If you think about Q3, we see with a flat sales development, we actually deliver 11% EBITDA. Now, for Q4, we expect to see double-digit sales growth. A significant part of the EBITDA improvement comes from the top line. In addition to that, we expect a better mix in the sense that OMNIA will carry a higher weight, it will be launching into VA. I already spoke to Costco and so on. That all improves our mix effect.
We also have a tailwind from exchange rates in the sense that, if you look at the first three quarters, we have a headwind of 2%. That will be, we expect, a benefit of 3% in the fourth quarter, so a swing factor of 5%. In addition to all of that, we've worked diligently on optimizing our cost structure during the year, and I've previously talked to supply chain initiatives, and that benefits both our margins but also our OpEx. Those are the main drivers for the expected increase in EBITDA margin as we move into Q4.
Okay, thank you. If I can just squeeze in one more question on OTC, probably early days, but, can you share with us some more feedback on especially the channel mix, you selling directly online versus the share of U.S. retailers? Thank you.
We've launched in the OTC market as of mid-October in Best Buy, in Amazon, as I'm sure you are well aware of. It is, I have to say, very early days. We have data for a couple of weeks, so I think it's too early to really comment on and give any trend on. I'd love to come back and talk more about that when we have our full year results. I think for now it's early days and I guess the verdict is still out whether we're gonna see the resilience that we see in the hearing aid market impacting the OTC market or whether it will be a market more driven by consumer sentiment.
I think more to come, when we come with the full year results.
Thanks.
We'll move next to Hassan Al-Wakeel with Barclays. Please go ahead.
Thank you for taking my questions. First, appreciate the data points around OMNIA. Are you able to be a little bit more specific on the level of double-digit growth? I know it's early days, are there any early indications or feedback from the VA? And how are you thinking about macro uncertainty and down trading constraining, you know, the rest of, I guess, Q4 and what is implied, but particularly 2023, if you have any preliminary views here? And then secondly, following up on leverage, you know, how are you thinking about this and specifically the potential or the need to raise equity should the macro outlook worsen, and, you know, GN as a business is not able to drive the level of de-leveraging that is anticipated in 2023? Thank you.
Thank you for that, and let me start with commenting on the questions specifically around hearing. Let me just repeat again, we had a solid double-digit growth in October. That obviously combined with other data points we have for now makes us confident about the guidance. It is early days in the VA. We launched first of November. It is too early for me to give specific data on that. In terms of down trading, I think a way to think about that is that when we look at the U.S. market overall, if I take that as an example, we see a flat market development or a slight decline. However, we do see managed care growing, and managed care is in the lower price points.
While we don't specifically see people come in and trade down, if you like, we see the growth being driven by managed care, and that means overall a negative ASP development for the market.
Hey, this is Peter. To the question on leverage. Of course, we are first and foremost looking at what we can control, improving the business, the margins, taking costs down, improving the working capital, because that's where we have the headache. Having said that, of course, if you, as you say, we run into a very, very tough environment next year during the review, as we said before, we are exploring all options and we're making scenarios. We're looking at the full toolbox in that sense, but cannot comment further on this.
Very helpful. Thank you.
We'll take our next question from Robert Davies with Morgan Stanley. Please go ahead.
Thank you for taking my questions. I just wonder if you could give us a little more detail on your comments around inventory in the channels on the audio business being quite low. Just if there's any more color, whether it's sort of regional or what your expectations for the evolution of that is heading into early part of 2023, given the macro backdrop. The second one was just on the comment you made on the ReSound OMNIA, with the customers reordering more frequently compared to the Quattro business. What are the sort of key elements sort of driving that? The final one was just stepping back and just looking at the, I guess, the volatility in margins of the hearing business in the last few years. I know you provided guidance for this year. How do you think about that business medium to long term?
Where do you see the typical sustainable level for profitability in hearing over the medium term? Thank you.
This is René here. I think on the channel inventory, as we have talked about, you have seen now since, you can say late Q2, early Q3, sort of a significant channel destocking across many sectors and also across the value chain. There's a little bit of a fight who sits on inventory right now. I think this is stabilizing. I think you are back to a point where you see a closer relationship between sell in and sell out. The pool. I think it's probably going to take time before you will see a restocking of the channel or a normalizing to where we were before. In that sense, I don't think we have an immediate sort of restocking opportunity there.
The reality is that the channel stock across our sort of categories, but of course, across many sectors, is meaningfully lower now than it was a couple of months back. Yeah.
Okay. The questions around ReSound OMNIA and the reordering pattern. The reason why we focus on that KPI is because there's a lot of curiosity around new innovations brought to market. The important data point is if the audiologists reorder. Here we compare to ReSound LiNX Quattro, because when we look over launches in the past 20 years, that's actually where we've had the strongest reordering performance. Actually we see better performance here with OMNIA. What is driving that? I think one of the things we've worked diligently at during the last couple of years is really ensuring a high matureness of the technology when we bring it to market. High quality. In addition to that, we've worked on our fitting software to make that easy and intuitive for the audiologists to use.
I think that, if you like, more holistic customer approach is paying off. In addition, you asked about our long-term perspective on margins, and I just want to reconfirm that we are aiming to be back at an EBITDA margin of 20% in 2024.
Cool. Thank you.
We'll take our next question from David Adlington with J.P. Morgan. Please go ahead.
Morning, guys. Thanks for the questions. Firstly, just on hearing, Gitte, just wondering if I could follow up on your Hearing Australia win. Just wanted to, I'm not entirely familiar with that contract. Just wonder if the 100,000 units, is that a sole supply and will you therefore be taking sole supply ongoing forward? Just trying to gauge the size of the opportunity there. Secondly, on audio, just in terms of, I was quite surprised to see you pick out Germany and U.K. as particular strengths in the European market. Just wondering if you have any further color there, whether it was Enterprise versus Consumer and what was driving that strength in those markets. Thanks.
On the Hearing Australia win, I mean, when we talk about the opportunity of 100,000 units, it is because it is a sole supplier agreement, and therefore obviously a huge opportunity for us. I think, again. Yeah, something we are really proud about, 'cause I think it's a testimony to the strengths of the company.
René here. I understand your question on the Germany/U.K. situation and the rest, of course. This is driven by Enterprise, which somehow also confirms there's a disconnect between the consumer sentiment and the effects of that and then whatever happens in the Enterprise side. In that sense, at least we have seen in these two countries that these investments have continued at a solid level despite a sort of depressed consumer behavior, basically.
I just wanna know, René, was that a broad-based? There weren't any particularly large contracts you managed to win, it was just a broad-based strength on the Enterprise side?
This was broad-based. There's no. You can see really, I think we talked about that earlier. We are at a point now you can see sort of specific contracts in the numbers really anymore. It's a while. It's years back, basically. It's broad-based.
Great. Thank you. Awesome. Thank you.
We'll take our next question from Christian Ryom with Danske Bank. Please go ahead. Christian, your line is open.
Yes. Good morning. Can you hear me? Hello?
Yes, we hear you.
Perfect. I'll go ahead then. A couple of questions. First to GN Audio. René, can you help us with your assessment of where channel inventory levels are now for the Enterprise business, coming out of these couple of years with order backlogs on several products? Second question on a similar theme. With your assessment of the Consumer market being down around 30% this year, can you give us some kind of a feel for how much of that you believe is due to channel inventory reduction and how much is due to the underlying market? A quick question for you, Peter, on the outlook for working capital development, particularly in the audio business.
Should we expect continued working capital build as we look into Q4, or will we begin to see working capital coming down? Finally, a point of clarification. The Hearing Australia delivery into that contract, will that have any impact on hearing sales here in Q4? Thank you.
René here. On the channels situation. First, I think it's good to understand that because of the differences between the Consumer segment where you are more direct, the channel inventory is far less than it is on the Enterprise side, where you can say the distribution machinery is there to hold stock and actually ensure that the resellers can get their products with short notice and so forth. I would say that my sense is that the Consumer downturn has a lot to do with the consumption and less to do with the channel resetting. There is a channel reset, that's clear. And I think...
It's also a consumption matter indeed, and that probably is the strongest. As I also talked to this, the channel reset, we think is more or less done. On the channel inventories on the Enterprise, I don't think we have given a number here, but it's clearly lower than it was before. We used to have, I think we talked about this, eight weeks plus in the channel, and you will. That will be the exception, I think now to have that much in the channel. It was affected a lot by supply chain issues, and it is affected less by that nowadays.
As we said in the introduction here, less SKUs are affected by this, and in that sense, you could say the order backlog is slowly being eaten up. Now the material sits in the channel, as it should.
Hey, Christian, it's Peter. On the working capital in Q4, we will not guide specifically on that, but it's very clear that, as we mentioned, that it was a fairly dramatic increase on the inventory level. I think as we've talked about many times during COVID, it was a fight to get the components. I think we also shared that some of the components have very long lead times, up to 15 months, so it's not something that you change overnight. You basically have components flowing in that we ordered in a completely different environment. It's a lot of attention and focus and hard work in getting this down. Rest assured, we're doing everything we can because we don't like having that much sitting.
We'll not give a specific number on where we'll be by Q4.
The question on Hearing Australia, whether that has an impact here in Q4 2022, it does not.
Great. Thank you all.
We'll move next to Niels Leth with Carnegie. Your line is open.
Thank you. First question on GN Audio. Now considering your cost reductions of DKK 200 million-DKK 300 million as you mentioned for next year, would that allow you to protect your current EBITDA margins next year, say in a scenario where we have a mild recession or flattish growth for next year? That would be my first question. Second question would be on your FalCom business. Could you talk a little bit about how much this business contributes in terms of sales, and is it profitable at this point in time? Does it have an effect on your cash flow? Thank you.
Thanks for that. I think we don't have guidance for next year, but obviously we are taking all these measures in order to drive the profitability across the company and also be ready for a softer sentiment that we experience at this point of time. The guidance will come when we announce the full year result, and we will talk about all these things. I mean, the target of course is that we need to drive the business as strong as we can also under softer conditions, and that's why we are taking these measures here. On the FalCom, we have not disclosed whether this is a profitable or not profitable business. I would say it's probably cash flow neutral as it is today.
We have not disclosed either the numbers, but it's been performing very well this year, but coming from small numbers. It's at this point in time a very promising business. Small.
Just on the cost cuttings of DKK 200 million-DKK 300 million from next year, will they accelerate during next year, or will they be effective already as of January?
We're preparing measures as we speak, and we will be driving a lot of these measures, most of them, this year. That means that the effect will be available from first of January to a very large extent.
We'll take our next question from Chris Gretler with Credit Suisse . Your line is open.
Thank you, operator. Good morning, Gitte, René, Peter. Two questions, essentially. The first, you know, is on this announcement, you know, with the review of the balance sheet. Now, does this actually also include the asset side? And also, should we also potentially expect divestiture of assets now to correct all the leverage? And the second question relates to the Consumer, including, you know, SteelSeries, business at Audio. Could you actually discuss, you know, the current profitability level of that business, and also the opportunity to increase prices, you know, for that business to correct, you know, for the profitability levels? That would be great. Thank you.
Hey, this is Peter. On the review and divestment, we are looking at the balance sheet. If we go into divestment, it will be only on non-core assets. Hopefully that answers. On the Consumer business, we don't disclose profitability levels there. This is a highly integrated matter because we have a lot of cross-segment levers of technology. There is some channel matters and so on and so forth here. I think we have said earlier that the gross margin levels are lower at this space than they are on the Enterprise side, but not to what extent.
You say from a profitability point of view here, it's about, of course, market pricing, the channel effects and then the strength of the products that we are launching in the market here. The price points we can demand and up against the levers of the technologies we have available here. I can give you numbers on this other than, of course, volume matters a lot and so does, say, the technology leverage that we have.
On the ability to pass on, you know, cost inflation in terms of price increases in that part of the business?
I think here we are in a tougher place when it comes to sort of somehow setting the prices. On the Enterprise side, we are the leader, and we somehow guide the market. On the Consumer side, on the, if I take the Consumer, the AirPods segments and so forth, Apple sets the price and the rest of the industry follows. I think when you come to the gaming gear business, we are in a much better spot because we are the leader in the high end of this space. There we can command prices and drive the market our way, in a better way. Of course it is, it's somewhere in between because it is a consumerized market.
We have much more pricing power in the gaming space than anybody has on the Consumer side, where a few companies set the price.
Thank you. I appreciate your comment.
We'll now take a follow-up from Maja Pataki with Kepler. Please go ahead.
Yes. Gitte, one question. You talked about the fact that you will sell Jabra Enhance, the OTC product through the website as of next year. Does that mean that the OTC product is going to be, you know, recorded in the emerging businesses going forward, so it's gonna be the ex Lively business plus the OTC business? That would be one question. I'll take them one by one, please.
Okay. Jabra Enhance Plus will be part of our core business. I hope I understood your question correct, but if that was the question, then-
Okay, fine. Okay, good. René, I think it's 12 months back when we were having the discussion on video and, you know, where you had very aggressive targets on video as part of your business, you know, kind of expectations for how big video should be within five years' time. Now, the world has changed upside down a bit. Have your ambitions or have Audio's ambitions within video changed during the last 12 months?
No, they haven't. Actually, we still have very high ambitions for our video business. We have talked about the fact that we have had more supply matters in this space than actually elsewhere, but coming out of that. We are supplying not fully to the market demand, but we're getting much closer. We are investing very significant amounts into video innovation, and in that sense, we are preparing a portfolio that will be very competitive. I think the first products we have in the market are highly rated. If you go to Microsoft's homepages and their sort of marketing, you will find Jabra PanaCast 50 everywhere.
We are right now technology leader in this space, but of course we are lacking the market impact that the big boys they have at this point in time. The ambition is very, very high, and I think we are progressing very well in this space.
Thank you.
We'll move next to Julien Ouaddour with Bank of America. Please go ahead.
Hi. Thank you for taking my question. So, first of all, René, as you are also the CEO of GN Store Nord Group, I was just wondering if Peter will assume this role too in addition to be CEO of GN Audio. And if not, just, yeah, like, what is happening on this side? For Gitte, just given the very high exit rate that you expect for GN Hearing in 2022 in terms of margins, above 30% EBITA margin, could you tell us why you don't really expect sort of more than 20% margin in 2023, but a year later in 2024? And if I can just squeeze one more for you, René, on GN Audio.
You mentioned that you are considering different scenarios in case of a recession for market next year. Just if you can provide a sort of base case or blue-sky bear case scenario for the market growth, it will be super helpful. Thank you very much.
René here. I will continue as CEO of GN Audio and the Group until mid-January, as we have announced. There's no announcement at this point of time about the Group CEO. So far it sits with me. This will be announced by the board, of course, at a later date before the sixteenth of January. Yes, we said exactly as we are. We are driving different scenarios and trying to understand where they take us and what we need to do and what the mixes we can provide and the impact in the market, but we don't have guidance yet.
We'll have to come back with that in early February when we have the broader guidance. That of course will have to have a view on the market or the span of the market scenarios. We'll come back with that, but we don't have it right now. Okay.
In terms of EBITDA margin development going into 2023, with the caveat that I'm not guiding for 2023 yet, a key reason for the high EBITDA margin in Q4 is that we expect to see double-digit sales growth. That's obviously reflecting the strengths of our portfolio, and it's also reflecting that we bring OMNIA and our rechargeable customs into VA, OMNIA into to Costco, and that we are still very early in the launch. Without having guided for the full year next year, I think I can say we're not going to guide the double-digit sales growth for the full year. I mean, for Q4, that's a key driver of the significant margin improvement.
We also have tailwinds of exchange rates with a swing factor of 5%, which also helps us in Q4.
Thank you. Thank you very much.
Take another follow-up from Veronika Dubajova with Citi. Please go ahead.
Thank you, guys. Just a quick follow-up on the sort of capital structure review. Just curious, and maybe this is a question for René as the Group CEO, but has there been any change in the board's and the management's thinking on the value of having the two businesses under one roof or not. Thank you.
No, I don't think there has been any change in the sort of perception of that or the direction we are taking so far. On the contrary, I think we are seeing right now that we can drive technology leverage across. We can drive brand leverage across. We have just renamed a good acquisition in North America to Jabra and so forth. We see also channel leverage increasingly across with the OTC. In that sense, I think what we have talked about for years is slowly coming together. In that sense, it is, I think, if you would ask every board member, they would have the same view that there's no change.
Well, thanks, guys.
We'll take our last question, a follow-up from Martin Parkhøi with SEB. Please go ahead.
Thank you very much. I cannot promise it will be a question, but it will be questions. Just two for René. First, René, can you talk about, I know it's early days, but also in SteelSeries you launched the Arena speakers. Announced it in August, which is a clear market expansion of your so of your addressable market. Can you say something about how much that have impacted SteelSeries in the third quarter?
That's a little bit more long-term question because you mentioned one of the drivers is work life getting a more hybrid, but with the increasing electricity, the energy bills, then it appears that many people prefer not to work at home anymore due to increasing costs. Do you actually foresee that so that return a little bit? On Gitte, just on the Australian win, and congratulations with that one. Can you maybe you know comment as in ballpark of how much you actually believe that it can drive a organic growth when these 100,000 units are fully analyzed? Are we talking pricing which are on level with what you get at Amplifon?
Also the cost to serve, is it also something which you think are a margin improvement? Then finally, I'll just say to René, I'm sad that you're leaving and thank you for the last eight years, which has been very full.
Thank you for that. I appreciate it. When we get there, I will say the same to all of you. I have enjoyed the collaboration with everyone on the call here. To your question on the speakers, it's not significant. We have been supplying the first volumes, but it's limited, and just ramping as we speak, basically. On the work from home, I have heard the same actually, that people don't wanna pay the energy bill. On the other hand, I think we also see across the world actually, that it's very hard for companies to get people back in the office.
There are sort of two counter trends there, and a lot of companies are actually building a lot of stuff or doing stuff to make people come to work. There are sort of counter trends. It seems that this hybrid thing is the winner and many large companies of different nature, they are rebuilding their facilities exactly for that. Of course, that's where we see the, you can say the, part of the growth driver, yeah, for across our portfolio, basically.
In terms of Hearing Australia, I think one way to think about the ASP is to think at a price level between selling into NHS and selling into VA. In terms of whether it's margin accretive, it's accretive to the EBITDA margin.
Thank you very much.
Include the Q&A portion of the call. I would now like to turn it back to the presenters for any closing remarks.
Thank you very much, operator, and thank you to everyone on the call. We appreciate your time today, and we will see you on the road. Thank you very much.