GNNDY - GN Store Nord A/S (GGNDF) Q3 2022 Earnings Call Transcript
GN Store Nord A/S (GGNDF)
Q3 2022 Results Conference Call
November 11, 2022 05:00 AM ET
Company Participants
Anne Sofie Staunsbaek Veyhe - VP, IR & Treasury
Gitte Aabo - CEO, GN Hearing
René Svendsen-Tune - CEO, GN Audio
Peter Gormsen - CFO
Conference Call Participants
Martin Parkhøi - SEB
Maja Pataki - Kepler
Veronika Dubajova - Citi
Hugo Solvet - BNP Paribas
Hassan Al-Wakeel - Barclays
Robert Davies - Morgan Stanley
David Adlington - JPMorgan
Christian Ryom - Danske Bank
Niels Leth - Carnegie
Chris Gretler - Credit Suisse
Julien Ouaddour - Bank of America
Presentation
Anne Sofie Staunsbaek Veyhe
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 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. Rene 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. And with that brief introduction, I'm happy to hand over to Peter.
Peter Gormsen
Thank you, Anne Sofie. Good morning, everybody, and thanks for joining our Q3 2022 call today.
Starting on Slide 4 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 EBITA ended at DKK 548 million equal to an EBITA margin of 11.7%. As a result of the recent M&A activities, the adjusted leverage ended at 5.9x in the quarter. During the quarter, we have launched multiple new products across the company, which Gitte and Rene 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.
And with this quick snapshot, I'm happy to hand over to Gitte for an update on GN Hearing.
Gitte Aabo
Thank you, Peter, and hello to all of you. The key messages I want to leave you with are, the loans 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. But 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 Belaudicao and a 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 EBITA margin in the Core business ended at 11%. This is a reflection of the gross margin improvement offset by investments in launch activities.
The EBITA in the Emerging business was negative DKK 40 million, which is a sequential improvement versus Q1 and Q2 as expected. Nonrecurring items of minus 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 7 and some more color on the regional development in the quarter. Beginning with North America, we delivered negative 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 KS10, 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 minus 3% compared to Q3 '21, in a generally soft markets. As for the Rest of World region, we are happy to announce that we will be the main supplier for Hearing Australia for the next 5 years with an extension option for further 5 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 '23 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 '23, and will ramp up during the year.
Moving to Slide 8 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 U.S. business. First of all, ReSound OMNIA is driving a better product mix. We've seen a 5 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 point of sales 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 9 weeks into the launch, the percentage of HCPs who placed more than 10 orders is 3 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.
And as I've already mentioned, we have seen solid double-digit sales growth in October.
Let's turn to Slide 9 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 to jabraenhance.com. Speaking of the OTC category, it is naturally still very early days, but our Jabra Enhance Plus is now widely available across the 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% to 8%, which means 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 EBITA margin, we are guiding around 14% for the year with a very strong end to the year. With a 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 EBITA of minus DKK 200 million, as communicated earlier.
And with that, I would like to hand over to Rene and an update on GN Audio.
René Svendsen-Tune
Thank you, Gitte, and good day to all of you. So it's now my pleasure to take you through the GN Audio's results for the third quarter of 2022.
And 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 minus 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 strong 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 delivered revenue sequentially -- 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 3 factors.
One, the significant [appreciation] of the U.S. dollar driving a negative impact of around 5 percentage points compared to last year. Second, the elevated freight costs and material costs 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 costs, the adjusted EBITA margin ended close to 15%. Nonrecurring costs amounted to DKK 21 million following the SteelSeries acquisition and ongoing integration initiatives.
The free cash flow ended 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 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 build-up and revenue, while we are currently running on a higher inventory levels 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 5 years, we have demonstrated a high degree of scalability and agility of the business. With the significant decline in 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 cost out immediately. This will drive run rate savings for 2023 and beyond of the magnitude of DKK 200 million to DKK 300 million per year. To execute these savings, we experienced a further DKK 100 million in nonrecurring 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.
And 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 a significantly declining Consumer business and an Enterprise business, which experienced some softness in the quarter. Compared to third quarter 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.
And compared to third quarter of 2019, Europe has doubled in size from an organic perspective. And 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 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. And 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'll have the strongest product portfolio in the market ever in the history of the company. In our contact center business, we launched some important headset additions to a strong line 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, as you may remember, we made a few years ago. The new software solutions 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. So 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 category or 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 lower than our internal expectations 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 minus 7% to minus 5% for 2022. Due to the continued [appreciation] of U.S. dollar and the reduced top line growth, we are now expecting an EBITA margin between 14% and 15% for 2022. And 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 our session is deemed high, we continue to see solid trends in our sell-out data related to our Enterprise business.
In Q3, the sell-out growth was stronger than our 7% reported selling. So nothing in the current sell-out 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 increase in unemployment rate and general cost-cutting exercise could impact our installed base negatively, and thereby, the short-term growth prospects.
On the other hand, these continues to be drivers -- there, sorry, continues to be a driver 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 costs 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.
So 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 Karlstromer as new Head of GN Audio. So after 16 years at GN, first 8 years as a Board Member and now soon 8 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. But now the Board has a very capable successor in place and GN Audio has a very strong management team in place. So yes, 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.
Peter Gormsen
Thank you, Rene. Let's move to Slide 19 and the group financial highlights. At group level, GN delivered minus 1% organic revenue growth and an adjusted EBITA margin of 11.7%. Total nonrecurring 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 '22. GN Hearing's positive cash flow was driven by slightly lower reported earnings and a positive impact from working capital. GN Audio, we saw a continued high level of operating profit, while the working capital was negatively impacted by inventory buildup, especially in SteelSeries. Compared to Q2, the total inventories in GN Audio up with 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 Rene and Gitte mentioned earlier, we are currently exposed to several external headwinds impacting our business. The FX environment and especially the U.S. dollar is significantly impacting our margins and cash flow, particularly in GN Audio. With the current U.S.
dollar level, we are looking into a yearly 4 percentage point structural headwind to the EBITA margin compared to '21 level.
At the same time, it is naturally worth mentioning that GN Hearing will experience a structural tailwind from the U.S. 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 are 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 the current situation much stronger.
In the Enterprise business, we have communicated a new round of price increases effective January 1, '23 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 road map 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 €520 million loan. This effectively means that the M&A bridge and bonds that are maturing in '23 will be fully repaid by this new loan maturing in '25 with the option of extending 1 more year.
In October, GN received formal project approval from EIB and KfW concerning new combined R&D loans of €110 million. The terms and conditions of the loan agreements have been agreed in principle with the 2 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 €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 '22 results next year.
Let's turn to Slide 23 and the financial guidance for '22, which we revised last Wednesday evening. Rene and 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 minus 30%.
And with this, I'm happy to hand back to Anne Sofie.
Anne Sofie Staunsbaek Veyhe
Thank you to Gitte, Rene and Peter for the updates. With that, I'm handing over to the operator for Q&A. Please limit your questions to 2 at a time.
Question-and-Answer Session
Operator
[Operator Instructions] And we'll move first to Martin Parkhøi with SEB.
Martin Parkhøi
Yes. I think I have a question for Peter and then from Gitte. Just -- Peter, just on the capital structure. Maybe you could -- can you give some kind of guidance where you expect the net debt to land at the end of this year? And also when you do this review, can -- what kind of noncore businesses -- I know, of course, you have addressed your retailer in Portugal as a noncore, and I also know that you've been trying to sell your Danish hearing care centers in Denmark for some while.
What businesses do you have to -- are you able to maybe get some money in from?
And then Gitte, just to understand that, of course, you obviously expect a 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 you -- of course, your numbers on September, but what do you expect year-on-year? And sorry, I will just squeeze in one little question because the question should probably be to your Chairman of the Board, but he is not really picking up the phone. So maybe I can ask you.
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?
Peter Gormsen
Martin, this is Peter. So on leverage, first of all, we will not come out with guidance where we'll end the full year. But you can rest assure, we are looking into this. And of course, it's, first and foremost, about improving the business. So as both Rene and Gitte looked -- talked into, we are spending a lot of energy and time and focus on improving the margins, taking cost out and then certainly focusing on the working capital.
In this, we also look at the balance sheet to your second question. And yes, we have mentioned that we have parts on our balance sheet where we have 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. And then 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. And rightfully, as you said, that you should address that to the Chairman. Thank you.
Gitte Aabo
Martin, thank you for the question on sales growth in Q4. Obviously, it's a mix of price and volume. And I'm sure you also understand, I will not be commenting on it in detail. But I think one way to think about it is that in the data we shared, we see a 10% increase in kind 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.
And then as of 1st November, we are launching ReSound OMNIA and our rechargeable customers into VA. And we've also launched our OMNIA technology into Costco. Now that also improves our mix picture going forward. So 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.
So -- and you are right that we do expect double-digit sales growth in Q4, as we've also seen a strong start in October.
Operator
And we'll take our next question from Maja Pataki with Kepler.
Maja Pataki
Yes. 2 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 2 years, if we want to put it very bluntly, and the annualization of the price cuts, it doesn't seem to really drive or turn things around.
So what do you think you can do to turn that part of the business around? And at what point in time are you just going to say like, well, 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?
Gitte Aabo
Thank you, Maja. Let me start on Costco. So late September, Costco decided to suspend KS10. And that's, obviously, meant that in the last days of September and going into the fourth quarter, we see more stronger position for the brands, and that, obviously, also benefit us. In terms of price, we have actually decided to keep our price also in this period, even despite the suspension of KS10, and I can easily talk to that because that is also what is visible on the homepage or if you go into Costco.
So 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 1st of November. So currently, we actually see strong performance in Costco.
Maja Pataki
Right, but Gitte KS is going to be back at some point in time, whether it's going to be -- KS10. It's going to be Sonova or somebody else. K is going to be back. So what makes you confident that you're not going to see a sort of crowding out of the branded segment in favor of KS11 and therefore, an ongoing difficult situation for you?
Gitte Aabo
Well, I think that the branded part of Costco continues to play a significant role. And 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. And that is very important, I guess, for all audiologists, but especially in a channel, like Costco, where you also see an improvement in -- the importance of driving efficiency and the again then there is -- yes.
Peter Gormsen
Maja, this is Peter. So 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. So the current level of financial items in this DKK 80 million to DKK 90 million is a fair assumption also next year.
Operator
And we'll move next to Veronika Dubajova with Citi.
Veronika Dubajova
I'll keep it to two for now. One, Gitte, if you just want to come back to the hearing guidance, and I -- look, I appreciate more -- not even half of the quarter in, but obviously, the 5% to 8% does imply 2 quite different growth rates in the fourth quarter. So I'm just curious if there is -- do you feel more comfortable at the lower -- the higher end of the guide? And 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? And then my second question is on Audio and the gross margins.
And Peter, Rene, 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. And sort of if the spot rates hold at this point in time, where would you expect the gross margin to end up at as we move into 2023?
Gitte Aabo
So in terms of the guidance range on the top line, obviously, we are off to a strong start with our October numbers. But as you point out, we are operating in a market that is flattish, and that, obviously, also has an impact on our numbers. So we are probably in the mid lower range of the guidance right now, if I should come with my best evaluation. But having said that, I do really want to confirm our guidance.
René Svendsen-Tune
So Rene here. Thanks for that question. Obviously, the FX impact is very material as we have talked to. 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 1st of January across the portfolio, the enterprise portfolio.
And then there's a longer-term sort of set a piece of work where we have to do 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 then, of course, also the go-to-market side. And we are working on that.
Veronika Dubajova
Understood. And the price increase in our Enterprise, sorry, Rene, are you able to quantify that for next year?
René Svendsen-Tune
So we have launched a 10% increase across the portfolio, but not in -- last time -- we can be open about this. Last time, it was across everything and the same, this is a more sort of focused approach.
Operator
And we'll move next to Hugo Solvet with BNP Paribas.
Hugo Solvet
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? And 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 and the fact that now you will be more targeting the mid- to low end of the guidance range?
Peter Gormsen
So 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 cost out. It's improving the cash. We talked about working capital.
So we are digging into all of those initiatives. And 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 finance. So we are exploring all those areas.
But of course, at this point in time, we cannot comment on either what we decide for or what we ultimately do not decide, but we'll come back and share more about that the next year, as I said earlier.
Gitte Aabo
So in terms of the margins for the Hearing business in the fourth quarter, again, in the year, we expect to see a significant step up. And what is driving that? Well, if you think about Q3, we see with a flat sales development, we actually delivered 11% EBITA. Now for Q4, we expect to see double-digit sales growth. So a significant part of the EBITA 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. We'll be launching into VA. I already spoke to Costco and so on. So that all improves our mix effects.
We also have a tailwind from exchange rates, in the sense that if you look at the first 3 quarters, we have the headwind of 2%. That will be -- we expect a benefit of 3% in the fourth quarter. So a swing factor of 5%. And then 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.
So those are the main drivers for the expected increase in EBITA margin as we move into Q4.
Hugo Solvet
Okay. And 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're selling directly online versus the share of U.S. retailers?
Gitte Aabo
So 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. So 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 going to 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. So I think more to come when we come with the full year results.
Operator
And we'll move next to Hassan Al-Wakeel with Barclays.
Hassan Al-Wakeel
I appreciate the data points around OMNIA. Are you able to be a little bit more specific on the level of double-digit growth? And 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 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, how are you thinking about this?
And specifically, the potential or the need to raise equity should the macro outlook worsen, and GN as a business is not able to drive the level of deleveraging that is anticipated in 2023.
Gitte Aabo
And let me start with commenting on the questions specifically around hearing. So let me just repeat again. We had a solid double-digit growth in October, and 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 1st of November. So 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. So 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.
Peter Gormsen
This is Peter. So to the question on leverage, of course, we are, first and foremost, looking at what we can control, improving the business, the margins, taking cost down, improvement of working capital because that's where we have the headache. But then having said that, of course, we -- if you -- as you say, we've 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. So we're looking at the full toolbox in that sense, but I cannot comment further on this.
Operator
And we'll take our next question from Robert Davies with Morgan Stanley.
Robert Davies
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 as there's any more color whether sort of regional or what your expectations for the evolution of that is heading into early part of '23, given the macro backdrop? And then 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? And then 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 this as a typical sustainable level for profitability and hearing over the medium term?
René Svendsen-Tune
So this is Rene here. On the -- I think on the channel inventory, as we talked to, you have seen now since, you can say, late Q2 or early Q3, a significant channel destocking across many sectors and also across the value chain. So there is a little bit of fight who own them and who sits on inventory right now. I think this is stabilizing. Actually, I think you are back to a point where you'll see a closer relationship between sell-in and sell-out.
So the -- but I think it's probably going to be -- take time before you will see a restocking of the channel or normalizing to where we were before. So in that sense, I don't think we have any immediate sort of restocking opportunity there. But 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.
Gitte Aabo
Okay. And the questions around ReSound OMNIA and the reordering pattern. The reason why we focus on that KPI is because there is a -- I was going to say a lot of curiosity around new innovations brought to market, but the important data point is if the audiologists reorder.
And 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. And actually, we see better performance here with OMNIA.
And 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, so high quality. In addition to that, we've worked on our fitting software to make that easy and intuitive for the audiologists to use. And I think that, if you like, a 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 EBITA margin of 20% in 2024.
Operator
And we'll take our next question from David Adlington with JPMorgan.
David Adlington
So firstly, just on hearing, Gitte, I just wondered if I could follow up on your Hearing Australia win? Just wanted to -- I'm not entirely familiar with that contract. It's one of the 100,000 units, is that sole supply and will [indiscernible] that will be taking sole supply on going forward? Just trying to get some -- trying to gauge the size of the opportunity there?
And then secondly, on Audio, just in terms of the -- I was quite surprised to see you pick out Germany and U.K. as a particular strength in the European market. Just wondered if have any further color there whether it's enterprise versus consumer and what was driving that strength in those markets?
Gitte Aabo
So 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. And I think, again, yes, something we are really proud about because I think it's a testimony to the strength of the company.
René Svendsen-Tune
Rene here. So on the -- I understand your question on the Germany, U.K. situation and the [indiscernible], 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 and -- so 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.
David Adlington
I just wanted to [indiscernible] 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.
René Svendsen-Tune
This was broad based. There's no -- you can't see really -- I think we talked about it earlier. We're at a point now, you can't see sort of specific contracts in the numbers really anymore. It's a while, it's years back, basically. So it's broad-based.
Operator
And we'll take our next question from Christian Ryom with Danske Bank.
Christian Ryom
Yes. Can you hear me? Hello?
René Svendsen-Tune
Yes, we hear you.
Gitte Aabo
Yes, we hear you.
Christian Ryom
Perfect. I'll go ahead then. A couple of questions. First, to GN Audio. So Rene, 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?
And then second question on a similar theme. So 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? And then 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?
And then finally, a point of clarification, the Hearing Australia delivery into that contract, will that have any impact on hearing sales here in Q4?
René Svendsen-Tune
So Rene here. On the channel situation, first, I think it's good to understand that the -- 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 I can ensure that resellers can get their products with short notice and so forth. So 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 -- but it's also a consumption matter indeed, and that's probably the strongest.
And as I said also talked to this, the channel reset that 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 8 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 effectively less by that nowadays, as we said in the introduction here, less SKUs are affected by this. And in that sense, you would say the order backlog is slowly, slowly being eaten up.
And now the material sits in the channel as it should.
Peter Gormsen
Christian, it's Peter. So 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. And 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 you change overnight.
So you basically have components flowing in that we ordered in a completely different environment. So it's a lot of change and focus and hard work in getting this done. And rest assured, we're doing everything we can because we don't like having that much sitting. So -- but we'll not give a specific number on where we'll be by in Q4.
Gitte Aabo
So the question on Hearing Australia, whether that has an impact here in Q4 '22? It does not.
Operator
And we'll move next to Niels Leth with Carnegie.
Niels Leth
First question on GN Audio. Now considering your cost reductions of DKK 200 million to DKK 300 million, as you mentioned for next year. Would that allow you to protect your current EBITA margins next year, say, in a scenario where we have a mild recession of flattish growth for next year? So 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? And does it have an effect on your cash flow?
René Svendsen-Tune
Thanks for that. I think we don't have a 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 experienced at this point of time. So -- but the guidance will come when we announce the full year results, and then we will talk about all these things. But I mean, the target, of course, is that we need to drive the business as strong as we can also on the soft 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 is probably cash flow neutral as it is today. It has been -- we have not disclosed either the numbers, but it's been performing very well this year, but coming from small numbers. But at this point in time, it's a very promising business, but small.
Niels Leth
And just on the cost cutting of DKK 200 million to DKK 300 million from next year, will they accelerate during next year? Or will they be effective already as of January?
René Svendsen-Tune
We are taking measures as -- we're preparing measures as we speak, and we will be driving a lot of these measures, most of them this year. And that means that the effect will be available from 1st of January to a very large extent.
Operator
And we'll take our next question from Chris Gretler with Credit Suisse.
Chris Gretler
Two questions, essentially. The first is on this announcement with the review of the balance sheet. Does this actually also include the asset side? And also -- should we also potentially expect a divestiture of assets now to correction of the leverage? And the second question relates to the consumer, including SteelSeries business at Audio.
Could you actually discuss the term profitability level of that business and also the opportunity to increase prices in order for that business to correct the profitability levels?
That will be great.
Peter Gormsen
This is Peter. So on the review and divestment, we're looking at the balance sheet. And if we go into divestment, it will be only on noncore assets. So hopefully, that answers.
René Svendsen-Tune
So 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 levels of technology. There is some channel matters and so on and so forth here. So I think we have said earlier that the gross margin levels are lower at this base than they are on the enterprise side, but not to one extent.
So we say, from a profitability point of view here, it's about, of course, market pricing, the channel effect and then the strength of the products that we are launching in the market here.
So the price points we can demand and up against the leverage of the technologies we have available here. So I can't give you numbers on this other than, of course, volume matters a lot. And so does, say, the technology leverage that we have.
Chris Gretler
And on the ability to pass on cost inflation in terms of price increases in that part of the business?
René Svendsen-Tune
So I think here, we are in a tougher place when it comes to 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 [AirPod] 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, and there we can come on prices and drive the market our way in a better way. But of course, it is somewhere in between because it is a consumerized market, but we have much more pricing power in the gaming space than anybody has on the consumer side, where a few companies set the price.
Operator
And we'll now take a follow-up from Maja Pataki with Kepler.
Maja Pataki
Yes. Gitte one question. You talked to the fact that you will sell Jabra Enhance OTC products through the website as of next year. Does that mean that the OTC product is going to be recorded in the Emerging businesses, going forward, that could be the ex Lively business plus the OTC business? That would be one question.
And I'll take them one by one, please.
Gitte Aabo
Okay. So Jabra Enhance Plus will be part of our Core business. If I just -- I hope I understood your question correct, but if that was the question then...
Maja Pataki
Okay. Fine. Okay. Good. And Rene, I think it's 12 months back when we were having the discussion on video and where you had very aggressive targets on video as part of your business, kind of expectations for how big a big video should be within 5 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?
René Svendsen-Tune
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 we're coming out of that. So 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 product we have in the market are highly rated. If you go to Microsoft homepages and the sort of marketing, you will find Jabra PanaCast 50 everywhere. So we are right now a 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. But the ambition is very, very high.
And I think we are progressing very well in this space.
Operator
And we'll move next to Julien Ouaddour with Bank of America.
Julien Ouaddour
So first of all, Rene, as you are also the CEO of GN Store Nord Group, I was just wondering if Peter will assume this also in addition to the CEO of GN Audio? And if not, just -- yes -- what is happening on this side? Then for Gitte, just given the very high exit rate that we 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, Rene, 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 case scenario for the market growth, it would be super helpful.
René Svendsen-Tune
Yes. So I will continue as CEO of GN Audio and the group until mid-January, as we have announced, there is no announcement at this point of time about the group CEO so far, but this will be announced by the Board, of course, at the latest date before the 16th of January.
On the -- 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 mix is we can provide and the impact in the market, but we don't have guidance yet, so we'll have to come back with that in early February when we have the broader guidance. That, of course, did have to have a view on the market or the span of the market scenarios.
So we'll come back with that, but we don't have it right now.
Gitte Aabo
So in terms of EBITA margin development going into '23 and with the caveat that I'm not guiding for '23 yet, the key reason for the high EBITA margin in Q4 is that we expect to see double-digit sales growth. And that's, obviously, reflecting the strength 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. So 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. And that's -- I mean, for Q4, that's a key driver of the significant margin improvement. Then we also have tailwinds of exchange rates with a swing effect of 5%, which also helps us in Q4.
Operator
And we'll take another follow-up from Veronika Dubajova with Citi.
Veronika Dubajova
Just a quick follow-up on the sort of capital structure review. And just curious, and maybe this is a question for Rene 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?
René Svendsen-Tune
No, I don't think there has been any change in the, sort of, perception of that or the direction we have taken so far. On the contrary, I think, we are seeing right now that we can drive technology [leveraged] across. We can drive brand [leveraged] across. We've just renamed a good acquisition in North America to Jabra and so forth, and we see also channel leverage increasingly across with the OTC. So in that sense, I think what we have talked about for years is slowly, slowly coming together.
And 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.
Operator
We'll take our last question, a follow-up from Martin Parkhøi with SEB.
Martin Parkhøi
I cannot promise it will be a question, but it will be questions. Just two for Rene. First, 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 addressable market? Can you say something about how much of that have impacted SteelSeries in the third quarter? And then perhaps that's a little bit more long-term question because you mentioned one of the drivers is work like getting more hybrid.
But with the increasing electricity prices, energy bills, then it appears that some -- many people prefer not to work at home anymore due to increasing cost. Do you actually so that return a little bit?
And then on Gitte, just on the Australian win, and congratulation with that one, can you maybe comment at some ballpark of how much you actually believe that it can drive organic growth when these 100,000 units are fully analyzed. Are we talking pricing, which are on level with what you get at Amplifon, and also the cost to serve. Is it also something which you think are marching improvement? And then finally, just say, to Rene, I'm sad that you leaving and thank you for the last 8 years, which has been [helpful].
René Svendsen-Tune
Thank you for that. I appreciate it. And when we get there, I will say the same to all of you. I have enjoyed the collaboration with everyone on the call here. So to your question on the speakers, it's not significant.
So 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 want to 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. So there are two countertrends there. And a lot of companies are actually building a lot of stuff, doing stuff to make people come to work.
And so that's sort of countertrends. It seems that this hybrid thing is the winner and many large companies of different nature, they are building -- rebuilding their facilities exactly for that. And of course, that's where we see, you can say, the part of the growth driver for -- across our portfolio, basically.
Gitte Aabo
So 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. And in terms of whether it's margin accretive, it's accretive to the EBITA margin.
Operator
And this does conclude the Q&A portion of the call. I would now like to turn it back to the presenters for any closing remarks.
Anne Sofie Staunsbaek Veyhe
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.
Operator
This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.
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GN Store Nord A/S (GGNDF) Q3 2022 Earnings Call Transcript