GN Store Nord A/S (GN) Earnings Call Transcript & Summary

Good morning. Good afternoon. It's David Adlington from the JPMorgan Medtech team here. Along now with Gitte Aabo, the Head of Hearing for GN Store Nord. I'll hand over to Gitte in a minute for the presentation, we should be able to follow online on the website. There will be a Q&A session, just after the presentation. If investors would like to ask a question. There should be a button on that website for you to press and enter your question and I can ask it afterwards. But with that, Gitte, thanks very much for today, and over to you.

Well, thank you very much, and thank you for giving us the opportunity to speak about GN. So what I want to talk about today kind of fall into 4 buckets. I want to start off with an overall introduction to GN, then I'd like to deep dive on our Q3 results, including talking a little bit about how we see the market development on the hearing side. Then I would like to deep dive on ReSound ONE, our new and great hearing aid that we brought to market on September 1, and finally, I'd like to finish off by talking a little bit about the hearing industry as such and the great unmet needs we continue to see in terms of people living with hearing impairment. So with that, I would like to move forward to the next slide, which is our safe harbor statement. And let us quickly pass that one and move on to GN at a Glance, which is Slide 3. So GN was founded back in 1869. So it's actually a company with more than 150 years of history. And that obviously gives us a lot of pride in the company. And I think also it is really and truly a story about innovation. The reason why GN has stayed alive, if you like, for that long and not only stayed alive, but is a company that is still growing and developing, I think, really, it's due to a relentless focus on innovation, on research and development. Combined across the 2 divisions in GN, Audio and Hearing, we invest more than DKK 1 billion annually into research and development. And that is what allows us to constantly bring new and improved technology into the market. We also possess very strong brands in GN Hearing. On the audio side, we talk about Jabra. And on the hearing side, we have ReSound and Beltone as our key brands. Also in terms of our geographical coverage, we have our own affiliates in more than 30 markets and our products are available in more than 100 markets around the world. So I really believe that as a company, we have the right and relevant geographical coverage. And I think all this results in great financial performance, we are obviously not yet able to share our results for 2020. And I guess it's no secret that, obviously, 2020 was impacted by COVID-19, I'll come to that in a second. But if you look back to the previous years, both Audio and Hearing has consistently been able to outgrow the market, and that is obviously due to our strong technology and a strong focus on innovation. Also in terms of profitability, we deliver profitability on par with our peers or better. And finally, we have a very strong test conversion in the company. This is an asset-light industry. So with that, let's turn to the next slide and make a deep dive on our Q3 results. So I'm now at Slide #4. So across GN, we have experienced quite different impact of COVID-19 in our Audio division, we've seen an increase in our turnover and actually delivered organic growth of 72% in Q3 due to an increase in our sales of headsets due to the working from home phenomena. However, I do want to point out that even prior to the pandemic, we did see very strong growth in our Audio business and it was further accelerated, but by the pandemic. It was still important to keep in mind that the underlying trend is -- was a very strong growth also prior to the pandemic. And in Hearing, we faced the opposite and our markets have been negatively impacted by COVID-19 due to the fact that our target population, which is mainly elderly people, obviously, have been especially exposed by COVID-19. So we saw our turnover decline with 11% in Q3 and despite the decline, it was a big improvement compared to Q2, where we saw a sales drop with 54%. Overall, the company delivered a 29% organic growth in Q3 on our top line. And actually, we were able to grow our EBITDA with 48% due to a very prudent approach to our costs. Also, we generated cash flow of more than DKK 600 million, and we're actually able to reduce our net bearing debt with DKK 0.5 billion during the quarter. So a mixed picture of the 2 businesses, but overall, a very healthy business with a very healthy balance sheet and access to ample sources of liquidity. And with that, let's make a deep dive into how the market has developed for the hearing aid business. And I'd like you to turn to the next page, which is Page 5 and speaks about the development in our sales throughout the year. So back in March and into April, we saw quite a significant impact on our sales in the hearing aid space. Actually, our sales dropped close to being in the index '20 as compared to last year. And then since April, we've seen a steady recovery May, June, July. And then mid-August, we saw a slight drop again because not due to COVID-19 at this point of time. But actually due to the fact that we announced that we were about to launch our new hearing aid, the ReSound ONE. And I think it's customary in the industry that when you're about to launch a new hearing aid, some audiologists will hold back in order to make sure that the patients get access to the newest technology. So we saw sales pick up again in September. And overall, we ended the quarter with minus 11% compared to last year. Now across the 3 -- our 3 different regions, we saw mix developments. So APAC actually showing quite strong rebounds in Q3 and almost on par with 2019. Europe also strong rebounds and coming close to 2019 level. And then third, U.S., where we're still lagging a little bit behind the 2019 levels. And that picture kind of continued into October. So also in October, we saw our overall business being around Index 90 compared to 2019. And now we saw a stronger start to October and then kind of a slowdown as we approach the end of October due to increase in COVID-19 infections, especially in Europe and the U.S. and then also the beginning of stricter restrictions in many markets. And that has obviously continued into November and December. I think one way to think about it is, if you look specifically at the VA channel in the U.S., you will notice that the volumes in that channel has declined in November and December compared to October. So that is probably a good indication for the impact in the overall market. Having said that, I just really want to underline that, obviously, we are not looking at anything that is close to what we saw back in April. Compared to that, we are still seeing a lot more healthy market, but obviously still impacted by COVID-19. Now with that, I want to turn to the next page to briefly speak about our new amazing hearing aid, which we launched on September 1. And there are many things that set ReSound ONE apart from other hearing aids on the market, it actually has sort of 3 main features, all access directionality, ultra focus both are functions that really improves the user's ability to hear in a noisy environment. But what really makes the hearing aids stand out is what we call M&RIE, mic and receiver in the ear. Here we are first, ReSound ONE is first in the industry with bringing this kind of technology into the market. And what we have done here is that we've put a microphone and receiver into the ear canal in an open pit. So this basically gives the user the ability to use their own outer ear in how they perceive sounds. If you think about it, apart from ReSound ONE, then hearing aids that are sitting behind the ear, and that is actually 80% of the form factors in the market today. They have the microphones sitting behind the ear, which means that when you pick up sounds around, you're basically not using your outer ear. And why is this critical? Well, it's critical because we use our outer ear to determine the distance and depths and directions of sounds. So more than half of people using a hearing aid are unable to tell whether the sound they hear is in front of them or behind them. So really with ReSound ONE, we are bringing unique technology into the market that truly makes a difference for the end user. And that's also reflected in the feedback we get from the market. Now we promote ReSound ONE into the market -- in the RIC form factor, and we see that being adopted into the market, as we've seen previously, with ReSound LiNX Quattro and other RIC form factors. And we also see the M&RIE being fitted in 80% of the cases. And I want to really specifically mention that and underline that because I know some of our competitors are kind of alluding to that ReSound ONE and M&RIE only has a narrow fit, well, no. That is definitely not what we see in the data and in our sales. And yes, then finally, and maybe I've already alluded to that, but we are receiving very strong feedback both from audiologists and users around the world. So let us turn to the next page and just take a look at the initial sales results. And here, so I'm looking at the Page 7, where we talk about encouraging initial reception of ReSound ONE. Here, we are looking at the first 45 days after the launch of ReSound ONE. And we launched ReSound ONE on September 1. And actually, due to COVID-19, we hosted the whole launch symposium as a virtual event. And normally, we will have the physical events. But obviously, this time around, we were forced to do it virtually. And that actually turned out to our advantage because we had 10,000 enrolled for the launch symposium, making this the biggest event so far in the hearing aid industry. And here not only referring to virtual events I'm also referring to physical events like AAA or [indiscernible]. So really, the interest and curiosity around ReSound ONE and our new technology was very impressive. What you see here is unit to unit comparison from the launch of ReSound ONE with the launch of ReSound LiNX Quattro, the first 45 days in the market. And I will start -- follow the sun around, I guess and start in Japan. So in Japan, we see the uptake of ReSound ONE being almost twice the uptake of ReSound LiNX Quattro. Again, reflecting a very strong launch of the product and certainly also a strong interest in the market. If we move to the Middle to Germany, you'll see that we almost have the 3x uptick of ReSound ONE compared to ReSound LiNX Quattro. But here, we need to take into account that at that point of time, we also saw a very strong bounce back in the German market. So probably, the numbers are slightly inflated by that. And then finally, in the U.S., we see an uptake of ReSound ONE compared to ReSound LiNX Quattro. But as I alluded to, when I went through the 3 different regions, we continue to see and saw at the time, a U.S. market being slightly below 2019 due to COVID-19. So that obviously explains this and again, reflects that across our 3 biggest markets, we see a very strong momentum with the ReSound ONE, means that we are in our independent segment of the market, which is where we have our strategic focus have either sustained or grown our market share. And with that, I want to turn to the page called GN Hearing, living with untreated hearing loss it's Page 8. And because I just wanted to take the opportunity to speak a little bit about the impact it has on people's lives when they live with the hearing loss. Obviously, it has a big impact on our people's ability to socially interact. So there's no doubt, and we see that consistently that it really improves people's quality of life. If they get a hearing aid. And I'm sure most of you will have relatives, I mean, uncles, aunts, maybe even parents, where you've come home -- to the home and just to discover that the television was turned on very loud. And that's clearly a great signal that maybe one of them has a hearing impairment. Now this is important, not only in order to stay socially active. It's also important for your cognitive health. Johns Hopkins University and the University of California, among others have done a combined review of more than 150,000 people above the age of 50, living with an untreated hearing loss. And the study actually documented that over a period of 10 years, these people that live with untreated hearing loss, they had a 50% increased risk of developing dementia. You also have a 3x increased risk of developing depression. And you're also more likely to fall if you have an untreated hearing loss. So really, hearing impairment is really -- treating your hearing impairment is really critical in order to stay in contact with your loved ones, but it's certainly also important in order to maintain your health and your mental health, especially. And with that, let us turn to the next page and talk a little bit about the hearing aid market and how we normally tend to think about this. So I think under normal circumstances and, here I am for a second disregarding COVID-19. We would -- we see the market growing year-on-year, with volume growth around 4% to 6%, and then maybe a slight decline in prices of 1% to 2%. But overall, a market growing at healthy with the mid-single-digit growth rates. And I think what is interesting to -- if you look in the left top corner and look at the red curve, you'll see it make a deep dive, if you like, in 2009 due to the financial crisis. But we also see it -- and that is reflecting a deep dive in the DGP growth at the time. But if you look at the gray bars, which reflect the hearing aid market, you'll see that despite the dip in GDP growth in 2009, the hearing aid market continued to grow. So clearly, with COVID-19, the hearing aid market has been impacted, but it is under normal circumstances, a market that is very resilient also to financial adversity. Below that, you see the adoption of hearing aids represented by the orange color. And I guess the message I really want to leave you with in that regard is that there are huge unmet needs. It's still a very low adoption of hearing aids despite significant innovations over the past 10 years. Also, this is an attractive market to be in due to the fact that the elderly population is growing. The amount of people above 65 is growing. The baby boomer generation is now coming into the late 60s or 70s and they have money to spend. So this is really an attractive market to be. It's also a market that is not so easy to enter. It's a regulated industry. You need to have approval of hearing aids by either FDA or it EMA. It is an industry that require huge investments into R&D. I already spoke to the long history of GN. And certainly, we bring more than 75 years of history and experience in sound processing and hearing aids. And finally, it is also an industry where it's important to have close relationships with the distributors. It is an industry where the relationship between the audiologist and the manufacturers is quite sticky. So also, it's important to be good to have those long relationships. So another reason why the entry barriers for the industry is high. So overall, a hugely attractive industry to be in. So let me turn to the last page in my presentation, which is Page 10 and talks about GN as an investment case. I think one of the successes -- great successes of the company is that we focus -- we focus our innovation, both in audio and in hearing, on sound processing, and here, we are world-class in that field. And that is what has allowed us to year after year, outgrow our market in both divisions. We have a leading positions in a market with high entry barriers, as I just spoke to. We have a focused growth model. We dedicate our focus on research and development and believe that we went through innovation. We have 2 years, had a clear strategy not to own retail. And it has year after year proven to be our right strategy, and it continues to be our strategy going forward. We believe that we have a very clear strategic direction. We have strong partnerships, and we are definitely experts in our field. As I've already alluded to, we are a very profitable company, and we have a profitability in line with or better than our peers. And last but not least, we have a strong cash conversion and is overall an asset-light industry. So GN is a very attractive company to invest in, and our aim is to make life sound better, certainly for the users, but hopefully, also for our investors. And with that, I'd like to turn to the Q&A.

Great. Thanks, Gitte. I might just kick it off here with some opening questions. So maybe just on the new product launch, ReSound ONE, you touched on some of the features in your presentation. Obviously, the key feature is that M&RIE feature putting a microphone in the canal as well as the receiver. Maybe you could just touch on why anyone hasn't done it before, and the benefits that are seen? Is that something that patients can see as being a benefit? Or is it more of a sell to the audiologist?

Yes. I'm certainly happy to do so. So I think putting a mic and -- microphone and receiver into the ear canal in an open fit has kind of been one of the holy grails grades in the industry for a very long time. Because everybody working in the industry and every audiologist obviously know the importance of being able to use your outer ear, or your pinna in order to pick out sound. I mean what we all want to do with the hearing aids is to come as close as possible to how we -- we hear normally when we have normal hearing. But it's not an easy thing to do because I'm sure you've all been at a concert or things like that when somebody puts the microphone next to the loudspeaker, that doesn't give a nice sound, so you get an unwanted feedback. And that actually also happens in the ear canal. So it's an innovation we've been working on for 10 years. And I know some of our competitors have been trying to do the same, but has failed. So it has not only required for us to put a microphone and receiver into the ear canal and design that. But it has required a complete redesign of our feedback suppression system and that has required completely new chipset. So we were first to launch a 28-nanometer chipset, which has significantly increased the process power of ReSound ONE compared to previous versions. We've increased the memory with 220% and yet reduced battery consumption. So really, it has required a complete rethink of the hearing aid from, yes, hardware, software, design, everything is new on ReSound ONE.

Perfect. And you pointed in your presentation as well as in terms of the U.S. uptake was, I'd say, less compelling than Germany and Japan. And the fact that, that was probably down to COVID-19, did you see any sort of delta in that as the U.S. began to recover from COVID-19, but also how -- with the increase in cases now across many parts of the world. How are you thinking about how COVID could impact the rollout from here?

Yes. I mean there's no doubt that COVID-19 has had an impact on our launch of ReSound ONE. I mean we hosted our launch event virtually, as I spoke to, and that has proven to be quite beneficial. But obviously, as everything about the hearing aid is new. It is -- it would have been ideal if we would have had our reps to come out and visit every audiologist immediately. Now in the independent and commercial market, that has actually, to a large extent, been possible also in the U.S., and we do see strong momentum with ReSound ONE in the independent market in the U.S.

Okay. And that takes me on onto the VA, right? Because the VA performance across the market looks a little bit odd because one are your competitors, which doesn't have its new product yet into the VA, I think did reasonably well. Is there anything we should be thinking about with that data?

Yes. I think that's a really good question. I mean, because VA is normally a channel where new technology picks up quite easily and gets a lot of attention. So and that is on the normal circumstances. But I guess these days are not normal circumstances. So under the current circumstances, we see a VA channel that actually has quite a big backlog of patients. As I've already alluded to, we saw volumes in the VA channel overall declined from October into November and again into December. And also, we hear about patients waiting 8 to 12 weeks from they get their audiogram made till they actually get the hearing aid fitted. So clearly, there's a big backlog and big pressure on the channel from that perspective. In addition to that, due to COVID-19 restrictions, we have been completely prohibited from visiting any audiologists in the VA channel. So all interactions are virtual and that combined with the fact that everything about ReSound ONE is new, as I just spoke to, it is really new and groundbreaking technology we bring into the market here. But under the current circumstances, that has actually led to a slower uptake than normal and so also a slower uptake than what we had hoped for. So -- but again, I really want to underline that despite this, the feedback and response, if you like, that we get for ReSound ONE in the independent market, which is our main strategic focus is really positive. So I know that on the noncircumstances, the VA channel is a great proxy for how a new product is received. But I guess this time around, it just doesn't work like that due to the impact of COVID-19. So in other parts of the markets, we actually do see a very strong momentum with ReSound ONE.

Perfect. And then just on COVID -- don't want to try and cover it off now completely. So obviously, we're seeing spikes in cases across the globe. I mean the U.K. is now in a fairly full on lockdown. Are there any markets that you're particularly concerned about in terms of closing audiologists again? Or do you think everyone will stay much more open than we saw through the second quarter last year?

Yes. I mean, obviously, it's hard to speculate exactly how this will pan out. But I think what we see right now is that the audiologists around the world are still open. Now there might be different other restrictions in place, if I take France as an example, I mean, the audiologists are open, but they are not allowed to do any marketing efforts towards new patients. So although they are open, this obviously dampen, if you like, the traffic slightly. So again, this is the situation that we see right now. And rather than start speculating exactly how that will develop. Maybe I want to point to the fact that we have throughout the pandemic worked with different scenarios. That goes for 2020, obviously, but also for '21, where we have right from March and into April, we've been working with scenarios saying, we might be on top with '19, we might be below '19, we might be above '19 levels. And the reason we worked with these different scenarios is obviously that we want to focus on what we can control, which is our cost and our ability to accelerate in the market. And I think our thinking right now, again, I'm not guiding for '21, but we probably think that we will see a first half of '21 continue to be impacted by COVID-19, whereas when we move into the second half of '21, we will probably see a market returning much more to normal conditions. Meaning market showing single-digit growth, as I just alluded to in my presentation under normal circumstances.

Yes. I mean I think one of the things that people -- some people were surprised at sort of in Q3 was how quickly the market bounced back post the second quarter. Is it able -- are you able to tease out how much of that was just kind of pent-up demand from what was postponed through the second quarter. And do you have any sort of patient feedback in terms of how people are feeling about going in and actually interacting and visiting the audiologists?

Yes. So I think that what the -- I'll come back to the feedback in a second. But I think what we saw during Q3 and markets opening up again. Was actually that we quite quickly returned to our normal sort of split in sales. So if you like, 10% to 20% being service and repair, around maybe a little less than 40% being new people coming in, or first time hearing aid users coming in and then around 50% or maybe slightly below that being second or third time users coming in. So that was kind of the normal mix. So it quite quickly returned to something along those lines. And I think in terms of the feedback of coming into the hearing aid clinics, I think, by now, most people realize that going to the hearing care professionals is actually quite a safe environment to be in. Most audiologists have really made an effort to communicate that we take one patient or one user in at a time. So you can feel safe going there. And I mean, in the U.S., we've seen an example of people offering drive through services or curbside services where people can come in and have done their hearing test and fitting of hearing aid while they remain sitting in the car. So I think a lot has been done to convey or really illustrate that this is a safe place to go. And I think the message is received.

Perfect. Maybe so moving on -- moving on from COVID, maybe something had a big focus here. But if you could maybe talk to the competitive environment because, obviously, you've seen yourself launching new product, both also from demand and also Sonova. How are you thinking about the competitive environment? It's been a while since we've had all the big 3 launch new products, are you seeing any impacts in the marketplace in terms of market shares or pricing? Any changes you're seeing there?

Yes. That's obviously also a great question. I mean we've seen Paradise come out from Sonova and now more coming out from Oticon or [ demand ]. And I mean, they normally launch solid technology, and I'm sure that they've also done this or done that this time around. However, I do want to point out that I really think that with ReSound ONE, we have a special edge on our product because with ReSound ONE and the M&RIE concept, we are kind of establishing a new class in the hearing aid industry. So yes, I am obviously respectful of our 2 great competitors. But I think with ReSound ONE, we have a very strong weapon in our hands, if I can use that analogy.

Perfect. All right. And then maybe just again, also on the market dynamics particularly in the U.S. I mean, we've been waiting much longer than expected originally for an update on OTC legislation. Just wondered what your expectations were there, where we're finally going to see that legislation at some point this year?

That's a really good question. I guess, I mean, we had expected to see the OTC regulation come out in August. That was kind of the deadline. It didn't happen. And then we had expected it to come out during December. And again, obviously, that did not happen. So I guess, I mean, honestly, I don't think we have any specific knowledge on when we will see the regulation, I would hope sooner, rather than later. Because I do think that, again, depending on how the regulation looks like, it may open up into to an untapped potential in the market. I just spoke to the very low adoption rates of hearing aids, I mean in the U.S., we are among 20% to 30% adoption rate of hearing aids. And I think imagine that the OTC opens up, maybe for category of hearing devices that you can use for occasional use. I mean that may sort of spill over to actually people being more sort of willing to use also a full-time hearing aid when it comes into that. So I really think again, depending on how the regulation looks like, it may open up a new market. And I think GN, in that case, might be the best company suited to play in that market, but because we have Audio and Hearing under the same roof.

Yes, agreed. And as you think about that potential for an OTC-styled product, would that sit still within the ReSound business? Or is that something you could stick a Jabra brand on?

Yes. Well, that is a very interesting question. And obviously, something we look forward to debate once we see the regulation.

Okay, great. And then one of your big customers or sort of cited China as a sort of medium to long-term big growth opportunity. I know it's fairly small for the industry currently, but how are you feeling about China and how do you target that market?

Yes. I would agree that if we think more long term, I think there are significant opportunities in the Chinese market. We certainly see the demographics developing in that regards, both in terms of a population that is growing older and also becoming more wealthy. So also have, if you like, the means to afford a hearing aid. And that, combined with a very low adoption rate. I mean the adoption rate of hearing aids in China is, I believe, around 3%, 4%. So really huge unmet needs in terms of hearing aids in China. So yes, I would agree, this is definitely a more long term, going to be an interesting market.

And does anything in particular need to change in that market in order to drive that adoption?

Well, I think 1 of -- I mean I guess, in order to reach a growing Chinese population. And I guess that does not only apply in the hearing aid industry. But in health as such, you would also need to grow the number for the audiologists or the number of doctors. And that's also why if you look at health care broadly in China, you see tele-health picking up faster than you see in most other markets in the world. So I think also that's the way to think about China and the hearing industry that probably will see teleaudiology and solutions like ReSound Assist Live picking up faster and having more dominant position in a market like the Chinese because that allows to -- to reach people at the distance and maybe also to reach more patients during the day.

Yes, perfect. And then just to wrap up here. There are some drugs in development for treating hearing loss. How are you feeling about those?

Well, the -- I mean, prior to joining GN, I was 27 years as a head of pharmaceutical company. So obviously, I have a strong belief in pharmaceuticals. Having said that, and I mean, we do obviously follow the development in this space closely. And I'm sure, in the longer run, we will see relevant treatments. But having said that, speaking with my pharmaceutical background, I think when you look at the onset of hearing loss, there are -- it's a multiple factor disease, so there are a number of reasons why you get a hearing loss. And in order to treat with a pharmaceutical, you need to address those specific targets. So it will probably require a number of different pharmaceuticals to treat. Also, at least so far, the way you distribute the drugs is by injecting with a needle into your inner ear. And depending on the frequency, you have to do that with -- I think that's a tough way to compete with the hearing aid. And I mean, there are so many other benefits. Also with the hearing aid, I mean, you can connect to your phone, I don't think you can do that with a pharmaceutical. So anyway, there are a number of benefits with the hearing aids. So I don't think the pharmaceuticals are an immediate threat. It's definitely something we should look at. And I guess, here, we're really talking long term, very long term, we may see meaningful treatments, and that would be great, too.

Great. Well, that takes us up to the end of the session. Thanks very much, Gitte and Henriette. And speak to you all soon. Thanks, everybody.

Thanks.

You too.

Than. Thank you.