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

Hello, everyone, and welcome to GN's conference call in relation to our Q2 report announced yesterday. Participating in today's call is Group's CEO, Peter Karlstromer; Group CFO, Soren Jelert; and myself Rune Sandager, Head of Investor Relations. The presentation is expected to last around 20 minutes, after which we will turn to the Q&A session. The presentation is already uploaded on gn.com. And with that, I'm happy to hand over to Peter for some opening remarks.

Thank you, Rune. And thank you all for joining us today. Before going into the business performance during the quarter, I would like to spend a few minutes on the development around the hearing transaction and the hearing business. To remind everyone, we took the decision in March to sell our hearing business to Amplifon to create a global leader in hearing care. The carve-out process is well underway and closing of the sale to Amplifon remains expected towards the end of this year. Let me also remind you about the few items that we shared in connection with our Q1 report in May. The proceeds of the transaction of DKK 12.6 billion in cash and $56 million Amplifon shares. As part of the process, we will make a carve-out of our continuing activities, which will be taxable. We're estimating this upfront tax payment to be between DKK 1.5 billion to DKK 2 billion. However, we will also get an equal size tax asset that we can use for tax reductions in the coming years. The estimated total one-off cash costs related to the transaction is DKK 750 million. This includes transaction costs, carve-out costs and rightsizing costs for the continuing GN. We announced in Q1 a cost reduction program that will reduce the running cost of the continuing GN of around DKK 200 million compared to the realized level on '26. These cost actions have now been executed during the second quarter and will positively impact our margins in '27 and beyond. As for the proceed and capital allocation going forward, we are targeting a leverage between 1 and 1.5x in the short term. We are not planning to do any major acquisitions. The excess cash will be distributed through share buybacks and dividends in the best ways for our shareholders. These shareholder distributions will begin as fast as practically possible after the closing of the transaction. Let's now move to next slide and our latest hearing aid we have launched. We have just launched ReSound Sensia, which is the world's smallest AI hearing aid, powered by a new AI platform that adjust automatically to the listening environment with unmatched efficiency. The product is built around 3 core technological strengths, the AcoustIQ technology that delivers the most accurate real-time sound sensing. The narrowest 4 microphone beam forming deliver even better speed clarity and noise and the best automatic DNN de-noising that lifts conversation in shallow listening environments with less effort. Sensia further strengthened GN Hearings portfolio and will help our patients to hear even better in noise environments, which we continue to believe is the most important area to innovate around. We have made these great improvements while keeping the small appreciated form factor and a full day battery life. The new family product will be launching in U.S., Germany and Austria as of today, with more markets to follow in the coming months. While it's early days, our initial customer interactions, actual preorders as well as the number of customers signed up for sales events during the coming periods are looking very encouraging. With that, let us turn to the group and division highlights for the continuing business in the second quarter. Let me summarize the key highlights for Enterprise & Gaming in the second quarter. In summary, we are building momentum, setting us up for growth and margin expansion in the second half of the year. In enterprise, we continue to see healthy growth in North America and APAC. in EMEA, we saw a continued decline, but importantly, with signs of improvements compared to the first quarter. Total organic revenue growth came in at negative 7% with the demand in comparison base and Falcon being a significant factor. Excluding Falcon, the organic growth was negative 3%. The Wolfe platform continues to resonate strongly with customers. We saw double-digit sellout growth in the premium headsets and well into double digit demonstrating that the products are in strong demand among customers. We also saw a healthy improvement of our gross margins in the quarter, while we execute the channel investment to support the launch of further Wolfe. As already announced in July, more products are coming now in the second half of the year. In gaming, we delivered 3% organic revenue growth despite continued muted consumer sentiment supported by headset market share gains driven by Nova Pro Omni. Margin progression was strong in the quarter, driven by pricing discipline, success of new products, a lower tariff level and a minor provision of lease. Looking ahead to second half, we see significant growth opportunities supported by the upcoming mouse and keyboard launches and continued health set momentum. Let's move to the next slide with a bit of further detail on the enterprise. In the second quarter, Enterprise delivered organic revenue growth of negative 7% in total or negative 3% if we exclude Falcon. On a regional basis, we continue to see strong growth in North America and APAC. In EMEA, we saw a decline, but with signs of improvements compared to the first quarter, driven by the positive reception of Evolve3 and a gradually improving EMEA market. Within the product portfolio, the headset business showed improving development and the meeting room and frontline worker segment delivered both healthy growth. Falcon advanced its project pipeline but will limit the revenue contribution as expected in the quarter. On the financial side, gross profits were DKK 891 million, translating into a gross margin of 57.2% compared to 56.1% in the second quarter of '25. Division of profit was DKK 483 million, translating into divisional profit margin of 31% compared to 34% in the second quarter of '25. The year-on-year development reflects the channel investments we are making to prepare for further valve-free launches in the second half. Overall, enterprise continues to progress in line with our plans. Let's move to the Evolve3 portfolio on Slide 9. On first of July, we announced 3 important additions to Evolve3 portfolio. There were 365 flex, 65 and 45 . The Evolve3 85 and 75 were launched in March '26 and have already demonstrated strong commercial traction with solid double-digit seller growth in the premium Bluetooth category, which I will return to more in a bit more detail. The next wave of the portfolio Evolve365, 65 Flex and 45 is planned for launch in September '26. This launch is significant to us and address 35% of our enterprise business. That means that we together with Evolve385 and 75 will address 50% of the enterprise business with a fully refreshed portfolio that is set up for growth. The Evolve365 Flex is tailored for users who move between locations. It comes without a boom in a small form factor with better out of voice pickup and a wind adaptable ANC, designed for professionals who need performance on the go in a very compelling small form factor. The Evolve365 brings the core Evolve3 experience into the mid-tier segment with better sound, a 4 microphone adaptive ANC system, a very strong product for everyday modern work. The Evolve345 takes a concept into the entry-level segment. It is the lightest model in the portfolio with best-in-class office voice pickup and ASC, making ideal for large-scale deployments and front line workers where price is key, but voice performance still cannot be compromised. With addition of these 3 products, Evolve3 is no longer a premium-only offering. It is a portfolio spanning from premium to entry level with more products still to come. this portfolio expansion set a stage for returning to growth in the second half of '26. Let us look at the rest -- sorry, let us look at the recent financial performance driven by Evolve3 products. As we mentioned in Q1, our premium Bluetooth category is roughly 15% of total enterprise. In this category, we experienced a very strong selling growth during Q1, driven by the initial stocking effects of Evolve3. Now a quarter later, it is encouraging to see that we're also seeing solid double-digit sell-out growth in the category, which underpinned the strong customer reception of the flagship products. On top of the strong sell-out, we have continued to see a very strong selling growth in Q2 as well. Taking it together on the right side of the slide showing the conceptual revenue buildup of our headset segment. In the first half of this year, we have seen strong growth in North America and APAC, but continued weakness and channel reductions in EMEA. That is weighed on the top line due to EMEA being the major revenue contributor. While there's still some uncertainties around channel inventories we expect this effectively smaller in the second half of the year. Also, as we move into the second half, we will begin to see the new free products starting to ramp up as well. This means that a larger part of our headset segment will be supported by new products. These effects together set us up for a healthy second half with significant revenue generation and profitability improvements. This year, we expect a bit of unusual seasonality driven by the strong set of launches we have, which is in line with what we also shared in our Q1 results. Let's move to the next slide and talk about gaming. In the second quarter, Gaming delivered revenue of DKK 630 million corresponding to 5% organic revenue growth in a market held back by muted consumer confidence. We saw strong growth and market share gains in headsets and keyboards, while mice had a more difficult quarter, predominantly due to an aging product portfolio. Regionally, North America continued to grow well whereas EMEA and APAC were more challenged due to the market conditions. Gross margins came in at 39.2% compared to 34% last year, driven by pricing discipline, success of new products and a minor provision release. Divisional profit margin ended at 15% compared to 12.2% last year, driven by continued cost focus, combined with some of the target channel investment we do to support growth opportunities in the second half of this year. Let's move to the next slide. This highlights a milestone we are very proud of. Steel Service is now the #1 brand globally in gaming headsets. This is the result of a consistent and relentless innovation over many years. Looking at our market share development from 2017 to today, the trajectory is clear. Each product generation has expanded our position. From the original Arctis headset line, [indiscernible] Arctis 9, ARCTIS 7+, Arctis NovaPro, the gamebuds, the Nova Elite and now the Arctis Nova Pro Omni. The Okta Nova pro omni has received outstanding reviews from leading gaming media, including IGN, T3 GamesRadar and PC Gamer. Descriptions like the best headset in the market and the most well-rounded gaming headsets available speak to the quality and product differentiation we have achieved. This market leadership position gives us a strong commercial foundation as we head into the second half of the year, where we expect continued headset momentum combined with the contribution from new launches across mice and keyboards. That concludes the deep dive into our divisions. Let me now hand over to Soren for the group financials and guidance.

Thank you, Peter. Let's have a look at the group financials for the second quarter. In the quarter, GN's continuing operations delivered organic revenue growth of minus 4%. As expected, the gross margin improved strongly following the temporary weak gross margin in quarter 1. Adjusted EBITDA ended at DKK 110 million, corresponding to an adjusted EBITDA margin of 5%. The development reflects targeted investments to support growth in the second half of '26. Total incurred one-off costs in the quarter were DKK 74 million, all of them cash costs, mainly related to the carve-out of the hearing and permeation for the new GM structure. Free cash flow, excluding M&A, ended at minus DKK 616 million, reflecting in-sourcing of activities in the supply chain driven a temporary increase in working capital, which is expected to normalize during the rest of the year. This in-sourcing is related to our distribution of products across enterprise and gaming. Net interest-bearing debt ended at DKK 9.6 billion, but let me just remind you that the coming proceeds from the transaction will resolve in a net positive cash position at closing. With that, let us move to the financial guidance for '26 on Slide 15. Our group-wide financial performance in the second quarter has been in line with the assumptions put out in May. We're seeing the underlying improvements in our growth development and at the same time, a strong development on our EBITDA margin, which improved strongly compared to first quarter. As we communicated yesterday evening, we are upgrading our margin outlook for the year and narrowing the revenue assumptions. We have had a healthy development of our gross margins in Q2 and feel good about the trajectory for the year. OpEx-wise, we are making growth-related investments as we planned. This, together with an assumption of DKK 100 million to DKK 150 million of tariff refunds led us to upgrade our adjusted EBITDA margin guidance for the year. Revenue-wise, we will be within our initial guidance, but given the continued muted market development as well as some earlier upside scenarios that is not deemed realistic we are narrowing the range towards the lower half of our earlier guidance. In summary, we are making healthy progress for the year and encouragingly, are set up to finish the year in a good second half momentum, which will carry with us into '27. Let's look at the margin expectations for the second half of the year in a slightly more illustrative form. The traditional seasonality in gaming as well as successful rollout will be a key turning point for the revenue development and thereby, growth aspects in the second half of the year. As we have mentioned throughout the year, we have assumed the year to be slightly more back-end loaded than normal. This also impacts our sequential growth outlook, but we remain convinced that quarter 3 will be a turning point with a return to positive group organic revenue growth and then likely improving sequentially into Q4 when we have a full quarter of launch products. As mentioned earlier, gross margin improved strongly in Q2 and was mainly driven by underlying improvements. We are, therefore, assuming that these current levels should continue into the second half on roughly the same strong levels. On top of this, you will, of course, see the impact from the expected tariff refunds we have a good control on OpEx. And while there might be quarterly fluctuations, you should expect more operating leverage as we are progressing during the rest of the year. When you combine these elements, revenue seasonality, gross margin improvements tariff refunds and a fairly stable OpEx, the path to the full year margin guidance of 9% to 10% is clear. In addition, the structural caution initiatives executed in the second quarter will significantly further improve our margins expansion for '27. And with that, I'm handing you back to Rune.

Thank you, Peter and Soren. That concludes our prepared remarks and the presentation for today. I will now hand over to the operator for the Q&A session. [Operator Instructions]

[Operator Instructions] The first question we have is from Martin Parkhoi of SEB.

Yes. Martin Parkhoi, SEB. Firstly, I hope my sound goes through clearly because I'm on the EVOLVE3. But my questions are also relating to the enterprise business. Firstly, First, of course, I think that you have made quite clear that there are significant growth opportunities on the EVOLVE3 launch planned for the rest of the year. But if you consider your guidance, what are the risk to the remaining 20% of enterprise that lies outside of your core headsets business. But because in the past, that has been a little bit destroyed the growth picture sometimes. And then also on the tariffs refunding, now it's completely already open. Could you talk about the risk of this affecting pricing. And then, yes, I know it's a third question, but it's at least within enterprise. At Q1, you mentioned that you had seen some shallower to a Chinese competitor. This specific competitor have seen accelerating growth in the second quarter. How significant effect do you see from this company on a global scale in the coming years.

Thanks a lot, Martin, and happy to confirm that we hear you loud and clear. And let me start here and Soren will help me out on some of the tariffs here. First, I mean, as I said here in the opening, the Evolve3 products we are launching now are addressing mean essentially half of the enterprise business. And we, of course, feel very confident about these new great products will confirm, yes, I mean, confirmed good growth in the market. If we look on the other part, there are, of course, a few different things in there. If I start with the rest of the headsets. I mean, you have done more corded products and some deck products and so on. I think it's true that these products then still on the old portfolio, and this is something you should expect us to address over the coming year or into next year. So we certainly will refresh this part of the portfolio also. I think they are performing okay. So the growth momentum from the new products should be stronger than any kind of smaller declines from this part of the portfolio. And then we, of course, also have Video. We have launched new products and video also perhaps talked a little bit less about them given that revenue is less, but these products are also confirming very well. So we had actually a very good video quarter also the last quarter. And then we have frontline worker where we also had a good quarter. So feel confident that this will continue into the second half also. And then the final piece, which you know we report into enterprises Falcom, but that we have called out. So I think that's hopefully clear to everyone. But in totality, when we weigh this together, we believe that we are set up for good growth in Q3 as well as in Q4, so growing in the second half. Then if I perhaps take the third question and then leave the second for Soren. Yes, we did speak before that we have seen some kind of share pressure in particular low end of the market. we called out a few different companies. I don't think it was only 1 company, but a few different companies. If we look now on the market share for us, they are stable here in the last quarter. We are not losing any share in this period. We also believe that with the new products we're launching here that address the broader set of market, we actually have a good opportunity to gain back some market share. Then your question more about -- I think you're talking about Chinese competition for the long term. I think we need to see how this develop. There has, of course, been changes in the competitive landscape over the last few years also. Some competitors are winning and some losing. So that is not new to us. So I think we will see. We are very focused on having a portfolio that is well differentiated and having a portfolio that spans from the premium where I think we are the strongest, but also strengthening up quite a lot in the mid- and entry-level products to essentially be well set up to satisfy different type of customer requirements.

Yes. And then, Martin, to a tariff question. I mean first and foremost, of course, we are pleased to see now that -- we have a very strong belief that we are getting in the repayments from the U.S. government here in the second half of the year. And to your underlying question on price, I think what we also communicated last year was that we would close the gap also when we are launching new products and also in terms of our pricing. So that is still our plan and also what we are doing. And as Peter spoke to, it's a significant part of our portfolio that's actually been refreshed and as such, is not linked to old tariffs in that matter. So in that sense, we do not expect that what the refunds is impacting current pricing of what we see.

The next question we have is from Andjela Bozinovic of BNP.

I have the first one on enterprise. Just I wanted to understand the new guidance, in particular, what has changed from May until now? And what are you seeing in EMEA specifically? What is embedded in the guide for EMEA regions? And for Falcom as well? And the second question is just on the profitability in the quarter. So if we adjust for the gaming provision, we reached the adjusted EBITDA margin of 4.6%. Can you help us understand better the performance in the quarter? And what gives you the confidence of profitability can significantly improve from here?

Let me start and then I hand it to Soren for the margin question. If we look on enterprise, the new guidance, and I think we wrote that out also in the communication yesterday, it's mostly the significant upside scenarios for part of our portfolio that we now see will not realize this year. Quite a bit of it is related to our defense business, Falcom. This is project-based business with very large orders. And we do believe in Falcom that this year will be similar to last year. And I think we have said that before, but we also had some upside scenarios that could have come in and reflected in the upper end of the guidance. Those scenarios are still there, but will likely be more an opportunity for '27 as it looks like now. And then on EMEA, we -- and maybe I'll take a step back across all regions. As we have said before, I mean the U.S. and APAC has been growing in a good way over a longer period of time. We actually expect that to continue into the second half. On EMEA, what we expect there is to grow -- I mean, turn into some level of low growth. It's probably the way to see it. in the second half. So that's what we have embedded here. I think it's, of course, about the region, but it is largely driven by the products we are launching. So it's not so much that we're sitting and hoping for the market to recover it's more like when we're launching all these products, it will support EMEA in a way where EMEA also turn into growth. I also mentioned the channel reductions here in my introduction, and that has been a headwind on the EMEA business for a while, while we can, of course, not be sure about those exactly over time, they have now come down and also with the new products we're launching, our base assumption is that there will be more in balance over the second half. So that's the way I think you can build it together in terms of the enterprise guidance we have given. So if I leave it to you, Soren, and for the margin question.

Yes. I think, of course, the way you deduct the group margin is absolutely fair. For us, and we called it out after the first quarter also that especially the gross profit was an area where we had good insight and comfort in would actually improve in the second quarter. And I think that is exactly what has happened and especially also on the enterprise, also with a positive impact of the portfolio refresh we are doing right now that are yielding margins at levels that we also historically have seen. So it's more a question of that this quarter is a testimony true that the Q1 was probably more a one-off, and this is back to a normal gross profitability of the enterprise business and also what we can see going forward. On gaming, we have also here been on the clear path to deliver between these 35 million to 40 million -- and here also, we can see a positive impact on the mix within the gaming. We're still of the opinion that a good gross margin for gaming is within this area of 35% to 40%. And in that light, of course, even deducting 1% in the gross margin in gaming, 38% is definitely approved, and we expect that these levels can continue up in this part of the 35% to 40%. And that is really the core and very fundamental belief of the margin, both in the second quarter but actually also for the full year. And then in addition to that, you get the top line growth and you get an OPEC stability in the second half of the year. That's what we are planning with.

Our next question is from Veronika Dubajova of Citi.

I'm going to keep it to 2, please. The first 1 is just on gaming and the reduction in the outlook there. Just curious of your rationale around that, especially given the on now being confirmed for the end of the year and whether there is anything to read into in that reduction of guidance in terms of what are some of the sell-in trends or other signs of demand that you're seeing on that front? That would be my first one. And then the second 1 is just I know, Peter, you addressed this a little bit in your prepared remarks, but give us a little bit more flavor for how much more work there is left to do in terms of the carve-out of the hearing business and whether you see any risk the time line there slipping at all.

Thanks, Veronika. Let me take this. On gaming, we feel very good about our progress. We feel good about what we've done in the first half and feel good about what we have lined up for second half. I mean, if we look on taking down the guidance to low end, it's more market related. And -- we actually believe in a fairly constructive market in second half due to the GTA as you highlight. I mean, it looks like it will launch on time now and it will support the market. But as you also can see in our numbers, we actually have -- the implied guidance for the second half gaming growth is a very constructive growth. So I think it's a little bit more the ground we lost in the first half due to quite muted market environment that makes us to make this adjustment. So we do believe in a good second half. A little bit better market-wise, but in particular also with the great launches, which we have planned. And then on the carve-out, and I think it's more on the closing estimate. You know that there are 2 things that need to happen. One is to carve out the business -- that is something we and GN are responsible for and I think very much in control. I think that is progressing well and very much is in line we'll be able to complete this towards the end of the year. On the regulatory side, the evidence we have until today is that also point to a successful kind of closing of the transaction in -- towards the end of this year. So nothing has really changed. So I think we are progressing with this time line and feel good about it. And we'll, of course, update you all if something would change, but there is nothing we see at this point in time.

The next question we had is from question Carsten Lønborg Madsen of Danske Bank.

Two questions here. First, this supply chain internalization that hits working capital quite hard this quarter. Could you try to describe what are you doing? And why are you doing it now? And will this lead to cost savings down the road? And then secondly, in terms of your EBITDA guide for the year, obviously, you need quite a strong lift in the same part of the year. But how do you see the trajectory? Are we talking about sort of sequential. So improvement in Q3 versus Q2 and then Q4 was Q3? Or is it more of a Q4 thing when all sort of revenue lift comes through and margins improve.

Thanks a lot. Let me start and then Soren will continue. As some of you know that have looked into our operations more in detail, we have been having an outsourced model for operations in enterprise and gaming. We still very much believe in that to have an outsourced manufacturing we have, over time, I mean revisited some of that when it comes to the logistics. So what we're in-sourcing is essentially our logistics and distribution. And we now would like to be in full control of that ourselves. I think it's for a few reasons. We think we can do it more cost efficient than what we can in an outsourced model. We also think that there are significant automation and even AI opportunities to do this better, that we better can control and deliver on if we have it in-house. So that's why we, from a strategic point of view, we would like to have this as an controlled. And then now when we're moving it in, there are some effects on the working capital in this transition. I mean there are essentially 2 things happening. We need to then pay out cash to get it in. But then also, we will have good payment terms with our major suppliers, so we will get back some of that. We have just not been able to time it in the same quarter. So you essentially see quite a hit on our cash flow in this quarter. But we will catch up that in the second half. And we believe that the change we're doing the supply chain will be very beneficial over time for us.