GN Store Nord A/S (OTCPK:GGNDF) Q4 2022 Earnings Conference Call February 9, 2023 5:00 AM ET
Company Participants
Anne Sofie Staunsbaek Veyhe – VP, IR & Treasury, M&A
Gitte Aabo – CEO, GN Hearing
Peter Karlstromer – CEO, GN Audio
Peter Gormsen – CFO, GN Store Nord
Conference Call Participants
Martin Parkhøi – SEB
Maja Pataki – Kepler
Julien Ouaddour – Bank of America
Veronika Dubajova – Citi
Christian Ryom – Danske Bank
Hassan Al-Wakeel – Barclays]
David Adlington – JPMorgan
Oliver Metzger – Oddo BHF
Rajesh Kumar – HSBC
Niels Leth – Carnegie
Anne Sofie Staunsbaek Veyhe
Hello, everyone, and welcome to GN’s Full Year 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 today is Gitte Aabo, CEO of GN Hearing; Peter Karlstromer, 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’ll turn to the Q&A session.
And with that brief introduction, I’m happy to hand over to Peter Gormsen.
Peter Gormsen
Thank you, Anne Sofie. Good morning, everybody and thanks for joining our full year 2022 call today. Starting on slide four with a snapshot of the performance during the year. We delivered revenue of DKK18.7 billion, equal to an organic revenue growth of negative 3%, while revenue growth was 18%, driven by the acquisitions of SteelSeries and Lively, as well as impact from FX. The growth achieved during the year is a result of significant market share gains across soft markets.
Adjusted EBITA ended at DKK2.2 billion, equal to an EBITA margin of 11.6%. Growth in adjusted EPS ended at negative 31%, which was in line with guidance. As a result of the earlier acquisitions, the adjusted leverage ended at 5.5 times at year-end.
During the year, we have launched multiple new products across the company, which Gitte and Peter will get back to later. These great innovations will be an important aspect of our ambition for ’23, where we once again expect to take market share in challenged markets.
Moving to slide five and our capital structure review. GN continues to be operating in long-term attractive markets and we continue to gain share. As part of the strategy, we invested into the large and fast-growing premium gaming gear market by acquiring the best assets out there. The financing decision was made in an environment with low interest rates and financing widely available.
Now the world has changed. 2022 was different than expected. We generated less cash than expected due to a volatile macroeconomic environment, supply chain effects with high inventory buildup and channel investments in Hearing. At the same time, financing markets have completely changed with high-interest rates and less capacity.
After assessing alternatives, we have deemed it right to switch to equity financing and we intend to raise DKK7 billion in equity through a fully underwritten rights issue. This will take us back to our long-term target of between one times to two times net interest-bearing debt over EBITDA in the short term and provide the appropriate capital structure to underpin further growth and allow us to pursue our successful strategy to create shareholder value. Once we revert to target leverage, we will recommence dividend payments and share buybacks.
And with that, 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, we had a very strong ending to the year with significant market share gains across countries and channels, driven by the successful ReSound OMNIA.
A few days ago, we announced five new form factors which will finalize the ReSound OMNIA family. We look forward to seeing these form factors built on our current momentum in 2023. Based on the strong complete product portfolio and strong momentum, we expect to deliver market share gains and margin expansion in 2023.
Let’s have a look at GN Hearing’s Q4 2022 and full year 2022 financial performance. In the full year 2022, GN Hearing delivered slightly more than 5% organic revenue growth, while the emerging business delivered 73% organic revenue growth.
Specifically, in Q4 2022, GN Hearing delivered 14% organic revenue growth as a result of the strong commercial execution across the company, driven by ReSound OMNIA. This growth was executed in a soft hearing aid market, which had a slightly negative growth in the fourth quarter.
The gross margin was spot in line with 2021, although it was negatively impacted by elevated freight costs, increased material costs, offset by pricing initiatives and the successful launch of ReSound OMNIA.
The EBITA margin in the core business ended at 13.1% in 2022, driven by operating leverage with a strong focus on the cost base. The EBITA in the emerging business was negative DKK187 million in 2022, but saw sequential improvement in the quarters throughout the year, and it is well in line with the financial guidance as a result of the stronger-than-expected revenue growth.
Non-recurring items of DKK146 million was booked in the year, primarily related to the previously announced supply chain initiatives. Free cash flow ended at negative DKK377 million for the year, reflected the earnings level as well as investments into future growth opportunities and strategic financial support agreements.
Let’s move to slide eight and some more color on the regional development in the fourth quarter. Beginning with North America, we delivered 11% organic revenue growth in the quarter in soft market conditions. We experienced very strong performance across the independent market VA and Costco, primarily driven by the successful ReSound OMNIA launch.
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.
Moving onto Europe, we delivered an organic revenue growth of 8% in the quarter, with particularly strong performance in Germany. In our Rest of World region, the organic revenue growth ended at 22% compared to Q4 2021, driven by strong growth in among others Japan, despite market headwinds we experienced, especially in China.
Moving to slide nine and our finalization of the ReSound OMNIA family. I have to say that I’m very impressed by the development in our R&D department during the last one and a half year. Today, we can proudly say that we have finalized the ReSound OMNIA family. We have achieved this only six months after releasing the platform, which is much quicker than traditionally. This is a great testament to our R&D organization being back to where it has been for more than a decade.
ReSound Omnia was originally launched in the RIC form factor in August 2022, and has shown impressive results in the last part of 2022. We’re now finalizing the family and are introducing five new form factors. A new Mini RIE product that is smaller than the current RIC product on the market, and then two new rechargeable BTEs and two new custom-made products, one rechargeable ITE and one battery version of CIC.
The new form factors will include the same benefits with 150% improvement in the ability to understand speech in a noisy environment. ReSound OMNIA is the only product in the industry utilizing a beamformer which improve hearing in noise without feeling cut-off. The products will be commercially available by the end of February.
Let’s move to slide 10 and the expected market development. Overall, we expect to see a soft, but resilient hearing aid market in 2023. In 2022, we saw very strong market growth in the beginning of the year but with some softness by the end of the year. As a result, we estimate low single-digit positive volume growth in 2022.
The demand for hearing aid product remains intact, fueled by demographic changes. Let me just reemphasize that we’re still not seeing any significant trade down. We continue to see the Managed Care segment growing faster than the private market in the US, but trading down as such has not been material.
First time users continue to enter the hearing aid journey, but we do see some postponement in the replacement purchases for returning customers. Based on the above factors, we expect a low single-digit positive volume growth in 2023, and we continue to expect low single-digit negative ASP growth in 2023.
To conclude, we expect flat to slightly positive market value growth in 2023, which is softer than normal and also slightly more uncertain. The long-term dynamics are fully intact and we don’t see any reason why the market will not return to historical trends when the current softness is behind us.
Let’s turn to slide 11 and our financial guidance for the year. Our ReSound OMNIA product family has shown success in the end of 2022, and with the expanded and finalized product family, we expect this momentum to continue into 2023.
Due to the market growth expectations, we expect an organic revenue growth in the range of 2% to 8% for 2023, driven by continued market share gains and catering for the uncertainties for a slightly lower-than-expected market growth.
Consequently, the guidance range is slightly wider than normally. As for the adjusted EBITDA margin, in the core business, we expect it to be in the range of 13% to 16%, naturally correlated with the organic growth.
EBITA for the emerging business is expected to land at minus DKK150 million for the year, improving year-over-year. We expect to have non-recurring items of around minus DKK150 million, which is driven by the supply chain initiatives and rightsizing of the organization.
For the guidance, we are assuming the following for Q1. The organic revenue growth is assumed to be within our full year guidance range of 2% to 8%, driven by continued strong commercial execution and market share gains from ReSound OMNIA in an assumed soft market. Specifically for the Q1 EBITA margin in the core business, we assume a mid single-digit level excluding non-recurring items due to the revenue seasonality and launch costs.
And with that, I would like to hand over to Peter Karlstromer, and an update on GN Audio.
Peter Karlstromer
Thank you, Gitte, and hello to you all. Let me start by saying how happy I am to be joining GN. The first month in the role has shown me what a strong organization I’m joining, and I’m excited about the future we can create together. I am new to many of you, so let me start with saying a few words about myself.
The last 25 years I worked in technology and telecom around the world. The first part of my career I was with McKinsey & Company, working with technology and telecom in the Nordics, Europe, US, Middle East, Africa and Asia. From there, I joined Cisco Systems, a leading significant parts of the European business, in close collaboration with global R&D teams.
Most recently, I’m coming from Securitas, where the European business going through a major technology transformation. As of the month, I’m the proud new leader of GN Audio, and working hard to make a seamless transition from Rene and together with our teams to build a strong and exciting future for GN as stakeholders. I’m now pleased to take you through GN Audio’s results for ’22.
Moving to slide 13. 2022 was a weak year in our markets and we experienced significant supply chain disruptions, in particularly in the beginning of the year, combined with the reduced consumer sentiment negatively impacting our consumers SteelSeries businesses.
In this challenging environment, Enterprise gained market share and delivered a slightly positive organic revenue growth on top of the record high base from ’21. For Q4 specifically, Enterprise delivered 9% organic growth, which is a testimony to our strong product lineup and commercial execution.
In 2022, the gaming equipment market saw a significant year-over-year decline. In this challenging market, SteelSeries performed strongly, resulting in a significant market share gains, driven by product introductions and strong commercial execution. For the year, SteelSeries delivered an organic revenue growth of negative 19%. We saw an improvement of trends throughout the year, which is encouraging.
Consumer was especially affected by current market conditions and delivered negative 35% organic revenue growth in ’22. In total, GN Audio delivered negative 7% organic revenue growth in ’22, which is in line with our updated guidance.
The GN Audio adjusted gross margins ended at 43.5%, which is 7.1 percentage point below ’21. This can mainly be explained by four factors. The first one is FX with a significantly appreciating US dollar, driving a negative impact of around 4% on our business compared to last year.
Secondly, within elevated freight and material cost, thirdly, the consolidation effects from SteelSeries; and lastly, there were significant promotional activities more than normal in the consumer-oriented businesses due to the high inventory situation across the industry.
To partly counter this, we put in place pricing initiatives in beginning of ’22 and have also increased prices in January ’23. The adjusted EBITA margin ended at 14.1%, reflecting the gross margin decline as well as offsetting effects from OpEx management.
Non-recurring cost amounted to negative DKK460 million, primarily related to the SteelSeries acquisition and cost reduction measures across our business. The free cash flow ended at negative DKK91 million. We had a healthy operational cash flow, but were negatively impacted by significant inventory buildup. Excluding working capital changes, GN Audio would have generated free cash flow of almost DKK1 billion in ’22.
Let’s move to slide 14, and give it a little bit more color on the regional development in Q4, which excludes SteelSeries. In North America, we delivered negative organic revenue growth of 18%, explained by a significant decline in consumer business and enterprise, which experienced softness in the quarter, which was also the case in the third quarter.
In Europe, we delivered solid organic revenue growth of 9%, driven by a strong enterprise performance across countries and customers. In the Rest of World, the growth was negative 9%, explained by growing enterprise business and a significant decline in consumer business.
Let’s move to slide 15 and SteelSeries. In 2022, SteelSeries had an organic revenue growth of minus 19% in soft market conditions, although there were some improvements in the market and our performance towards the end of the year.
During ’22, we progressed well with integration of SteelSeries. We have now integrated supply chain and back-office functions and recently also combined our sales teams of SteelSeries with our consumer teams into a joint organization. During the integration process, we’ve been able to retain key personnel on all levels.
During the year, SteelSeries had launched several products that have been very well received by the market. A result of this great work by our teams, we estimate that we gained approximately 2% of market share in core product categories.
Let’s move to slide 16 and the supply chain. We have used this traffic-like system throughout ’22 to illustrate the different impacts on our supply chain. As you can see, the situation has improved. Today, the negative effect on our business is limited. With what we know today, we believe the supply chain will have no significant negative impact on our business in ’23. We continue monitoring this situation carefully and will respond as needed.
Let’s move to page 17 and product launches. In 2022, GN Audio launched several new products showcasing our strong innovation. New products were launched across Enterprise, SteelSeries, as well as consumer. A week ago, we also announced the newest innovation to our PanaCast portfolio with a fully integrated video voice system utilizing the technology-leading PanaCast camera.
This new very well-received product is based on Android, which will help us to significantly increase the addressable market for us in video collaboration. With our current product portfolio and roadmap for ’23, we believe that we are well-positioned to continue gaining market share in particular in enterprise and gaming.
With that, let’s turn to page 18 and an overview of the market long and short-term. First of all, we want to stress that we believe the long-term growth drivers for our markets are fully intact. The world continues to adapt to a hybrid work environment and enterprises globally are continuously deploying productivity-enhancing tools.
While we experienced strong growth during the pandemic, we believe there is significant more growth to expect in the future as we continue to demand a better quality of experience in communication. We’re also confident in the long-term growth and attractiveness of the dynamic and growing gaming market. In short, we expect our markets to return to healthy growth when the current macroeconomic uncertainties behind us.
At this time though, we experienced significant economic uncertainties which is also affecting enterprise and consumer demand. No one knows exactly how ’23 will develop. In the last few months, there has been several revisions downwards and we expect the market growth in all categories. As we plan for ’23, we’re doing this on different market scenarios which also affect the guidance which we are giving.
Moving to slide 19 on our guidance for ’23. Given the economic uncertainties, we are giving a broader guidance range than what we have done in the past. As for revenue, we expect GN Audio to deliver an organic growth rate from negative 10% to positive 5% in ’23. The guided range for the adjusted EBITDA margin is between 10% and 15%. The broad span is primarily driven by the difference in business volume.
In all market scenarios, we assume that we will continue to gain market share, so the variance in performance is driven by variances in macroeconomic conditions affecting the growth of the markets where we operate. We expect the non-recurring items to be around minus DKK150 million for ’23, as a result of cost reduction measures in relationship to the rightsizing of our organization. Our business is robust and well managed. Across our guidance range and scenarios, we expect to generate a positive cash flow for ’23.
For the guidance, we are assuming the following for Q1. Organic revenue growth is assumed to be a negative due to the current challenged market conditions. In Q1, the EBITDA margin, we assume a mid single-digit level excluding non-recurring items due to the top line development and investment in growth opportunities.
And with that, I’m happy to hand over to Peter Gormsen.
Peter Gormsen
Thank you, Peter. At Group level, GN delivered minus 3% organic revenue growth and an adjusted EBITA margin of 11.6. Total non-recurring items were minus DKK624 million, driven by the SteelSeries integration, the cost reduction measures as well as the supply chain initiatives in GN Hearing. Adjusted leverage ended at 5.5 times by the end of ’22. To reflect accounting practices across PS [ph] we are now also including our FSA balance which is our launch to the [indiscernible] in our net interest bearing debt definition. Even when excluding this accounting policy change we still saw a sequential decrease in our leverage.
Let’s move to slide 22 and our cash flow for ’22. GN Hearings negative cash flow was driven by impact from emerging business, supply chain initiatives, as well as strategic financial support opportunities to fuel future growth.
GN Audios negative cash flow was driven by the lower adjusted EBITA, as well as non-recurring items. Although there was a high level of operating profit, the working capital was negatively impacted by inventory build up. Excluding changes in working capital and GN Audio, the free cash flow would have been close to DKK1 billion.
We do have a very strong focus on cash flow generation in ’23 and beyond, a key lever to drive strong positive cash flow in ’23 is related to the inventory situation, which is expected to improve, especially in the second half of ’23.
Let’s move to slide ’23 and a recap of the financial guidance. Peter and Gitte already went through the guidance across Hearing and GN Audio, so I will keep this short. To conclude, for group level, we now expect organic revenue growth of between negative 6% to plus 6%, which will result in further market share gains in expected challenged market conditions. EBITA in other is expected to be around minus DKK200 million.
And with this, I’m happy to hand back to Anne Sofie.
Anne Sofie Staunsbaek Veyhe
Thank you to Gitte Aabo, Peter Karlstromer and Peter Gormsen for the updates. With that, I’m handing over to the operator for Q&A. Please limit your questions to two at a time.
Question-and-Answer Session
[Operator Instructions] And we’ll move first to Martin Parkhøi with SEB. Your line is open.
Q – Martin Parkhøi
Yes. Martin Parkhøi, SEB. Just two questions both for Peter, but not the same Peter. I’ll start with one on GN Audio. And I struggled a little bit, but your comment on the first quarter and – for the first quarter last year was extremely very weak. It served as the absolutely niches comparator going into 2023 for various reasons.
So if you are not able to grow in the first quarter, how should we be convinced that minus 10% for the full year is actually at risk? So for example, for last year, you saw a 32% growth from Q1 to Q2, so is this downside actually higher than – worse than minus 10% for the full year with the market challenges you see in the first quarter.
And then to the other Peter. I think it’s to you and maybe to the Board, but they are probably not here, but that’s a question. Do you feel comfortable that the authorization for the right issues will actually be granted at the Annual General Meeting or do you see other alternatives? And related to that question, have you been approached with other alternatives than the right issue to bring down the debt?
Peter Karlstromer
Okay. Thank you for the question. Let us start with your first one. And as you rightly highlight, Q1 is relatively low compared to what we like it to be. What we see are a few things. I mean around the world, there’s been a lot of uncertainties and probably increasing uncertainties, and also that is affecting the markets where we operate somewhere.
And we believe that in particular in the US side of the market, we see a bit of a weaker demand at this point in time. So this guidance for Q1 should be exactly to clarify that we see a relatively slow start in the year. We expect though that the growth will improve over the year and we’re also launching several products throughout the year that will support this growth of our business throughout the coming quarters. But you’re right, Q1 is a bit lower than what would be normal.
Peter Gormsen
Hey, Martin, on your other question, this is Peter. So of course, maybe to take a step back. So we have of course looked at all the available options – alternatives that we had at GN. We have had many thorough discussions among management with Board, with Peter coming in, so we’ve spent a lot of time analyzing this. It’s clearly – it’s a big decision.
So do we feel comfortable? We firmly believe this will put GN in a better position and puts us in a better position from where we can grow and we can continue taking share. I think that’s the short answer.
Of course, we understand there is different reactions when you come with a cap – decide to do a capital raise. I think we’ve done our homework. I think we are very well prepared. And again, we feel it’s the right decision to put you in a much better position after a general meeting.
Martin Parkhøi
Thank you.
Operator
And we’ll move next to Maja Pataki with Kepler. Your line is open.
Maja Pataki
Yeah, thank you. Also two questions from my side going over to the Peters in the group. Peter on Audio, I’m sorry, I’m coming back to the question that Martin has posted. If we have to look at a negative growth in Audio in Q1, and it’s being the softest quarter throughout 2022, how are – what triggers are there that are going to accelerate growth or what visibility do you have that the markets are actually going to improve meaningfully throughout the year? That’s my first question.
And my second question, Peter, you talked about getting the leverage in the short term to one times to two times EBITA [ph] range. Could you maybe tell us what you consider being short-term in that within this year or is it something in the next 12 months? Thank you.
Peter Karlstromer
Okay, let me start here. I mean, as I mentioned, we believe the range for the year is negative 10% to plus 5, and part of that range we are factoring in a slow start in Q1. What we see at this point in time is market related. It’s not our ability to operate in the market. And we believe that even with this kind of conditions we see now, we should be able to meet our guidance.
What we also should say is that towards the latter part of the year, we are introducing several new products which we also think will help our business to grow compared to the market.
Maja Pataki
Okay. So you’re not expecting the market to improve meaningfully towards the end of the year. It’s more the product launches that you have?
Peter Karlstromer
Yes. We believe if the market stays stable to the level where they are now, we believe we’ll be able to operate within the guidance we have given.
Maja Pataki
Okay. Thank you.
Peter Gormsen
Hey Maja, this is Peter. So on the short-term, I don’t think we will disclose exactly what month this will happen, but I think our definition of short-term is probably in the range of six to 18 months.
Maja Pataki
Okay, super. Thanks a lot.
Operator
And we’ll move next to Julien Ouaddour with Bank of America. Your line is open.
Julien Ouaddour
Thank you very much. Good morning, everyone. I have two as well. First one, GN Hearing. A tough 2022 year, let’s say, for the profitability. So it’s surprising to see the guidance range starting at 13%, which basically implies no margin expansion despite you have – you will have organic growth and you have all product cost [indiscernible] like in 2023. So could you just walk us through the different scenario when building growth for the guidance?
And then just on like capital structure, and you have some assets that you could sell so, for example, like the Portuguese retail one, you have some building, et cetera. Is it still expected to be – like to be sold at some point? Thank you.
Gitte Aabo
So, thank you for the question. And let me just underline that as we move into ’23, we actually see the strong momentum of ReSound OMNIA continue, so that’s obviously really nice. Nevertheless, we do see – as I spoke to a softer hearing aid market as such than we would see normally, and especially we expect that to be the case in the beginning of the year.
So we expect overall the hearing aid market to be flat to around 1% value growth which is lower than normal. And that is the basis for our broader guidance range that we see this uncertainty. So when we guide to 2% to 8% on the top line, it’s definitely reflecting strong momentum and that we’re taking market share.
Now in terms of the profitability, obviously, if we end up in the lower part of the range, say 2%, that has an impact on the profitability because although we’ve taken a number of measures to improve cost, we also expect our cost base this year to be impacted by inflation.
And also we have important launches coming into the picture, and we’ve already announced the five new form factors in the ReSound OMNIA family. And obviously, there will be more coming into the market later in the year. So I think those are the key building blocks, are we at the upper end of our guidance in terms of top line, it will obviously positively impact our profitability.
Julien Ouaddour
And if I may just before we jump to the second question. Do you confirm the sort of mid-term guidance for more than 20% EBITDA margin for this business after the 2022 being around like 13% in – like probably this year not exceeding mid-teens? I mean is it still a target for you? And if yes, just if you have sort of timeline in mind just when you would be able to get back to this level?
Gitte Aabo
The answer is yes. And we have communicated to the market that will be back at 20% in ’24, and that still stands.
Peter Gormsen
Hey Julien, on your second question. So the short answer is yes, we certainly still are very focused on generating cash, and that also includes looking at our balance sheet and divesting some of our non-core assets, including the Portuguese retailer that you mentioned.
Julien Ouaddour
Perfect. Thank you very much.
Operator
And we’ll move next to Veronika Dubajova with Citi. Your line is open.
Veronika Dubajova
Hi. Guys, good morning and thank you for taking my questions. I have two please as well. My first one is just on the cash flow structure, and Peter I was hoping you could talk to why you think one to two times and then why target leverage with this business. I think if we look at lot of your peers they do operate a fair bit [ph] higher degree of leverage between two, sometimes even after three times. I am just curious why you had decided in that review that one to two is the right number and therefore proposing the size of the right issue that you are? And then I have a follow up after that. But maybe we should start there.
Peter Karlstromer
Hey, Veronika. Yeah, so as I said before, we spent a fair amount of time discussing this and we certainly reached a conclusion that we are quite convinced that one to two is the right level for DN. We want to go back becoming an investment grade company with all the benefit that entails. We are looking at high uncertainty, low visibility at the moment. So – but we are quite firm on coming back to a strong position with a strong capital structure that will allow us the flexibility we need to continue growing this business.
Veronika Dubajova
Okay. And I guess, if you – presumably you get into that corridor already this year, with the free cash flow generation there would be further deleveraging. Should we read your comments on the buyback a set of [indiscernible] regime assuming you see that path for further deleveraging?
Peter Karlstromer
I think exactly as we said, when we are back in that corridor then we also plan to go back doing both dividends and share buyback.
Veronika Dubajova
Okay. And then if I could ask a quick one to Gitte and then I’ll jump back into the queue. Gitte, just curious if you can comment on the impressive growth that you see in Hearing, where exactly its coming from the type of customers, the type of geographies, where you feel that you are winning?
And maybe if you can just briefly state what the growth would have been excluding the contribution from Costco just so we have a flavour the independent?
Gitte Aabo
Yeah. So thank you for that question, Veronika. And maybe let me start with the first one. I mean, even if we exclude Costco where we obviously had extraordinary tailwind, we will still be growing double-digit organically in the fourth quarter. And I think one of the things that makes me really pleased with our performance in the fourth quarter, is that its across the board, its across all regions and countries and so on, we really see strong performance and it is due to the fact that we’ve launched ReSound OMNIA which is well received in the markets.
Veronika Dubajova
Great. Thank you, guys.
Operator
And we’ll move next to Christian Ryom Danske Bank. Your line is open.
Christian Ryom
Hi. Good morning and thank you for taking my questions. I have two as well. First one for Peter Karlstromer. And can you talk a bit about your expectations for the year for the SteelSeries business here in 2023? And how we should think about that relative to the overall guidance for GN Audio?
And then my second question is to Peter Gormsen. And on the rights issue and specifically why the decision to wait till the AGM to conduct this – to get this approval? And as I read your articles of association and the Board should be authorized to do this straight away. And can you clarify this matter? Thank you.
Peter Karlstromer
Okay. Let me start here. So If I take us back to what we’ve seen in the last year, I mean the gaming market has been in a [Technical Difficulty] a strong portfolio, that’s been further strengthened during the year. In terms of expectations for next year, I mean of course also here we have scenarios depending on the market development, but generally, we’re very positive to this SteelSeries trajectory. So we do expect that in several of our scenarios, certain top brand, SteelSeries will deliver growth in 2023.
Christian Ryom
Thank you.
Peter Gormsen
Hey Christian, this is Peter. So I think as I said before, reaching a conclusion after doing a rights issue is a fairly big decision. And I think we wanted to make sure that we had a very thorough review that we had all the necessary collaboration dialog with both Board and among management and advisors on getting to this conclusion.
So that you don’t do overnight and of course, we did not want to jump to any conclusions. We are certainly aware of what opportunities we had, but we feel this is the right process and we’re at a very good price. Then these things take time, so – but I think we are exactly where we wanted to be.
Christian Ryom
Thank you.
Operator
And move next to Hassan Al-Wakeel with Barclays. Your line is open.
Hassan Al-Wakeel
Thank you for taking my questions. I have two, please. Firstly, so following up on the cap structure and given the size that was higher than many investors had expected. Can you comment on whether you have any indication from large shareholders that they would participate in the rights issue? So that’s the first question.
And then secondly on Hearing. Could you talk about whether you’re seeing any initial signs of spillover volume deferrals from the US into Europe, and any initial signs of down-trading in Europe, and whether you consider this to be a meaningful risk in 2023?
Peter Gormsen
So, Hassan. This is Peter. So of course, we have talked with our largest shareholders, and of course, they need to have a chance also read through this, but I think the feedback is largely positive.
Gitte Aabo
Yeah. And in terms of how the European market is developing compared to the US market, I think it’s important to keep in mind that a big part of the European market is actually covered by reimbursement. So in many European countries, you will see hearing aids being subsidized by the governments.
So we actually continue to see slightly stronger growth in the European market than what you see in the US market. Nevertheless, in Q4, when we look at the global hearing aid market, we saw a slightly negative development.
Hassan Al-Wakeel
That’s very helpful. And if I can follow up just on the overall reception to OTC and whether you’re seeing a younger demographic entering the market and expectations for your contribution this year, that’d be helpful.
Gitte Aabo
Yeah. So bearing in mind that it is obviously still early days in the OTC market. What we’ve seen is that we actually do reach a younger audience. Based on the data point we have so far, the average consumer in the OTC market is 59 years of age, whereas what we see in the traditional core business, people are in the mid-70’s. So we’re definitely reaching people earlier on in the hearing aid journey.
On how that market will develop this year, I expect it to continue to grow, but obviously, it’s still early days and it’s something that we follow very closely. I think we’re well-positioned to compete in the market.
Hassan Al-Wakeel
Very helpful. Thank you.
Operator
And we’ll move next to David Adlington with JPMorgan. Your line is open.
David Adlington
Thanks for taking the question. Maybe just one on Audio first. Obviously, the guidance is quite conservative given the start in the comp. I just wondered if you’re seeing any weakness on the Enterprise side. Obviously, the consumer side was very weak last year. Wondering if you are seeing any actual softness in the Enterprise side?
And then on the consumer side, you cited promotional activity in the fourth quarter. Just wondering how much the consumer declined in the fourth quarter, and how much of that was due to price/that promotional activity? Thanks.
Peter Karlstromer
Thank you. I mean already last year, we saw a very uncertain market and continue to see that into the year, but we feel very good about our Enterprise product portfolio and our ability to gain share. Specifically what we’ve seen more market related is a bit of weaker development in the markets in the US than what we’ve seen in the rest of the world. But we saw a tendency of that also last year and managed to in total grow the business.
So there are a few different dynamics going on that we’re monitoring carefully. But in all the scenarios, we are very confident in our position and our portfolio. In terms of consumer, I think, help me, Peter, you have the numbers.
Peter Gormsen
Yeah. So Q4, we were down 38%, so you have both volume decline and to your point, David, also, price decline.
Peter Karlstromer
Yeah. And just a further comment on that. And the split with that, I don’t think we have that – I mean exactly in a way we can communicate, but certainly a combination of a relatively weak market and significant promotions, in particular towards the end of the year.
David Adlington
Okay. I think you mentioned in the presentation, there is not a lot of visibility, but in terms of on the consumer side, what stock levels were like, and the inventory levels were like in the channel?
Peter Karlstromer
I mean our assessment is that towards end of the year, they were relatively normal to what we have seen before.
David Adlington
Thank you.
Operator
We’ll move next to Oliver Metzger with Oddo BHF. Your line is open.
Oliver Metzger
Good morning. Thanks a lot for taking my questions. The first one is on the planned equity raise. So if everything goes through, how are your plans to buy back debt? So it’s fixed debt and it’s the bigger maturities due in more than 1.5 years. So if you buy them back and they’re trading still significantly below par, it means that at the end, you buy and back this strong premium or whether respected premiums or even today’s bond prices or do you react quite positive? So how to think on it conceptually? Do you want to buy back earlier, or do you just want to remain the cash on your balance sheet until the debt is due?
Second question is on GN Hearing, also on the organic growth guidance. So the range is just very broad. You made your comments, there is a higher level on certain kind of market. But given your current strong momentum in Q4, also what you have said regarding the first month. So for me, it appears like the lower end appears as a very adverse case scenario. So how do you derive to this lower end? How is this possible regarding your assumptions? Thank you.
Peter Gormsen
Hey Oliver, this is Peter. I think generally, we do not disclose those level of details. But of course, we’re certainly aware that there is a possibility to tend the bonds, but those [indiscernible] not at a point of place to share with you today. But we certainly look at those opportunities.
Gitte Aabo
So thanks for the question. I admit that it is a broader range then we would normally guide on the Hearing aid market and it is reflecting that we’ve seen more volatility, although in an overall perspectives and market is still resilient. But we did come out – of Q4 where the market actually had negative growth. So I guess its on the mindset.
And then bear in mind, that if the market we forecast that for the full year to grow 1%. So even if we grow twice to 2% we are growing twice the market. Obviously, as you allude to, we are in a very strong position and I expect us to take significant market share.
Oliver Metzger
Okay. Thank you.
Operator
And we’ll move next to Rajesh Kumar from HSBC. Your line is open.
Rajesh Kumar
Hi, good morning. Thanks for taking the question. First question is, you are thinking about the capital structure, is there sort of pressure from your distributor or enterprise customer about the capital structure, which is forcing you to factor that in at a lower level or is that a non-issue?
And second question I have is…
Anne Sofie Staunsbaek Veyhe
Apologies. Rajesh, could you just repeat the question, please. I think the line broke up.
Rajesh Kumar
I am so sorry about that. Is there a pressure from your customers or distributors, which is forcing you to factor that in that one to two times leverage or is that complete non-issue?
Second question is that, when you think of the medium term strategy, you are raising a lot of capital from shareholders, you are raising a lot of capital from shareholders, what strategic direction changes are you thiking about?
Peter Gormsen
So this is Peter. On your question about pressure from customers, distributors and key area [ph] its a non-issue there, not duration.
Rajesh Kumar
Okay. And strategic commitments you are making while raising this capital?
Peter Gormsen
I mean, I take that for Audio at least. I mean, we feel good about the strategic direction we having, which is clearly to build on our core capabilities on Audio and Video and with those operate in markets where we find long term attractiveness.
And as an example now, we investing to build a strong position in the Video market. So no major change as related to the capital increase here.
Rajesh Kumar
Okay. Thanks.
Gitte Aabo
No, I think that – I mean we definitely want to continue our strategy of being a growth company and operating in segments where we have the position to take market share. And I think we’ve demonstrated that throughout ’22, and we want to continue doing that.
So I think it’s more the capital raise. It’s a different way of refinancing the acquisition of SteelSeries. That’s all. No change in strategy.
Rajesh Kumar
Understood. Thank you.
Operator
And we’ll move next to [indiscernible] with HSBC. Your line is open.
Unidentified Analyst
Hi. Thanks for taking my first question. Its [indiscernible] from HSBC here. My first question is regarding your mid-term target. Of course, the lead from ’23 to your mid-term targets become larger. So can you maybe give some color about how you see the projection from ’23 levels to your midterm targets? And whether in terms of timing, mid-term changes or whether that stays around ’25 as well?
And a second, in terms of the inventory, the inventory progression was quite striking. So could you give some color about the dynamics whether the required inventory became more because of the reactions requirements of your supply chain, or whether is more to it? Thanks.
Gitte Aabo
Yeah. So as I’ve already mentioned, we did confirm our mid-term target, and also our target of being back at 20% EBITA margin in 2024. And the building blocks towards that is clearly revenue growth. That is an important part of that. I think we saw the impact of revenue growth in the fourth quarter. We obviously get a lot of leverage from that having had a strong focus on controlling our OpEx.
In addition to that, we have both last year and this year, taking a number of measures to improve our supply chain and ensure that our products are designed for manufacturer. And as we move into ’24, a larger part of our portfolio will be designed for manufacturer, which means that we should see improvement in our gross profit. So those are the main building blocks if you like, efficiency in our supply chain and top line growth.
Peter Karlstromer
So here for Audio. I mean, first, on the mid-term targets, I mean we were almost there a little while ago, and now we’re working through some market uncertainties. We are confident we will soon be back there again as those uncertainties in the market have cleared. So reconfirming that guidance.
When it comes to the inventory, as many players in the industry, we have an elevated inventory situation on GN Audio. A few messages on that. First, it’s of good quality. So we are convinced that we’ll be able to take use of this inventory in a good way. And of course, there are many different components to the inventory situation. But if you look on the parts that we would like to reduce also gradually getting reduced.
But of course, we still need to have a healthy inventory because we’re also launching new products in particular here in the first half of this year. So I think it’s fair to say that we probably will see a somewhat increase in the inventory now in Q1 and then throughout the year, we should see a decrease from that position.
Unidentified Analyst
Okay, that’s very helpful. Just to confirm in terms of the lead in margins, 20% you’re expecting ’24 and from ’23 [ph] levels, seems that was quite a jump. That’s what I wanted to check. And how we expect that progression? Whether you expect already towards the second half, the great difference first half or not. So that was just maybe as a follow-up, but thank you otherwise. The clarifications are helpful.
Gitte Aabo
Yes. Let me be clear. I confirm that we will be back at 20% in ’24, and the two big building blocks are further efficiencies in our supply chain leading to a lower cost per unit and the other thing is top line growth.
Unidentified Analyst
Thanks very much.
Operator
And we’ll take a follow-up from Martin Parkhøi with SEB. Your line is open.
Martin Parkhøi
Yes. Martin Parkhøi, SEB And Gitte, stay on the 20% because I just wanted to confirm one thing is that this year you guided 13% to 16% on an adjusted EBITA margin for the core business. In the mid-term, is that 20%? It says only say 20% on an EBITA margin. So can you confirm that, that means that there will be no further one-off costs in 2024 as we have seen for the last couple of years?
And then second, maybe Gitte you can elaborate a little bit on the market development because now we have seen you delivering 14% in the fourth quarter. We saw a statement earlier this week, delivering 11% in wholesale growth of [indiscernible], we saw WSA only 1%, but still we haven’t seen any proper warning from Cenova [ph] yet. So how can you actually come to the very soft development because it’s actually not what we have seen in reported numbers yet?
Gitte Aabo
So Martin, on the two questions, first off, are we planning non-recurring items in ’24? No. On the last one on the market development, when I speak about the market development, it’s actually based on numbers coming out of EHIMA [ph] so the manufacturing organization where we all share our volume numbers.
So assuming that everybody has reported in the units correctly, this is actually the picture we see. Obviously, we cannot see the individual manufacturers, but we can see how the full market has developed. So those are the numbers I’m referring to when I talk about a negative growth in Q4.
Martin Parkhøi
Thank you.
Operator
And take another follow up. We’ll move to Maja Pataki with Kepler. Your line is open.
Maja Pataki
Yeah. Thanks for taking my follow up. Gitte, for you this time. We are seeing a good growth acceleration in Q4. And hearing yet what was quite surprising is the soft number that came out of VA where you were not able to hold on to the market share gains that you reported in November.
So can you kind of share your thoughts what is wrong in the VA channel or why you don’t seem to make any progress in the channel? And if you think that is going to change going forward and why?
And then just a very short one, in your presentation, you were talking about the emerging business, and you said it’s primarily JabraEnhance.com. I mean what is it you mean like primarily? Is there anything else that is in there? Thank you.
Gitte Aabo
Yeah. So let me take the last one first on the emerging business. I mean it is JabraEnhance.com, so sorry for not being more specific. I mean I’m struggling to remember if we book anything else under that, but I mean the top line growth and everything is JabraEnhance.com and nothing else, just to be clear.
Maja Pataki
Yeah. And just to double-check. I mean through JabraEnhance.com, you are now also selling OTC products, right?
Gitte Aabo
Yes.
Maja Pataki
How are you accounting for that? Is there – because at some point in time, you said the OTC will be booked into traditional business. The JabraEnhance just sounds sort of traditional. How do we think about that going forward? Is it going to be split or one way or the other or…
Gitte Aabo
So I guess at some point maybe in ’24 later on, I guess emerging business will become a normal business. But for now, everything that is sold through JabraEnhance.com is considered emerging business.
Maja Pataki
Okay. And VA?
Gitte Aabo
And in terms of VA, obviously, I was also disappointed to see that our market share dropped in December, and obviously, that is not our ambition. We’ve seen such a strong reception of ReSound OMNIA in the rest of the market across countries for that matter. So obviously, also we expect to see a different development in VA.
There’s no secret that we’ve been struggling in VA for a while, and I guess it just takes time to rebuild the confidence in that channel. I am however confident that we will also see our share in VA develop positively over the year.
Maja Pataki
Throughout 2023?
Gitte Aabo
Yes.
Maja Pataki
Or 2024? I mean – okay. Thank you.
Operator
And we’ll move next to Daniel [indiscernible] with Stifel. Your line is open.
Unidentified Analyst
First of all, I was very impressed by your European organic growth of 9% when we consider France at its high base from the reimbursement change and considering the fact German market was down high-single-digit according to the business. So can you – I know it’s probably most likely only half – can you give us a bit more flesh on the bone? I mean, probably your market position in Germany and France is probably much lower than your other bigger rivals. That’s the first question.
And the second one is that has the battery feature helped you to gain market share with ReSound OMNIA [ph] as the bigger competitor decided not to have battery functions in this premium product which I hear from audiologists, it’s a niche nowadays, but still quite important for some patients which don’t have rechargeable possibility every day. So was battery as well a driver for your [Technical Difficulty] a lot of patients?
Gitte Aabo
So thank you for that question. And let me start with the battery question. I mean, obviously, we do see part of our sales of ReSound OMNIA in the rig version and the battery version. But I mean, by far, the majority is rechargeability. It’s like more than 80% of our sales are rechargeability. So it adds, but I wouldn’t say it’s a key driver. It is just that ReSound OMNIA is really great reliable product. I think that’s the reason why it’s so successful.
In terms of Europe, I mean, you are right in the sense that France has a lower weight in our all European business because our market share in France is relatively low. So although the French market didn’t develop as much, it didn’t have the same impact. And then we actually still managed to grow and take market share.
And the same actually applies for Germany, if you like that, again, our market share in Germany is still relatively low. So we have a good condition to grow from and ReSound OMNIA was actually really well received in the German market, which led us to have very strong growth numbers in Germany.
Unidentified Analyst
Okay.
Operator
And we’ll take our next question from Niels Leth with Carnegie. Your line is open.
Niels Leth
Hey, thank you. And could you provide a little bit of cash flow guidance for this year? And I know that interest rates of course would have an effect there, so I mean, if we assume that you don’t do the rights issue this year, so where would you expect your free cash flow to arrive for this year? And what would be your assumptions for your net working capital development for this year? Thank you.
Peter Gormsen
Hey, Niels. This is Peter. So if we start with the net working capital, I think Peter spoke into it a little bit. We will see a phasing where we publish here some modest increase here in Q1. Bear in mind, we have a lot of components coming in still with some unfortunate up to 15 months lead time. But then we expect to bring it down again.
I think we did manage to bring it down in Q4 already, so that worked well and we’re continuing being extremely focused on doing that. As Peter said, we have the right products. It’s healthy components and we can certainly sell those. But we’re also very focused on not doing heavy discounting to get them out in a very fast way. So I think we balance it in the right fashion.
That inventory reduction will drive a positive cash. And I think I’ve earlier shared that we actually work on having up to a DKK1 billion positive impact from net working capital. So, of course, all the uncertainty, we’re looking into can spoil that a little bit, but we’re still working towards that aim for the year. We don’t guide specifically on cash flow, but as Peter said, we certainly plan to deliver positive cash in ’23.
Niels Leth
And on that line, where would you expect your net financial cost in the P&L to arrive for this year, say, provided that you don’t do a rights issue?
Peter Gormsen
I think normally we assume around a little less than DKK100 million per quarter, so that would be around DKK400 million for the full year on the financial items.
Niels Leth
Thank you.
Operator
And we’ll move next to Oliver Metzger with Oddo BHF. Your line is open.
Oliver Metzger
Hi, thank you. Two follow-ups. First on Audio. So you have this ample slide where basically all the supply chain station is or has normalized in Q4. Enterprise was up by 9% in the quarter. Was there any impact from pent-up demand in the quarter? So would you say that the underlying development was below your reported results?
Second question also on the Enterprise development in North America, so it’s kind of weak. Is it more about reluctancy of customers to buy equipment or do you see some down trading in the market?
Peter Gormsen
Okay, thank you for those questions. First on the supply chain, and the answer is no. The growth in Q4 was not related to pent-up demand, so we see that as unrelated to that.
Then your question on the US. I think it’s more the uncertainty, which is probably quite broad-based in a macroeconomic environment is driving to longer decision cycles and hesitations to purchase. So we see a slowdown in particular the US market at this point in time.
Oliver Metzger
Okay. That’s helpful. Thank you very much.
Operator
We’ll take our last question from Veronika Dubajova with Citi. Your line is open.
Veronika Dubajova
Thanks for squeezing me at the end for a follow up. I just wanted to clarify the comment around the Audio guide for the year, both for the year and for the first quarter. I guess, Peter, maybe just remind us. Within the range that you’ve given, if we just look at the midpoint of it, what is that assuming for enterprise versus consumer, and maybe the same comment for the first quarter? I’m just a bit surprised by some of the comments that you’ve made on the call. I just want to make sure we all understand it properly. Thank you.
Peter Gormsen
When we made those scenarios, I mean it’s been in different of course expectations and different segments. So it’s hard to call it out in exact way that you’re asking the question. But I can say, I mean, as I tried to highlight in the intro here, I mean, we feel very good about the portfolio for enterprise and gaming where we continue to gain market share.
And I think you should see that, that’s probably where we see the strength in the portfolio at this point in time. So generally, you should expect those markets to perform well. But again, they of course operate in markets that are impacted by the macroeconomic situation.
Veronika Dubajova
And the softness that you’re expecting for the first quarter, that’s driven by enterprise or by gaming?
Peter Gormsen
I will say that is driven primarily by the US market. And I would say that, that part is at this point in time also in the enterprise market in the US.
Veronika Dubajova
Okay. That’s helpful. Thank you, guys.
Operator
There are no further questions at this time.
Anne Sofie Staunsbaek Veyhe
Thank you very much, operator, and thank you, everybody, on the call. We appreciate your time today, and we will see you on the road. Thank you very much.
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