GN Store Nord A/S

CSE:GN

Hello, everyone, and welcome to GN's conference call in relation to our Q1 report announced last night. Participating in today's call is Group CEO, Peter Karlstromer; Group CFO, Soren Jelert; and myself, Rune Sandager, Head of Investor Relations.

The presentation is expected to last about 25 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 here today. This is a special call at a special time given the elevated uncertainty we experience around the world. Today, we will start our presentation with our Q1 highlights and then we will spend some time at the end of the presentation on how we're approaching the challenges we're facing in the fast-evolving global trade environment. Hopefully, this will provide you with an increased level of understanding and clarity as well better visibility on the actions we're taking to navigate the situation well.

Let me start with the highlights on Slide 4. While we acknowledge that our Q1 financial results were influenced by various short-term factors, we are optimistic about the underlying strength of our business, and we are confident in the proactive steps we are taking to navigate the uncertain global trade environment. In Hearing, the launch of ReSound Vivia is progressing well, even surpassing the launch metrics of our previous successful product introductions. We have experienced healthy market share gains in all the markets where Vivia have been launched, which bodes well for our business in the coming quarters.

In Q1, we experienced a weak U.S. market and also relatively weak international markets. We also had some slowdown of our business due to the ongoing Vivia launch. We see a stronger momentum in the market in April, and we remain confident in our ability to have a strong year in Hearing, thanks to our promising launches and good execution.

In Enterprise, we did see positive sell-out growth across North America and Rest of the World, in line with what we also saw in Q4 last year. In Europe, we experienced a slowdown in the market, likely related to the global uncertainty. We experienced a somewhat weaker sell-in than sell-out and also had a challenging comparison base as we successfully executed several large deals last year. Despite the challenges, Enterprise has successfully maintained a strong market-leading position by holding share across segments. Thanks to our strong pricing discipline, our margins also have remained robust.

In Gaming, we continued the strong momentum from Q4, achieving double-digit organic revenue growth once again and gaining market share in a competitive gaming gear market. Furthermore, our strong execution was reflected in our margins as we delivered a double-digit divisional profit margin during the quarter that typically sees lower revenue and margins. Overall, this was a very encouraging development for Gaming.

On a group level, GN is taking a prudent approach, implementing the necessary actions to safeguard our business from both the direct and indirect tariffs from the global trade situation. We will cover this further later in our presentation. And with that, I'm happy to hand it over to Soren for group numbers during the quarter.

Thank you, Peter, and thank you all for being here with us today. As Peter mentioned, Q1 presented some challenges and introduced uncertainties on global trade. However, by concentrating on the business factors within our control, GN executed well under these circumstances. We are actively implementing initiatives that enables us to navigate through a world filled with significant uncertainties.

In summary, our organic revenue growth ended at minus 3%, excluding the wind-down, influenced by a slight decline of minus 1% in Hearing and a minus 9% in Enterprise due to the sell-in pressures and the high comparison base. This was partly offset by a strong performance in Gaming, which achieved 11% organic growth, including the wind-down our organic growth was minus 8%.

While Q1 showed strong improvement in our gross margin and the combination of a challenging top line and launch-driven investments resulted in an EBITDA margin of 8%. Our cash flow was affected by the traditional seasonality of working capital in Q1, leading to a negative cash flow of minus DKK 395 million, excluding M&A.

Now let's move to the P&L details on Slide 6. As previously mentioned, the 3 divisions faced some challenging market conditions, resulting in an organic revenue growth of minus 3%, excluding the wind-down effect. Despite the mixed top line performance across our divisions, our gross margin remained strong, showing an improvement of 2 percentage points compared to quarter 1 of last year.

This positive result was achieved even with the negative business mix and a slight impact from the tariffs. Our success can be attributed to our strong pricing discipline and the anticipated benefits from the One-GN integration. Reported EBITA reached DKK 300 million, reflecting the top line development and some negative operating leverage.

Now let's move to the Slide 7 to explore the cash flow performance. As a result of the revenue impact, our operational cash flow experienced a slight decrease compared to Q1 of last year. As anticipated, we faced a negative impact from the working capital due to traditional seasonality leading to a negative cash flow of minus DKK 395 million, excluding M&A. Given the seasonality in cash flow and a lower absolute profitability in Q1 of '25, our adjusted leverage concluded at 4.1x. With that recap of our group performance, I'm pleased to hand you back to Peter for additional insights across the 3 divisions.

Thank you, Soren. Let me start with our Hearing division. In Q1, we executed strongly in the flat market. The Vivia launch is progressing very well, which I will come back to soon. However, as you would normally see, we did also experience some slowdown of existing products in anticipation of the upcoming product introductions. In total, our organic revenue growth ended at negative 1% in the quarter. Our gross margin came in a little lower than last year, which is primarily due to a country mix and the disposal of Dansk HoreCenter, which we executed last year.

Sales and marketing costs increased by 12% compared to last year to support the launch activities related to ReSound Vivia and ReSound Savi. As a result of the gross margin development and our launch activities, our divisional profit margin ended at 28.4%.

Let me move to Slide 10 for an overview in the initial phase of the Vivia launch. Just over 8 weeks into the launch, we're excited to share the initial success of ReSound Vivia. At this point, we have got a valuable data, particularly for our ReSound commercial business in the U.S., where we also can compare the data with earlier product introductions. Since launch, we have seen a double-digit increase in the amount of customers who have been trained compared to the similar time period with ReSound Nexia.

This increase in awareness has also translated in the growth of more than 20% in customers who placed at least one order for Vivia. Also encouragingly, we observed an increase of more than 30% in repeat customers compared to what we experienced with Nexia at the same time of the launch. We also see this success translates into market share gains where we have launched, which is great to see.

Although Vivia was launched in only a few countries during the first quarter, we've now multiple launches planned for the coming months. Vivia will be available globally by the end of Q2 with only a few exceptions. Additionally, we are pleased to confirm that Vivia will be available in VA as well, part of the new 5-year contract, which we have been awarded.

With this, let me move to Slide 11 and Enterprise. During the quarter, the Enterprise division delivered a negative 9% organic revenue growth due to challenged European markets. While we did experience some pressure on sell-in, the sell-out growth was somewhat stronger in the quarter. Despite the negative top line development, the gross margin improved to around 56%, reflecting strong pricing discipline and a limited negative impact from tariffs in the quarter.

Sales and distribution costs in the division increased by 8% compared to last year as channel investments were initiated in the beginning of the quarter to enable revenue growth in assumed recovering Enterprise market. Divisional profit margin ended at 33%, positively impacted by gross margin improvement, but offset by the development in top line and sales and distribution costs.

Moving to the next slide. To provide some additional insights into the Enterprise revenue development in Q1, let's examine the dynamics of sell-in and sell-out as well as historical seasonality. Sell-out growth was positive across North America and the rest of the world. However, Europe continues to face challenges due to the economic downturn in some major European economies. Due to increasing global uncertainty, sell-in experienced significant pressure, particularly in Europe as well as in North America, while the rest of the world delivered slightly positive growth.

It's also important to consider the comparison base from last year as Q1 of '24 was quite strong, reflecting several larger deals that positively impacted our revenue. Over the past 10 years in Enterprise, we typically observe a slightly lower absolute revenue in Q1 compared to the rest of the year, which is normal. So while Q1 started a bit softer than we had anticipated, we are generally in line with some of our historical trends. Despite the current downturn, we firmly believe that the long-term attractiveness of the Enterprise market remains strong, driven by hybrid working and the ongoing upgrade of collaboration tools to create a seamless and efficient meeting experience.

Now let's move to Slide 13 for more details on our Gaming division. The Gaming division delivered strong results in Q1 with 11% organic growth compared to last year, reflecting market share gains in a challenged gaming gear market with sharply declining consumer sentiment, in particular in the U.S. With the successful wind-down of the consumer business, overall revenue growth for the division was negative 18%. Our gross margin for Gaming improved significantly to almost 36%, supported by strong pricing discipline and benefits from continued synergy realization from the One-GN integration.

Sales and distribution costs decreased 10%, reflecting structural savings from the wind-down, partly offset by channel investment to support the current strong momentum. Altogether, the divisional profit margin ended at 12.9%, enabled by strong sales momentum, gross margin improvements and positive operating leverage.

And with that overview of the Q1 performance, let's move to the next section of the presentation to discuss the trade environment, mitigation actions and the assumptions behind our guidance. Let me start with recognizing that the uncertainty is higher than normal and that policies around trade are changing at a rapid pace. We have approached this with a focus on flexibility, speed and execution.

The key initiatives we're taking at this time include: firstly, we're accelerating the diversification of our manufacturing footprint to ensure we can produce our products in different locations and, if needed, in locations outside of China to the U.S. market. Secondly, we're responding swiftly from a commercial perspective as we just announced price increases across Enterprise and Gaming for the U.S. market. And thirdly, we've taken several cost and cash flow initiatives to protect our financials as we're going through this period of change. While the short-term market and business outlook is uncertain, we remain confident in the attractiveness of our markets and our ability to drive profitable growth over time.

Moving to Slide 16 and our diversification strategy. Towards the end of last year in Enterprise, most of our manufacturing activities took place in China. However, due to the great work of our operations team during the last 18 months, we're currently executing a fairly quick diversification strategy, meaning towards the end of the year we will be in a situation where we can manufacture most of our product variants across countries like Malaysia, Vietnam and a small part of Europe.

In Gaming, we had a similar exposure towards the end of '24 as in Enterprise. Although we started diversification later in Enterprise, we will also be able to manufacture most of our product variants outside of China towards the end of '25. In Gaming, we're also benefiting from some of the recently announced electronics exceptions when importing to the U.S., which help us to some extent also.

Finally, we are fairly well diversified already today in Hearing, which we have been for 10 years now. All products in the U.S. can be manufactured as a combination of Denmark and Malaysia. Moreover, it's still our assumption that the hearing aids remain exempted from tariffs.

Moving to Slide 17 and the assumptions behind the impact across our divisions from a revenue point of view. We are fundamentally basing our forward-looking guidance on an assumption that the current tariff rates will stay constant throughout the year. On the Hearing business, the global markets, especially the U.S., have started a little bit slower than what we had expected due to the sudden decline in consumer sentiment.

We are encouraged though by the April market behavior, and our base case is that the market will strengthen in the coming months and for the year grow between 3% and 5%. As I mentioned earlier in the presentation, recent Vivia has also had a strong start, and we do expect this momentum to continue, allowing us to take further market shares in '25. As a result, we continue to believe that Hearing will contribute with an organic revenue growth of 5% to 9%.

As for Enterprise, we need to recognize the uncertainties our customers are facing. The impact from the evolving trade environment is naturally very difficult for us to quantify. Our forward-looking statements are coming with greater uncertainty than normal. However, due to the uncertainty, we do take a cautious assumption behind the market development and believe that the market recovery that's been underway for a while likely will stall in the coming periods.

We are focusing on what we can control, as earlier mentioned, accelerating our supply chain diversification. And on top of this, we have announced price increases for U.S. customers to further mitigate the tariff impact. All in all, we believe that our Enterprise division will contribute to organic revenue growth between negative 8% and 0%.

As for Gaming, we're also experiencing uncertainty. With the ripple effects from the global trade situation and the muted global consumer sentiment, we believe that the market will grow less than normal this year. As was also the case with Enterprise, we are proactively accelerating our diversification efforts of our supply chain and have also announced price increases for the U.S. market.

All in all, we are therefore believing that Gaming will contribute with an organic revenue growth of negative 6% to positive 2% growth.

And with that, I'm happy to hand it back to Soren for an overview of the actions we take on the cost side and the related impact on our guidance.

Thank you, Peter. We are executing a wide range of cost containment initiatives to mitigate the direct and indirect effects of the tariff situation. As Peter mentioned earlier, we have now accelerated our supply chain initiatives, including our general diversification. In addition, we will share part of that direct tariff cost with our suppliers. We've also implemented certain cost avoidance initiatives, including hiring freeze and certain global travel reductions.

Moreover, we're also limiting the use of external consultants to reduce other OpEx across the divisions and functions. Finally, we're also pausing certain noncritical projects and activities. Some of these initiatives will have an OpEx impact while some will have a CapEx impact.

This leads me to Slide 19 and the impact across our headwinds and tailwinds compared to our guidance from February. In February, we assumed an EBITA margin of 12% to 14% for the year. As a consequence of the assumed negative demand impact across Enterprise and Gaming following the global uncertainty, we expect a negative impact from operating leverage due to the lower revenue assumption. On top of this, there will be a direct tariff impact following the tariff rates as of today that we assume will stay throughout the year. This combined impact is symbolized with the red box.

As is illustrated in green, we expect to be able to mitigate the majority of the negative impact. Firstly, it is important to remember that we have been preparing for the supply chain diversification during the last 18 months, and now we are even accelerating this project. Secondly, we are increasing prices across Enterprise and Gaming, as Peter mentioned earlier. Thirdly, we are executing the cost reduction initiatives, as I mentioned on the prior slide.

And finally, the U.S. has weakened in the last 3 months. So what we assumed in February would be a headwind is now likely turned into a small tailwind instead. So to conclude, despite the quite significant direct and indirect impact from the tariffs, we will be able to mitigate the majority within the financial year of 2025. We are continuously assessing the developments, and additional prudent and diligent actions will be taken as needed going forward if deemed necessary.

Moving to Slide 20 and the financial guidance. Applying the divisional assumptions Peter mentioned earlier, leads us to a group organic revenue growth of minus 3% to plus 3%, excluding the wind-down impact. As mentioned in the previous slide, we are essentially able to mitigate the majority of the direct and indirect impacts from the trade situation leading to an EBITA margin guidance of 11% to 13%, assuming the current tariff level stays constant throughout the year.

Finally, with the CapEx initiatives we are temporarily pausing, we can mitigate the total absolute cash flow impact as we are continuing to expect a free cash flow, excluding M&A of around DKK 800 million for the year. And with that recap, I'm happy to hand you back to Rune.

Thank you, Peter and Soren, for the updates. And with that, I'll hand over to the operator for the Q&A. Please limit your questions to 2 at a time, please.

[Operator Instructions] Your first question comes from Martin Brenoe from Nordea.

Thank you for providing so many details with this report. I think it's highly appreciated that you're being this transparent. I have 2 questions. I might sneak in one more. But the first question is Enterprise. I just really want to understand the dynamics going on in Enterprise right now. Because if we take the Enterprise performance in Q1, I guess we still have the speaker phones dragging down with around 2 percentage points or 2% on Enterprise. And as far as I can recall, you also had Germany hitting in June last year being quite sluggish and never really rebounded, which I guess is also pulling you down, which will annualize in around June or July. And then you mentioned some large deals in Q1 last year, which I guess is also making the comps more difficult. So when I adjust for all of this, is it fair to assume that the underlying performance was more like 5% negative organic sales growth? Or would you correct me on that?

So thank you, Martin. And I think you lay out several of the ongoing dynamics here. Perhaps the easiest way to give some confidence, which points to a similar number is that the sell-out growth in the quarter here, Q1, was negative 5%. And we also -- I mean, that was essentially some level of sell-out growth in the U.S. and APAC, where we did see pressure in Europe essentially. I think there's a lot of ongoing ups and downs as you speak to some of them. But I think the broader themes still are that the U.S. and APAC markets are still exhibiting some level of recovery. And unfortunately, Europe is seeing a bit more of a muted development with declines even in the sell-out. And then as we mentioned here in the report, we -- it tends to vary a bit between quarters. But in this quarter, we saw quite a difference between the sell-in and the sell-out and the sell-out being a bit stronger, which is, of course, positive for the rest of the year.

Makes a ton of sense. And then the second question is the cash flow guidance and to some extent the margin guidance. How much of that is within your own control? And how much of the guidance is depending on external headwinds potentially easing or not easing? And is there any upside to your guidance as it is right now if the tariffs are improving between especially U.S. and China? Or is that embedded in the high end of your current guidance?

Yes. Thank you for the question. I think to start off with the last, I think it's, of course, in our opinion, we have given to the best of our ability, the outlook for what we believe is a robust guidance essentially that takes some of the things that you mentioned into consideration, and it actually -- the midpoint assumes that tariffs, as we said, stays at current levels. I think what is -- in terms of your margin question first, -- it is so that, of course, the 7.5% EBITA margin that we have now, given that we, on the full year guide the 11% to 13%, it is our opinion that it is the lowest margin that we have seen here in quarter 1, and we will see subsequently improvements and actually also absolute improvements in the quarters to come. And as you would say, normally, we will also see a quarter 4 where we are the highest because that's where we normally have the highest profitability levels.

So I think with the mitigating actions we have put in place where we will, on average, reduce or have a lower spend than what we've seen in quarter 1 and with the growth anticipated still with a strong growth in Hearing, this is why we believe that the margin profile is so that we can land between 11% and 13% and that it takes into consideration some of the uncertainties that's out in the world today.

When it comes to the cash flow, A, of course, part of what we see in the reduced top line has, in this case, a positive impact on the net working capital. That's one of the swings positive in our favor of cash flow. And then secondarily, we are taking CapEx mitigating actions, postponing initiatives that we likely will do long term, but where we -- with the situation we're in now, we can protect our cash flow, and that's why we can keep it at the DKK 800 million. So it's a combination of the mitigating actions and how the top line will project throughout the year that enables us to have a solid cash flow for the year.

The next question comes from Hassan Al-Wakeel from Barclays.

Two for me, please. Firstly, on the quarter and specifically the cost profile in Q1, could you talk to some of the moving parts there and how you think about that over the course of the year as well as potential for cost savings? I ask given the significant miss at the EBIT level and how you square the assumed margin improvement over the course of the year in guidance with the potential for more persistent uncertainty. Secondly, could you please talk about the U.S. Hearing market in Q1 and what you've observed as you've exited the quarter and really into Q2? I guess the question is, is a recovery to more normalized U.S. growth needed to hit the growth ambition for this year? Or do you see the strong reception of VA driving the improvement from here?

I will address, and I partly addressed it also before on the spending levels as we see them coming forward into the subsequent quarters. I think what we've seen coming out of quarter 1 is, I think, 2 things that we have seen, the sales and marketing cost that's been supporting our endeavor to launch. And as such, that's especially true for Hearing, have seen also that impacting the divisional profit in Hearing for the quarter isolated. We do anticipate that, that levels will come somewhat down during the quarters to come. And that's actually also true when it comes to the other functional cost lines that you spoke to that we do anticipate that the mitigation plan we are -- actions we are taking actually will lead to an absolute lower cost spend in the quarters to come. And it will actually also be split on lines, whether it's R&D, it's sales and marketing or for that matter, the administration line. So this is how we expect it to unfold.

And I think here we are in control of that line, whereas, of course, the top line is not only us controlling that, but for the OpEx line this is our assumption. So you should see absolute levels come down as a consequence of the mitigating plan we are putting in place.

And if I take the question on the Q1 in the U.S. Hearing market, as I mentioned in my opening, it was a weak U.S. market in Q1. And we of course do not know exactly what was driving it, but likely related to the overall uncertainty and the consumer sentiment. What's encouraging is that we saw some improvement towards the end of Q1 and have seen a better April, and that goes both for the market as well as our own sales numbers. So that's why we do believe that the market will continue to recover. And as I shared, the base assumptions for the year is a fairly normal market.

We also have Vivia. We believe strongly in Vivia. We're getting very good feedback, as I mentioned, and we have every reason to believe we should be able to gain market share. But still, the market environment will impact us somehow. We're not insulated from it, of course, even if the Vivia is strong. So I think you should also see our guidance range, the 5% to 9% growth for Hearing to factor in some of the uncertainty in the market development. I will say though that for Q2, we are confident in our ability to drive a very healthy growth in Q2 and believe we should be able to drive us towards high single-digit growth in Q2 for our own business in the current market environment.

Very helpful. If I can just follow up on tariffs, what is embedded in the guidance this year, if at all, from the recouping of Enterprise and Gaming sales as manufacturing moves outside of China?

The approach we have taken for tariff is that we have assumed that everything that is in place today in terms of tariffs and possible exemptions will stay in place for the rest of the year. That gives you a fairly high and blended tariff rate, if you put it like that. So we think it's a good base assumption. Then we don't know exactly, of course, if there will be evolution around that. The impact for Gaming and Enterprise, as we guided, it's quite a lot on top line impact, and you will see the majority of that impact now take place in Q2 and Q3 towards the end of the year, as we are making more and more movements into manufacturing locations where we can supply the U.S. markets from other markets in China, we will see some recovery of our businesses that -- the U.S. business, I should say. That is how we think about it.

Generally, we have looked on many different scenarios when we have put out this guidance because there's so much uncertainty, of course, around the trade environment. And we believe that the guidance, which we have shared yesterday afternoon, is robust for the majority of the scenarios we see basically.

I guess there is some kind of interruptions in the call right now. I don't know if you can hear me on the call. I think it's on the moderator side there is some problems maybe. So please hang on for me and we'll look into that. I think we can hear the moderator now. Moderator, maybe if you can give it to the next one in the queue. Maybe I heard also you, Veronika, at some point. Maybe you're still on somewhere. I guess you are the next up in line. So I don't know, Veronika, if you can try to say something.

I'm not sure if you can hear me.

Veronika, we can hear you. So please take a long question because then everything else is fixed, I think.

Very good. All right. Excellent. Brilliant. Since you need a long one, I'm going to ask 3, if that's okay. The first one is just if you can comment on the new VA contract and the likely price increases that you expect to see across your portfolio. And then specifically, can you confirm that Vivia will be launched in a separate category for dual-chip hearing aids? And what kind of price premium should we be anticipating for that category? So that's my first question.

My second question is on the launch costs and just the general SG&A or really selling and marketing run rate for the Hearing business was substantially higher certainly than we expected. Just if you can maybe split out what the contribution of the Vivia launch cost was in Q1 and what you think, Soren, is the right run rate for selling and marketing costs for Hearing through the remainder of the year?

And then my third question is just a clarification on your tariff commentary. When you say the guidance assumes tariffs as they are today, is your assumption that in the second half of the year, the pause that is currently there on the tariff regime when it comes to the tariffs that are not implemented right now is in place? Or do we revert to the higher rates of tariffs that were proposed on April 2?

Thanks, Veronika. Let me start on the VA question. First, we are pleased, of course, to confirm that we have a new 5-year contract in place, which we -- I mean, are very happy about, of course. And Vivia will be sold into VA. And the way we have priced into the contract and be awarded is that we have a smaller price increase across the portfolio, which we think is balanced and a good outcome. When it comes to Vivia, there is now, as most of you know, a dual-chip category. Vivia will be sold into that category. And as such, we're able to get a bit of a higher price increase in Vivia. The exact levels, Veronika, we have decided to not disclose like this. But we do think it will allow us to sell into VA in a sustainable way with, I would say, healthy margins in a fair pricing basically.

Then if I -- when I'm talking -- take your third question also and then I hand it over to Soren for your second one. For the tariffs, you're right, there's so much uncertainty. At this point in time, we have a very elevated tariff on China goods going into the U.S. of 145%. Then we have 10% in many other countries due to the pause that was announced. And then you have some exemptions in place in different ways. We have taken a fairly simplistic approach and say we do believe that this will stay in place for the rest of the year. Not at all pretending we know more than anyone else on the outcome of this, of course. But there are many scenarios and one scenario could be that some countries perhaps getting a slightly higher tariff than the 10%. On the other hand, I mean China could perhaps get a somewhat lower tariff than 145%. And when we are modeling different scenarios, we do believe that the guidance we have given is robust in the majority of them. That's the way we think about it.

Yes. And then to the third question -- sorry, the second question was on the launch cost within the Hearing space. The way we look at it is that the first quarter was, as you also stated, Veronika, linked to the Vivia launch, and that's also how we look at it. And you should expect that the subsequent quarters we see a lower sales and marketing spend within Hearing. So I think that's probably also what you hinted to, but that's also how we expect it to play out.

Thanks, Soren. And can you quantify, I guess, the contribution from the launch costs or what should be the run rate as we move for the rest of the year?

I think it's, we wouldn't quantify it, but just -- I mean, look towards that we are expecting a lower level for the subsequent 3 quarters. And then I think that should be guidance enough that you should see it come down.

Your next question comes from Martin Parkhoi from SEB.

Martin Parkhoi, SEB. First question on the long-term outlook on margins. You say this year you are struggling or fighting to keep your head above water and taking all initiatives to hold back cost and you're not really coming closer to the 16% to 17% you're promising in '28 for good reasons. But how can we see a credible path from here when you already have taken a lot of initiatives to cut costs to still reach this long-term target given the environment we are in right now?

And then second question on price increases. Can you maybe comment a little bit on what you have seen the competition? Of course, we heard Logitech increasing prices, which is, I guess, is relevant on the Gaming side. But what are you seeing in the Enterprise market with the price changes for competition? Maybe you can comment on that.

Thanks, Martin, for your questions here. Starting with the long-term margin targets of 16% to 17%, which we announced at the Capital Market Day, I mean we made a very healthy step forward on margin expansion in '24, and we set out to do another step this year. And then I think we have previously communicated that it will be a steady increase over the years to reach that target. Undoubtedly, this year has thrown us a few unexpected challenges with the global trade environment. So as you recognize, this year we will likely not be able to make the same level of margin improvement as we anticipated. We do see though that many of the effects that negatively impact our margin now are temporary in nature. I mean, you're right, we've taken some cost savings that we've taken now, but we're also taking quite some cost increases due to this temporary nature environment and costs. And when we have moved our manufacturing to more balanced global manufacturing footprint, that in combination with the right level of price increases, we believe we will be able to climb back some of the margins. Then also some of the margins should get support from top line growth and operating leverage also over time. So we recognize it's of course not moving in the right direction this year, but we do think it's a very special year, and we do think it's more of a temporary nature, several of the effects we're working through at this point in time.

Then on the price increases, both for Gaming and Enterprise, it is for the U.S. market and the blended increases we have made both for Gaming and Enterprise are around 10%. You commented on some Gaming. I think we've seen some competitors doing similar actions to us in Gaming. And when it comes to Enterprise, the same there, some competitors also taking similar actions as we are doing pricing-wise. We are of course monitoring this carefully because we don't want to price ourselves out of the market or what should we say, upset any customers or distributor by doing the wrong things here. But I think we're getting a good level of support from both customers and distributors for the actions we're taking. And I believe they are found balanced, so to say, and also comparable to what we see some competitors are doing.

Your next question comes from Richard Felton from Goldman Sachs.

Two questions from me, please. So the first one, just sort of digging into the tariff impact in a bit more detail. Could you perhaps quantify what the direct tariff impact is that you expect this year before any of the sort of the mitigations? That would be really helpful starting point to understand the scale of the challenge this year. And then the second one, as you look to diversify your manufacturing footprint outside of China, can you sort of tell us a little bit more about what that process actually looks like? Is it a case of finding manufacturing partners? Are you expanding your own facilities? Anything that you can share to help us understand what that process is actually looking like would be great and how much visibility you have on your ability to execute on that before the end of the year.

Hi. This is Soren speaking on your question number one. And I think to many -- in many aspects, your question, I think we've addressed it with the slide we have up on the margin, where we have actually illustrated that it is of course a significant impact directly from the tariffs, and that's also how we monitor and mitigate it. So I think we wouldn't give out a precise number, but you can see there that it is of course material. And as such, we are also working with a material mitigation plan where we believe that it's quite balanced as we have 3 actions actually mitigating the impact from the tariffs. So we wouldn't give a specific one, but you can see that it is actually material in the way we've illustrated it on the slides.

And then if I take the evolution of -- okay, and then if I take the evolution here of the manufacturing footprint, we brought back the slide here. Hopefully you can see it on how we believe that this will play out over the coming periods. And if we take it from -- I mean, a year ago, I would say that predominantly we manufactured for both Enterprise and Gaming out of China. And already a year ago we started to take the initiatives to create a more diversified manufacturing footprint. We of course didn't know anything about what we experience now. We did it more from a general point of flexibility and resilience. And we're benefiting to some extent from that today because several of the things and conversations have been ongoing for a longer period of time.

From a practical point of view, all the manufacturing, both for Enterprise and Gaming are outsourced. So when we say we're moving to different countries, it is about either moving with an existing partner that help us to set up manufacturing in another country or finding a new partner. And we're trying to do that in a way where we're maintaining a fairly consolidated set of partners that are significant partners to us in terms of volumes. So that is how we do it.

And then it is quite practical work. You need to find a good manufacturing facility. You need to find local operators that can operate the manufacturers and then you need the manufacturing equipment. For several of our products, we actually own that ourselves. So then in some cases, we're actually moving this manufacturing equipment from one country to another. We have fairly good line of sight of this. While it will take some time, the agreements with partners are essentially signed, and it's all about the practical work of making this happen together. So we are quite well advanced in locking in this transition and as such we feel quite confident on the time line and our ability to drive this successfully also.

Your next question comes from Maja Stephanie Pataki from Kepler Chevreux.

I think it's my turn, but the line was really bad. I have 3. And I would like to start with the statement that you made about the sellout for Enterprise in the U.S., where you said like that was holding up fairly well. How much of that do you think is going to be repeated in Q2? In other words, what are you seeing in April? Because a lot of headlines suggest that there seems to be like a standstill introduced in the U.S. That's the first question. The second question, just for clarification to understand the dynamics, please. You say that you expect the disruption for customers to be limited due to the fact that there is available channel inventory. I guess that is then related to the fact that you're moving more and more out of China. And in June, you're actually expecting only to have a small bit coming out of China. But then I'm going back to Veronika's question. What if by June it's not a 10% tariff for other countries like Malaysia, Vietnam. Is that going to -- would that change the picture?

And then lastly, just to confirm, Peter, did I hear you right that you said that you expect to grow Hearing in Q2 in the high single digit? If yes, can you tell us where you take the confidence from after 1 month? That would be very helpful.

So if I take the questions in the order you asked them here, so we can confirm that in North America we had sellout growth in Q1. We do not have the April data for sellout yet available. So I cannot comment on that data specifically. But we didn't experience any slowdown towards the end of the quarter or anything like that. So we do believe that there still is a relatively healthy market in the U.S. We also appreciate of course that there is so much uncertainty around both global trade, but also global macroeconomic indicators. So if anything changes dramatically, this obviously can have an impact on this also. But it's nothing we picked up today.

Then this about how can we reduce our sell-in and have a limited customer impact? I think it is a bit -- as I think you said in the question here, we of course have distributors and resellers in Enterprise. We're selling in 2 steps before it needs reaching our end customers. And at this point in time, we do not think it's so productive to import goods from China into the U.S. with the high tariff levels we have. But you also -- we should recognize it's a quite limited part of the U.S. Enterprise portfolio that has such tariffs. So the majority of the Enterprise products already today we can import in the U.S. from other locations.

But for those part of the portfolio where we cannot, that's where we believe we need to rely on available inventory in the channels or in some cases also have discussions with the customers to perhaps buy other similar products that we can provide at this point in time. So we do think we have a way to navigate this. The situation is of course a bit unusual. But with the help of this, we believe that the customer impact, we can keep it limited.

Then the third question, yes, we believe in a strong quarter here for Q2 in Hearing. We believe it will be high single-digit growth in Hearing. And it is due to the launch of Vivia essentially. As I mentioned, in Q1, we launched in part of the U.S. market and also part of global markets. In Q2, we will launch in many more markets. And we do know that there is quite an anticipated order coming into the quarter, and we have good momentum and very good feedback. That's what's behind our confidence here essentially.

The next question comes from Robert Davies from Morgan Stanley.

Most of the ones I had have been covered. Just a couple left. One, just on the Vivia launch and sort of rollout, I'd be interested in just getting some of the feedback from customers, how it compares from a technology standpoint compared to obviously the other AI-enabled hearing aid in the market?

And then the second one, just sort of following up on the sort of planned sort of manufacturing split, I guess. I saw your slide, I think it was 16, showing the planned changes between where your manufacturing locations are. Just could you quantify the costs of making that transition from the sort of heavily China-dominated sort of split to the more kind of diversified breakdown by the end of '25? And what's the backup plan if the April 2 tariffs were to come back in those regions? Are there kind of secondary locations you're looking at that you could switch out of those very high tariff rates? Because I know some of those regions were still in the sort of 30%, 40%, 50% range.

Thank you so much. Vivia, in general, has been very well received. And I think it's a combination of factors. I mean, in terms of its AI capabilities, it really helps to hear very well in noise. And if I compare less to our competitors and more to our previous products, it's a real step-up from where we were with Nexia that was already very good in helping people with hearing impairment to hear in noise environments. So it's really adding a capability here, thanks to the AI and the neural networks in the hearing aid. But it also is having all the great capabilities of Nexia, the small form factors, the long battery life as well as the good connectivity. So I think it's perceived as a very complete hearing aid with very few compromises. And I think the appreciation comes from the combination of all these attributes basically. So the reception we are getting is very positive.

Then the final way I would say is that hearing is a lot, of course, in the end how you experience the help you get. And the feedback we're getting from users is broadly it's a very natural experience, helping them to hear like they remember hearing in a normal way, so to say. So I appreciate it's hard to give on a call like this, the full comparison and confidence, but the feedback is universally very strong for these different set of reasons and factors.

Then your second question, I mean, we like to recognize there is a lot of uncertainty in the global trade environment, and we appreciate the question, what if this changed and what if that changed. And we're asking exactly the type of questions ourselves and running a lot of different scenarios and trying to have the right level of preparedness. I think the good things with having a more diversified setup is that it's actually possible to move products between the locations. So in the event that one of these locations would get into a very elevated tariff environment, then I think that the reaction we need to do is likely to move to other places.

To open up new locations is a little bit of a longer process, but can also be done. And we have increased our capability significantly now to produce outside of China, and we have a good level of preparedness to navigate. But of course, we cannot do it overnight. So we need to factor in some level of uncertainty here, which we believe we're also doing in our guidance.

The cost involved, we have not shared that, and I don't think we will share it more than in the guidance, but it is really the transition cost. It is about moving from one location to the other, training cost and everything related with opening up a new location. I mean the kind of cost of operating is comparable across these different locations. So it's not like one location have a much higher cost to produce the products than another one. But I mean, there's a lot of moving parts. We have factored in, to our best ability, all of this into the guidance, which we shared with you yesterday afternoon.

Your next question comes from Niels Granholm-Leth from Carnegie.

On the price increases, will those price increases have an immediate effect as of 1st of June? Or will there be a run-in effect where a number of customers will first have to renew their contracts over the course of the coming quarters before it has an effect? And my second question would be on your net financial costs. Can you please provide an update as to how many -- how much financial costs we should expect for this fiscal year?

So on the price increase, Niels, the way they work is that we have an advanced notice if you take Gaming as an example, with several of the large retailers where we need to announce price increases a period in advance. But then after that notice period has kind of lapsed, then the price increases are immediate. And it works in a similar way on the Enterprise, the notice period is a little bit shorter. So in reality, the price increases will come in at slightly different point in time for the different retail channels. So see the June more as a guidance for when the average has been fully implemented, so to say. But there will not be a long period after that, we need to wait or anything like that.

Niels, and then on the financial items, I think we are still of the opinion that the guidance we've given on this DKK 150 million a quarter is still a prudent estimate. We see interest rates coming down a little bit, but still the best estimate for you guys to work with is DKK 150 million a quarter. So that stands.

Your next question comes from Carsten Lonborg Madsen from Danske Bank.

As you say, Peter and Soren, it's quite clear that this year is a special year in terms of margins, et cetera, and costs. But as you now move outside China, can you talk a little bit about the like-for-like production cost? Because all else equalized, I find a little bit hard to see that things can be produced at the same price outside China as it can within China. I guess that was the reason to be in China in the first place. And also, again, coming back to your long-term margin target, so many things have changed since then. Top line has not really performed compared to your initial plans and costs are trending up quite a lot, not only this year, but I would assume it's also trending up next year, what we are talking about here. So can you tell a little bit more about how you plan to get to goal with your longer-term EBITDA margin aspiration? And then a final question, net working capital quite significantly negative impact this quarter. Is this because you're filling up inventories around the world ahead of tariffs being implemented? Or how should we read this?

Thanks a lot for your questions here. If we look on the production cost, I mean, naturally, there can be small variance between countries and so, but it is our planning assumption and belief that we can have a comparable cost here across these different manufacturing locations. And when we say cost, we also need to say that, I mean, our product cost is of course a combination of components and then logistics and, of course, assembly costs. So we see it also that, what should we say, the cost that could vary between countries is a relatively small cost of the total product cost and as such the difference becomes even smaller. So we think it's fair to assume that we can have this comparable. So we are fairly confident on that. And I should just say also that the locations we're moving to have built up a lot of capabilities. There are significant manufacturing clusters and also good infrastructure. So it's not like we're starting from scratch in any way in these locations. And we're also moving together with very capable partners helping us to manage these transitions. So that's what's behind the assumptions.

And then, if I make a comment on the long-term margins and then hand it to Soren for the net working capital question, I think I mentioned it here earlier in the Q&A that we appreciate that this is a year where we are, I mean, thrown a lot of new challenges, which we are navigating, and we are taking measures to do that well. But still also we recognize of course we see some pressure on the top line and also not a year where we're able to expand that margin towards our long-term targets. We do think that several of these effects are more of temporary nature. And after we're through this transition, we should be able to get back into more, what should we say, the normal kind of margins. We still have a bit of improvement work to do that need to come a combination of initiatives working to improve the gross margin, getting that back, and also the operating leverage. It is still our belief that at this point in time, we really are aiming to get to this target. If something would change, we will of course immediately update you. But at this point in time, we still think this is the right target to hold on to.

And then as I spoke to earlier on the cash flow for the full year, part of it is actually that the net working capital will ease as we go through the year. And as for Q1, it is actually not the inventory levels that as such has changed the comparator. It is more working within the receivables and the payables. So that's more where the mix is changing. And as I said, full year, we are expecting to have a better or improvement on net working capital as we move through the year.

Your next question comes from David Adlington from JPMorgan.

So first one, it's difficult, but I was just wondering what you're expecting the price increases in Enterprise, how they might impact volumes? Secondly, just in terms of your margin guidance for this year, that's obviously only with about a 6-month impact from tariffs. As we think about 2026, you've got the full year impact of tariffs, but also full year impact of mitigation. How should we be thinking about the trajectory of margins in '26 relative to '25, up, down, sideways? And then finally, just in terms of the challenges you're facing, just wondered if you thought that the balance sheet needed any further support from new equity.

I mean in the Enterprise, we -- it's difficult to know, of course, the elasticity here. What I would say is that it's been a couple of occasions in the past where we made price increases in Enterprise around 10% also. And we have not seen a significant impact on the volumes. There could be some, but it's hard, of course, to exactly isolate the cause and effect there. And also here, I do think we will be helped, of course, with several of our competitors taking similar measures at the same point in time. So we do not factor in a significant drop in volume due to this. But I appreciate there is some level of uncertainty around it, but we do factor in that well within the guidance, I believe.

Just one comment on the '26 margin before handing it to Soren to make further comments. The movement of our supply chain and our ability to manufacture in more locations and in particular, to supply the U.S. market outside of China in case the tariffs will remain elevated. I think that's of course something where we are hurt this year, but we will see much less impact of that in '26. Then I leave it to Soren, if you like to make more comments on that and the final question.

No, I think that would have been my comment reiterating that, again, the diversification we are doing now, we have been planning for, for quite some time. As Peter said, we are now accelerating that to be the vast majority of U.S. supplies, at least not being supplied out of China by the end of this year. So as such, that is what we also consider and Peter spoke to as temporary effects this year that we expect to go out in '26. When it comes to your -- the equity, it is clear that the guidance we have laid out now still points towards a free cash flow of DKK 800 million. As such, we do not see the equity as something that we're working with.

Your next question comes from Susannah Ludwig from Bernstein.

I have 2, please. I guess just first, I wanted to follow up on your outlook for sort of normal market growth this year and what gives you confidence that we can see that after the U.S. private market was down mid-single digit in Q1. Can you confirm if the U.S. private market saw growth in April? And then maybe could you talk a little bit about how European market performance was in Q1 and April? And then second question is just on the transition costs of moving your manufacturing. Was sort of the total transition costs, was that in your original free cash flow guidance? Or has the acceleration sort of increased the amount of transition costs that you're going to see this year?

I can start here. So as I mentioned in the beginning, the market, I assume it's the Hearing market we are discussing here, in Q1 was in the U.S. quite under pressure and in a fairly unusual way. It is encouraging to see April being stronger. And therefore we remain of the view that we will see a fairly normal market in the U.S. this year, unless something very unexpected happened to the global kind of macroeconomic environment or similar. In terms of the Europe and rest of the world, we saw a little bit pressure on the market in Q1, but not in the same dramatic way as we saw in the U.S. And therefore also, I mean, perhaps less of an outlier, and we do expect the market to continue to perform fairly normal also in Europe and the rest of the world during the year. Hopefully, that helps.

And then when it comes to the…

Extra one, if I could…

Yes, please.

Could I ask just quickly as a follow-up on the U.S. Hearing market in April? And when you say stronger, could you confirm then that you mean positive in April? Or was it still negative but just less negative than in Q1?

No, no, it was positive in April. I can confirm that.

And then when it comes to the transition costs, as Peter spoke about it, it is limited for us. And it's also here, bear in mind that the transitions we are talking about is also we are using the CMOs basically in China and as part of the change of the diversification, and it is as such included in our cash flow.

Your next question comes from Shubhangi Gupta from HSBC.

So could you comment what was the growth you saw in Q1 for U.S. commercial markets? And on your EBIT margin guidance, how much of that is dependent on Hearing growing towards the upper end of your 5% to 9% organic growth guidance? And second, just a small clarification on your tariff assumptions. So you're assuming tariffs only on your Enterprise and Gaming segments? Or is it also in your Hearing segment?

Sorry, we didn't hear the first part of the first question. Can you repeat that, please?

What was the growth in U.S. commercial markets that you saw in Q1, the market growth?

I mean the growth in the U.S. market in the first quarter, we saw a decline, more mid-single-digit decline in the market, which is unusual and a bit of an outlier compared to what we've seen, of course, over many, many years. And exactly what has been driving this, it's hard to say, but it is probably driven by a high level of uncertainty in multiple dimensions. But as I recently mentioned, we are encouraged to see April being back in growth, and we do believe that the market will stabilize during the year and end up in a fairly normal way for the complete of '25.

And then, if I just take the final question and then leave it over to Soren for the second question, you're right, we have assumed tariff impact on Enterprise and Gaming. When it comes to Hearing, we have a manufacturing setup where we are manufacturing in Denmark and doing the chipsets and then in Malaysia, the hearing aid for the U.S. market. But at this point in time, we are exempt from tariffs, and we do assume in our planning that we will continue to be that. We have not heard anything else.

And to your question on the group guidance on margin, the 11% to 13%, we assume that the Hearing there is in the midpoint of the Hearing guidance.

There are no further questions. This concludes our Q&A session. I would now like to turn the conference back over to the company for any closing remarks.

Thank you very much, operator, and thank you, everybody, on the call today.