Interim Report 2013

Company announcement no 2013-08                        14 August 2013

Improved earning momentum in first half-year despite difficult conditions in several markets

As expected substantial contribution to corporate growth by Oticon Alta

William Demant Holding A/S today published its Interim Report 2013. Selected highlights from the Interim Report are summarised below:

• In the first half-year, the Group realised revenue of DKK 4,541 million, or a 7% rise compared to the same period last year. Both the Group’s core business, wholesale of hearing aids, as Diagnostic Instruments and Personal Communication have generated positive organic growth. Furthermore, revenue was positively impacted by acquisitions, including the acquisition in April 2013 of the French implant company Neurelec.
• Driven by the successful launch of the high-end product Oticon Alta, the Group’s core business, wholesale of hearing aids, has in the reporting period generated a growth rate that outmatches the market growth rate. Compared with the second half-year 2012, the organic growth rate was 8%. Growth was achieved despite continuously difficult conditions in several markets, including Denmark, Norway and Holland, where the Group has lost revenue of more than DKK 100 million, or 2-3% of corporate revenue.
• By virtue of the boosted sales momentum, corporate operating profit (EBIT) in the period under review reached DKK 880 million, or a rate of growth of 12% on the second half of 2012. The profit margin (EBIT margin) was 19.4%, which is 1 percentage point above the level realised in the past six months. Compared to the second half-year of 2012, earnings per share (EPS) rose by as much as 16% to DKK 11.2, which are the highest earnings per share ever generated by our Group in any half-year period.
• Our hearing aid business will in the second half-year carry out its most comprehensive launch of new products ever, including the introduction of the mid-priced product Oticon Nera in early September. We will also see the introduction of a completely new family of paediatric products from Oticon and new mid-priced products from both Bernafon and Sonic.
• The Group maintains its expectations of 2013, except that the corporate tax rate is now expected to amount to 24-25% against a previously estimated tax rate of “approx. 25%”. We would also emphasise that revenue and earnings in the second half-year are expected to exceed the levels achieved in the first six months. We thus maintain our expectation that for 2013, organic growth rates in the wholesale of hearing aids will exceed market growth rates by 3-5 percentage points and that our operating profit (EBIT) will exceed the level realised in 2012.

“In the light of a rather difficult previous half-year, that is the second half-year of 2012, we are especially pleased to see that our core business has managed to grow 8% organically and that our Group’s earnings per share have risen by 16%. A significant reason for this is that with its successful launch of the high-end product Oticon Alta, Oticon has again achieved sales momentum and cemented its position in this part of the market,” says Niels Jacobsen, President & CEO of William Demant Holding.

“In our opinion, the development we have seen in the first half-year only goes to prove that we are on the right track to meeting the expectations communicated to the share market for the full year. Our optimism is of course supported by the many new products we will introduce in the second half-year, which will enable us to maintain our strengthened sales momentum achieved in the first half of 2013,” adds Niels Jacobsen.

Principal key figures and financial ratios

Market conditions and business trends

Growth in unit sales in the global market for hearing aids developed positively in the first six months of 2013, and we estimate growth to be in the middle of our long-term forecasts of 2-4% unit.

We are of the opinion that the average selling price in the global hearing aid market is still under pressure mainly due to keener competition in connection with large tenders, changes in public subsidy systems and a rise in sales to channels that cater for the more cost-conscious end-users. In return, the number of product launches in the upper price categories had a positive impact on the average selling price, but with manufacturers’ different launching strategies of whom some have opted for simultaneous product launches in all price categories as well as strong sales to the NHS, we are of the impression that in overall terms, the average selling price on the market has fallen by about 3% in the first six months of the year. In terms of value, we therefore estimate that the market for hearing aids has developed flatly.

In the first six months of 2013, our corporate core business, which comprises the development, manufacture and wholesale of hearing aids, once again captured market shares with a fair rise in unit sales. Organic growth in revenue was well over 1% in a market which, in our opinion, saw flat development in terms of value. Compared with the second half-year 2012, our core business generated 8% organic growth. Overall, our hearing aid business, which also includes our retail activities, produced 5% growth in local currencies, whereas organic growth in revenue was neutral compared with the first half of 2012.

Trends in corporate hearing aid sales should be viewed in the light of the negative market development in Denmark, Norway and Holland where structural changes have resulted in a sizeable drop in revenue compared with the same period last year. Our strong position in these markets has had a noticeably adverse effect on organic revenue growth in Europe by more than DKK 100 million, corresponding to 2-3% of the overall revenue of the business. Generally speaking, sales in the Group’s other markets developed satisfactorily.

With the launch of Oticon’s latest high-end hearing aid, Oticon Alta, in the first quarter of 2013, Oticon has taken another step towards delivering not only the best audiological features and improved speech intelligibility, but also the most natural sound. Based on Oticon’s new Inium platform, Alta offers features such as Speech Guard E, Inium feedback shield and YouMatic Premium, which together create a natural listening experience adapted to match the user’s listening preferences. Oticon’s customers and users have been very enthusiastic about Alta and in the first half of 2013, sales fully matched our expectations despite tough competition in this particular price category.

Unlike some of its competitors, Oticon has chosen to pursue its usual launching strategy, which means that initially Oticon will only launch products to the high-end segment, but in return, products are launched in all styles. Most competitors have, however, chosen to introduce new products in all price segments simultaneously and were therefore in a relatively stronger position than Oticon in the mid-priced segment in the reporting period. The launch strategy adopted by Oticon resulted in strong Alta sales in the high-end segment in the first six months of 2013, but has had an adverse effect on sales in the mid-priced segment. Compared with the period immediately prior to the introduction of Oticon Alta, i.e. the second half of 2012, this turn has, however, been significant. If compared to the previous six months, organic growth in the wholesale of hearing aids was 8% in a market that saw flat or slightly positive trends in the same period, resulting in an increase in the Group’s global market share of 1-2 percentage points.

With its launch in early September of a mid-priced product called Oticon Nera in two price points, Oticon will however very soon be able to offer hearing aids based on our Inium platform in a total of four price points, which will substantially boost Oticon’s position in the mid-priced market. Based on the restored growth potential in the mid-priced segment, we thus expect Oticon to fairly quickly recapture market shares in this part of the market. In addition, we will introduce an entirely new line of paediatric products also building on the unique qualities of the Inium platform. This new line will deliver significant new audiological features for the fitting of hearing aids designed for children. With these potent product novelties, Oticon’s product portfolio will again be among the absolutely strongest and most updated portfolios on the market, and we will therefore hold a very strong position in the continuing battle for market shares.

Sales in Bernafon and Sonic also developed favourably in the first half-year. With the launch of its high-end product Acriva in April, Bernafon has fortified its product programme and once again demonstrated that the company can muster a fully updated product portfolio with highly competitive products based on the ChannelFree technology – and what is more, products that do not compromise on features or performance despite their competitive prices. The roll-out of Sonic’s Bliss family is progressing as planned and in the first half of 2013, Bliss made a substantial contribution to Sonic’s continuous growth. September will see more exciting product novelties in the mid-priced segment from both Bernafon and Sonic. Together with Oticon’s new products, our Group will thus be able to present a record number of product introductions in any second half-year and have one of the most powerful product ranges on the market.

In the period under review, our retail activities delivered a fair improvement in revenue driven by acquisitions made in both 2012 and 2013.

The original part of Oticon Medical, which develops, manufactures and sells bone-anchored hearing solutions (BAHS), once again delivered an impressive rise in revenue, driven among other things by increasing sales on the UK market and a number of markets in South America. Our takeover of the cochlear implant business, Neurelec, is proceeding according to plan, and we have succeeded in keeping up the sales momentum that matches our expectations. On the short term, our major focus areas are to further strengthen distribution and to boost our research and development and marketing efforts.

In the period under review, Diagnostic Instruments generated 5% revenue growth on the same period last year. In terms of local currencies, growth was 6%, organic growth accounting for 2 percentage points.

In the first six months of 2013, Personal Communication realised an organic growth rate of 47%. Accounting for more than half the revenue generated by Personal Communication, Sennheiser Communications has moved its inventory closer to its customers by selling it to Sennheiser KG. This extraordinary sale naturally had a positive impact on revenue, but even if we adjust for this income, both Sennheiser Communications and Personal Communication have been quite successful and have achieved fair double-digit growth rates.

Results for the first half of 2013

In the reporting period, the Group realised revenue amounting to DKK 4,541 million, or 7% growth on the first half of 2012. The improvement in revenue is attributable to organic and acquired growth of 2 and 5 percentage points, respectively. The exchange rate impact for the period under review was neutral. Corporate revenue rose by 6% compared with the previous six months.

In the period under review, consolidated gross profit totalled DKK 3,292 million, or an 8% rise on the same period last year and a rise of 7% on the second half of 2012. The gross profit ratio was 72.5%, or an improvement of 0.8 percentage point compared with the same period last year and an improvement of 1 percentage point on the second half of 2012.

In the first half-year, capacity costs totalled DKK 2,414 million, or a 12% rise in local currencies compared with the same period last year, acquisitions accounting for almost half this increase.

Operating profit (EBIT) amounted to DKK 880 million, representing a 2% increase on the same period last year and a 12% rise on the second half-year of 2012. The profit margin (EBIT margin) is 19.4%, matching a fall of 0.9 percentage point on the same period last year. The fall resulted from higher growth in underlying capacity costs in the period than in organic revenue and also from a high level of corporate acquisitions. Compared with the second half of 2012, the profit margin rose by 1 percentage point.

In the period under review, the Group continued to generate significant cash flows from operating activities and once again succeeded in converting a considerable share of its profit into proper cash flows. In the first half of 2013, consolidated cash flows from operating activities were DKK 704 million, or a fall of DKK 86 million on the same period last year. The lower level is mainly due to an increase in trade receivables attributable, among other things, to the introduction of Oticon Alta and the sale of Sennheiser Communications’ inventory to Sennheiser KG.

Outlook for the 2013 financial year

We maintain our forecasts for 2013, except that the corporate tax rate is now estimated at 24-25% against a previous expectation of “about 25%”. We would emphasise that revenue and earnings in the second half-year are expected to exceed the levels achieved in the first six months. Our overall outlook for 2013 may be summarised as follows:

Despite the fact that in 2013 the market for hearing aids is still marked by more uncertainty than previously, our best estimate is that the global market for hearing aids will generate a modest positive growth rate in terms of value for the year as a whole.

For 2013, we expect an organic revenue growth rate in the wholesale of hearing aids to exceed the market growth rate by 3-5 percentage points in local currencies, and our retail business is expected to generate an organic growth rate, matching the growth rate in the underlying market. We further expect Diagnostic Instruments to capture market shares organically in a market that is estimated to show low single-digit growth. In addition, there may be some exchange rate impacts. Moreover, we maintain our forecasts in respect of consolidated operating profit (EBIT) for 2013 and expect such profit to outmatch the level realised in 2012.

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Further information:                                                         Other contacts:

Niels Jacobsen, President & CEO                                  Stefan Ingildsen, SVP Finance

Phone +45 3917 7300                                                     Søren B. Andersson, VP IR

www.demant.com                                                            Morten Lehmann Nielsen, IR Manager                        

The full Interim Report 2013 for William Demant Holding A/S totalling 15 pages will be published in continuation of this announcement.

Please be advised that we will host a teleconference for analysts and investors today at 1.00 p.m. CEST. The teleconference will be conducted in English and broadcast via our website, www.demant.com.