UdkastCompany Announcement no 2007-13 8 November 2007
Quarterly review, third quarter 2007 8:30am CET
Very promising Epoq sales after prolonged introduction phase
Driven by growth in unit sales of own-manufactured hearing aids, the Group
generated substantial double-digit growth rates in the third quarter, which
significantly exceed market growth rates. Add to this solid growth in the
Group's other business activities.
In the third quarter, the sale of the Group's newest high-end hearing aid Oticon
Epoq developed at the lower end of the plans made due to a prolonged
introduction. However, preliminary trends in the fourth quarter bear witness to
strengthened momentum in Epoq sales.
Feedback from hearing aid fitters and end-users on Epoq is extremely positive,
and the Group's expectations for Epoq sales continue to be high.
In the third quarter, the Group was favoured by substantial growth in sales to
the NHS and a number of international retail chains and also by continued
progress in the Group's own retail activities. Conversely, Oticon Tego has
gradually moved into the later stages of its lifecycle.
For 2007, the Group maintains its expectation of revenue growth of 9-12% in
local currencies and a negative exchange rate effect of approx. 3%. Based on
this, the Group maintains its expectation of revenues of DKK 5,400-5,550 million
in 2007.
Due to changes in the Group's product and customer mix, the Group now expects an
operating profit (EBIT) of DKK 1,375-1,425 million in 2007 against previously
DKK 1,425-1,500 million. This includes non-recurring additional cost in the
production of hearing aids of an estimated DKK 25-40 million in consequence of
the transition to new technological and mechanical platforms.
Based on the ongoing budget process, it is expected that in 2008 the Group will
continue to generate high revenue growth, which - calculated in local currencies
- will exceed market growth. This growth is expected to be driven by Oticon
Epoq, Brite from Bernafon and by a number of promising product introductions in
2008.
Market conditions and business development
Hearing Aids
Growth in the global hearing aid market is still within the range of the Group's
long-term expectations of 2-4% unit growth. Throughout 2007, the demand for
instruments by the National Health Service (NHS) in the UK and by Veterans
Affais (VA) in the USA has been above the level in the commercial part of the
market.
Recent years' significant trend towards open and cosmetically attractive
mini-instruments is continuing. Extensively dominated by Oticon Delta since its
launch in spring 2006, this segment is at the moment characterised by increased
competition - a trend manifested among other factors in a considerable number of
product launches from the competition, which reflects growing acceptance of the
concept. The fact that the overall share of behind-the-ear instruments on the US
market exceeded 50% in 2007 also reflects this trend. It is obvious that the
Oticon Delta products have been drivers of this market development and the
success of Oticon Delta seems to continue with unabated strength.
In the third quarter, the Group's core business - the development, manufacture
and wholesale of hearing aids - generated double-digit growth rates. This growth
was driven by increased unit sales of Group-manufactured hearing aids and
significantly exceeded market growth. Both the Oticon business and the Bernafon
business grew considerably in the third quarter - especially in terms of volume.
Unit growth in the Oticon business was in particular driven by Epoq, Delta and
Go Pro, while Prio and Neo were the main unit growth drivers in the Bernafon
business. Generally speaking, the Group's hearing aid businesses were favoured
by handsome growth in sales to the NHS and a number of international retail
chains in the third quarter.
As far as Oticon is concerned, the third quarter was to a wide extent dominated
by the introduction of the high-end product Oticon Epoq, which offers the
hearing impaired the world's hitherto only, truly wireless, binaural hearing aid
solution with notably improved sound processing. We continue to receive positive
feedback on Epoq from hearing aid fitters and end-users, who emphasise, in
particular, the sound reproduction of the product, including the recreation of
the user's sense of space and ability to localise a sound source. Oticon took
the opportunity to present Epoq at the European hearing aid congress, EUHA, held
in mid-October in Nuremberg, Germany. The interest in Epoq was considerable and
centrered particularly on new clinical results, which were presented at the
congress. These results show very high user satisfaction with Epoq both in
typical listening situations and in connection with the user's ability to
localise and separate sound sources. On a 10-point scale, the leap in
satisfaction when using two Epoq instruments with binaural sound processing is
significant on all parameters compared to using two conventional hearing aids.
This improvement is so significant that it compares to the leap from using one
to using two conventional hearing aids.
However, in the third quarter Oticon Epoq sales developed at the low end of the
plans made, as sales did not get off the ground until early autumn in many
countries, despite the fact that the product was released for sale as early as
May/June. Moreover, the first few months after Epoq's release were characterised
by keen interest in the innovative possibility of wirelessly connecting Epoq
with for instance a mobile phone via a Bluetooth-based Streamer. This
possibility represents a big technological breakthrough that the industry has
waited for in years, but the breakthrough will not really materialise
commercially, until the demand by end-users increases. The possibility 0f
Bluetooth connectivity has to a great extent cast a shadow over Epoq's obvious
audiological features and the breakthrough that genuine binaural sound
processing based on wireless broadband communication between the two instruments
offer all hearing impaired. In overall terms, this resulted in a more gradual
penetration in the first few months after its launch, which put a damper on Epoq
sales in the third quarter.
After a period with much enthusiasm amongst customers for the possibility of
Bluetooth connectivity, our marketing materials and the ongoing dialogue with
the customers now focus much more on Epoq's fundamental audiological features,
which undoutedly make the product the best hearing aid on the market at the
moment. Thus, the development in the past part of the fourth quarter also points
towards a considerably improved pace in the sale of Epoq, as an increasing
number of hearing aid fitters offer Epoq primarily due to its unique
audiological features - with or without a Streamer and mobile phone. Due to the
positive sales momentum in the past part of the fourth quarter combined with
unusually high satisfaction among fitters and end-users, the Group continues to
have high expectations for Epoq sales.
Based on the so-called RITE technology (Receiver-In-The-Ear), the cosmetically
attractive product concept Oticon Delta still contributes significantly to
corporate growth. Despite increased competition in the area for designed
mini-instruments, it is obvious that also in the past quarter Oticon succeeded
in maintaining and in some cases even expanding Delta's position as a benchmark
product in the fastest growing segment on the hearing aid market.
Since their launch in spring 2005, Oticon Tego and Oticon Tego Pro have
generated substantial growth for the Group in the mid-priced segment. It has,
however, now been more than two and a half years since the products were
introduced, and it is becoming increasingly clear that the Tego instruments have
moved into the later stages of their lifecycle.
In autumn, Bernafon launched the product concept Brite (Bernafon
Receiver-In-The-Ear), which marks Bernafon's entry into the market for
cosmetically attractive mini-instruments. Based on an innovative design and
state-of-the-art technology, Brite was very well received by the customers, not
least at the EUHA congress in October. The reactions are full of promise for
Brite sales during the coming quarters. Bernafon also used EUHA to present its
new Super Power instrument Xtreme.
The outlined changes in the product and customer mix in the hearing aid business
will have a negative impact on the Group's expected operating profit (EBIT) in
2007. Moreover, Epoq is a fundamentally new product concept in all respects -
both technologically and mechanically. From a production point of view, the
transition to the new platforms has presented greater technical challenges than
foreseen. The necessary adjustments of the hearing aid production, which have
now been fully implemented, were rather cost-intensive and temporarily resulted
in reduced production efficiency. The negative one-off effect will amount to an
estimated total of DKK 25-40 million in 2007, or approx. 0.5-0.7 percentage
point on the corporate gross margin.
In the third quarter, the Group's retail activities generated sales growth
significantly above growth on the markets where the Group is involved in
retailing.
Diagnostic Instruments
In the third quarter, Diagnostic Instruments generated revenue growth exceeding
growth in the first half-year. Growth in the third quarter was well-founded in
the different product categories - however with particularly high growth rates
within brainstem audiometry (ABR).
Personal Communication
In the third quarter, Personal Communication saw considerable revenue growth. In
Phonic Ear, growth was satisfactory with FrontRow as the main growth driver.
In the past quarter, Sennheiser Communications - the Group's joint venture
within high-end headsets - continued its very positive development from the
first half-year. A major part of this growth was driven by the new wireless
headsets for offices (BW-900) and mobile telephony (VMX 100).
Other matters
After write-down of the share capital to nominally DKK 60,986,527 at the general
meeting on 29 March 2007, the Company continued its buy-back of shares. In the
third quarter, the Company bought back 604,645 shares for a total amount of DKK
300 million. At 8 November 2007, the Company holds a total of 961,320 treasury
shares, or 1.58% of the share capital. Since 1 January 2007 and up until today,
the Company has acquired a total of 1,578,770 shares at a total value of DKK 784
million. The Group expects to continue to buy back shares in 2007 at a total
value of approx. DKK 1 billion.
Expectations
In 2007, the Group expects to see continued revenue growth rates of 9-12% in
local currencies and a negative exchange rate effect of approx. 3%. Based on
this, we still expect to see revenues in 2007 in the DKK 5,400-5,550 million
interval.
As a result of changes in the Group's product and customer mix, the Group now
expects an operating profit (EBIT) of DKK 1,375-1,425 million for 2007,
including additional cost in the production of hearing aids of an estimated DKK
25-40 million as a consequence of the transition to new technological and
mechanical platforms.
Based on the ongoing budget process, it is expected that in 2008 the Group will
be able to continue to generate high revenue growth, which - calculated in local
currencies - will exceed market growth. This growth is expected to be driven by
Oticon Epoq, Brite from Bernafon and by an number of promising product
introductions in 2008. The Group's success with the sale of hearing aids to
international retail chains is expected to continue in 2008. Based on current
exchange rates, the operating profit (EBIT) is expected to be negatively
impacted in 2008 by movements in foreign currencies by an estimated DKK 30-50
million compared to 2007. The previously announced restructuring of the Group's
production facilities and the establishment of production facilities in Poland
are proceeding successfully and at a quicker pace than originally planned, which
means that the announced saving will be realised earlier than assumed.
Financial calendar 2008
6 March 2008 Annual Report 2007
31 Marts 2008 Annual general meeting
7 May 2008 Quarterly review, first quarter 2008
14 August 2008 Interim Report 2008
5 November 2008 Quarterly review, third quarter 2008
Niels Jacobsen, President & CEO
Stefan Ingildsen, VP, Finance and Investor Relations
Phone +45 39 17 71 00
www.demant.com
