Publication of Annual Report 2013

Company announcement no 2014-01                               27 February 2014

Publication of Annual Report 2013

10 % sales growth and 14% growth in net profit in 2013

Operating cash flow of DKK 1,320 million, equivalent to a cash conversion ratio of 74% 

Today, the Board of Directors of William Demant Holding A/S adopted the Company’s Annual Report 2013. This announcement includes the highlights of the Annual Report: 

• In 2013, consolidated revenue totalled DKK 9,209 million, matching a growth rate of 10% in local currencies supported by all the Group’s business activities. Organic growth was more than 3%.
• In our core business, wholesale of hearing aids, the organic growth rate exceeded 5%, when adjusting for the impact from the Danish and Dutch markets. Unadjusted, we realised 3% organic growth in a market estimated to have seen flat growth in terms of value.
• In 2013, our operating profit (EBIT) rose by 8% to DKK 1,784 million, corresponding to a profit margin of 19.4%. Net profit and earnings per share (EPS) went up by as much as 14% each for the full year 2013 and by 23% for the second half-year 2013.
• In 2013, the Group once again generated a strong cash flow from operating activities, totalling DKK 1,320 million and equivalent to a cash conversion ratio of 74%.
• In spring 2014, Oticon will join Apple’s Made for iPhone programme and launch its first Made for iPhone (MFi) connectivity solution for hearing instruments. Oticon’s MFi solution will be available for all existing and future users of Oticon’s ConnectLine instruments across the price spectrum, including an installed base of around two million current users of wireless Oticon hearing instruments.
• In 2014, we expect to continue to generate growth in all our business activities. Following a 14% growth rate in the Group’s net profit and earnings per share (EPS) in 2013, we expect to see growth in EPS of 5-10% in 2014. Based on a continued strong cash flow, we expect to be able to buy back Company shares worth more than DKK 500 million in 2014.

“I am very pleased that in 2013, we gained market shares in all three business activities, resulting in 14% growth in net profits and earnings per share. With Oticon’s introduction of a new technological platform in early 2013 and also the launch of a new Premium family called Oticon Alta, our largest hearing aid brand embarked on a new journey that created renewed momentum for the Group,” says Niels Jacobsen, President & CEO of William Demant Holding and continues:

“2013 was another year of significant acquisition activity, and our entry into the cochlear implant market is an important step towards further strengthening our position as one of the world’s strongest hearing healthcare companies. When considering the dilutive effect of spending more than DKK 1 billion on acquisitions in 2013, I actually find a stable profit margin very satisfactory.”

Market conditions and business trends

In 2013, the global demand for hearing aids again proved to be stable, and the industry saw positive volume growth rates slightly exceeding our normal expectations of 2-4% volume growth. In our estimation, the average selling price on the market for hearing aids declined by approximately the same percentage as volumes increased in 2013, primarily due to changes in channel mix and reimbursement systems. The high demand by the NHS (National Health Service) in the UK and the changes to hearing healthcare systems in Denmark and the Netherlands clearly had a negative impact on average wholesale prices. In terms of value, the overall market growth rate in 2013 was, in our estimation, flat.

Our core business – the development, manufacture and wholesale of hearing aids – realised an organic growth rate of 3%, thereby exceeding the market growth rate by approximately 3 percentage points. This development can be attributed to a strong product offering. Due to our relatively strong positions in Denmark and the Netherlands, the structural changes in these two markets had a noticeably adverse effect on organic growth of DKK 120-140 million in total. If we disregard these two markets, our organic growth rate in the wholesale of hearing aids did in fact exceed 5%. Our market share with Veterans Affairs (VA) dropped in 2013, and we have not managed to benefit from the high growth rates in this channel in the reporting year.

With the introduction of the Premium product Oticon Alta in January 2013, Oticon launched its first hearing instrument based on the new Inium platform. A few weeks after its launch, Alta was available in all styles on all the Group’s main markets. The substantial improvements in Alta compared with previous Premium instruments, such as twice the working memory, a significantly improved anti-feedback system and a unique customisation tool, resulted in very positive responses from both end-users and dispensers. Alta became an important growth driver in 2013, and we succeeded in substantially increasing our market share in the Premium segment.     

Our practice of launching products in only one price category at a time meant that for the first three quarters of the year, Oticon’s product portfolio consisted of ageing mid‐priced products. However, with the launch of the mid-priced product Oticon Nera at the end of the third quarter of 2013, we have strengthened our product portfolio significantly. The introduction of Oticon Ria in the Essential category in February 2014 completes the roll-out of the Inium platform in all three Performance categories.

In spring 2014, Oticon will join Apple’s Made for iPhone programme with Oticon’s first Made for iPhone (MFi) connectivity solution for hearing aids. In order to ensure that as many end-users as possible will be able to benefit from Oticon’s MFi solution, availability will not be restricted to specific price segments. In fact, Oticon’s MFi solution will be available to all existing and future users of Oticon’s ConnectLine instruments across the price spectrum, including an installed base of around two million current users of wireless Oticon hearing instruments. Based on 2.4 GHz wireless technology, our new MFi solution enables iPhone remote control of Oticon’s ConnectLine hearing instruments, without compromising the audiological benefits and low power consumption that are indeed the hallmarks of Oticon’s hearing instruments. The controllable functions include program choice, volume control etc. and this is a clear signal that we are further exploiting the potential benefits to be derived from the new wireless technologies.

For Bernafon, growth in 2013 was driven by important product introductions of particularly the high-end instruments called Acriva 9/7 in April and the mid-priced instruments called Carista 5/3 in September. Bernafon’s now very strong product offering must in 2014 be used to attract, among others, new large-volume customers in more markets, such as retail chains and purchase groups, and also for government tenders.

In 2013, Sonic continued the positive trend of re-establishing itself as a viable brand with new interesting product concepts based on new technology. A completely reshaped business, today’s Sonic is in stark contrast to the business that joined the William Demant Group at the end of 2010. Sonic saw fair growth in 2013 and is expected to continue its growth path in 2014.

In the period under review, development in our corporate retail activities was in line with development on the markets where we operate. A few markets, such as Australia and the Netherlands, saw negative growth rates, which of course impacted our ability to grow. However, in overall terms 2013 was a fairly satisfactory year for our retail activities.

With the acquisition of the French manufacturer of cochlear implants (CI), Neurelec SA, the William Demant Group has taken a crucial step towards becoming a full-line hearing implant manufacturer and thus a true hearing healthcare company, offering a full range of hearing solutions. Since the acquisition in April 2013, sales have been in tune with the initial plans made. The BAHS (bone-anchored hearing systems) business of Oticon Medical saw satisfactory growth in 2013 and once again captured market shares. We saw the rapid penetration of the introduced tissue preservation surgical techniques, and surgeons have been quick to adapt to these new methods. On 1 November, the new wireless Ponto Plus sound processor family based on the Oticon Inium platform was released for sale.

Diagnostic Instruments, a global market leader in diagnostic equipment, grew satisfactorily in 2013 by 8% in local currencies. Half of this growth was driven by the acquisition of mainly SIDs (Special Instrument Distributors) in the USA. The total global market for diagnostic equipment is estimated to have grown by 3-4% in 2013, and Diagnostic Instruments has increased its market share due to a combination of organic and acquisitive growth. We will continue to look for new acquisition opportunities, but we will first and foremost focus on integrating and developing the companies already acquired. The multiple product introductions by Maico, Grason-Stadler and Interacoustics in autumn 2013 have further strengthened our competitiveness and will be among the drivers of continued growth in 2014.

In 2013, Personal Communication realised a satisfactory 28% growth rate in local currencies. This growth was to a large extent driven by strong organic growth in Sennheiser Communications, especially in the CC&O segment driven by Unified Communication (UC).

Financial review

In 2013, consolidated revenue totalled DKK 9,209 million, matching a growth rate of 10% in local currencies, with organic growth accounting for more than 3 percentage points. The effect of changes in exchange rates on revenue was -2%.

In 2013, consolidated gross profit rose by 9% to DKK 6,672 million. The consolidated gross profit margin of 72.5% represents a rise of 0.9 percentage point compared with 2012. Consolidated operating profit (EBIT) rose by 8% to DKK 1,784 million. This improvement was first and foremost due to solid growth in our gross profit, even if this growth was dampened by deteriorating sales in Denmark and the Netherlands. Our profit margin was 19.4%, corresponding to an increase of 0.1 percentage point. When considering the significant dilutive effect of acquisitions, such as Neurelec and various distribution networks, and also the changes to reimbursement systems in Denmark and the Netherlands, we find our profit margin satisfactory. For the first time ever, our EBITDA exceeded DKK 2 billion, and our net profit and earnings per share (EPS) went up by as much as 14% each for the full year 2013 and by 23% for the second half-year 2013.

Consolidated cash flow from operating activities (CFFO) increased by 4% to DKK 1,320 million in 2013, equivalent to a high cash conversion ratio of 74%, or the ratio of cash flow from operating activities to operating profit (CFFO/EBIT). The free cash flow grew by 9%, amounting to DKK 851 million, an increase of DKK 69 million compared with 2012.

Other matters

In 2013, the Company bought back 201,525 shares at a total price of DKK 101 million. In addition, we have year-to-date bought back 235,435 shares at a total price of DKK 120 million. Our total holding of treasury shares at 27 February 2014 is 436,960.

In 2013, our Board of Directors decided to raise the target for the Group’s net interest-bearing debt to a range of DKK 2.0-2.5 billion from previously DKK 1.5-2.0 billion. The consolidated net interest-bearing debt rose by DKK 445 million, amounting to DKK 2,249 million at the end of 2013. This rise can be attributed to acquisitions.

Member of the Board of Directors, Thomas Hofman-Bang, has taken up the position as CEO and Senior Partner of KPMG in Denmark and has chosen not to stand for re-election. The Board of Directors therefore proposes that Benedikte Leroy, VP and EMEA General Counsel of Dell Computer Corporation, be elected at the coming annual general meeting on 9 April 2014.

The Group’s implementation of new IFRS accounting standards eliminates the option of proportionate consolidation of joint ventures from 1 January 2014, which in particular will affect the consolidation of the Group’s 50% investment in Sennheiser Communications. If these changes had been implemented already in the previous year, we would in 2013 have seen a reduction in consolidated revenue of DKK 250 million and a decrease in gross profit and operating profit (EBIT) of DKK 128 million and DKK 17 million, respectively. However, there would have been no impact on the Group’s net result.

Outlook for 2014

In the global hearing healthcare market, the Group holds a unique and very strong position, which we believe can be further strengthened in the years to come. At the same time, we as a Group are exposed to obvious uncertainties and challenges, including channel mix changes, price competition, short- to mid-term margin dilution from acquired distribution activities and the establishment of future growth platforms like our investment in cochlear implants. The structure and contents of the Group’s outlook for 2014 are in essence a reflection of this balance.

In 2014, we expect to continue to deliver growth in all of our business activities. As far as wholesale of hearing instruments is concerned, our growth will mainly be driven by fully updated and very competitive product portfolios combined with the ongoing conversion to Group-manufactured products in acquired distribution activities. For Oticon, growth will be backed by the Inium platform and further supported by Oticon joining Apple’s Made for iPhone programme in spring 2014, resulting in Oticon’s first Made for iPhone connectivity solution for wireless hearing instruments.

Acquisitions are expected to contribute by 3-4% to Group revenue in 2014, mainly driven by acquisitions made in 2013. Based on foreign exchange levels in late February, more than half of the positive impact from acquisitions will be offset by changes in exchange rates.

In consideration of a weakened set of invoicing currencies as well as gains from our hedging activities, exchange rates are expected to negatively affect the Group’s operating profit (EBIT) in 2014 by around DKK 100 million compared with 2013.

In 2013, the Group once again generated a strong cash flow, reflected in a cash conversion ratio (CFFO/EBIT) of 74%. Also in 2014, we expect to deliver a high cash conversion ratio. Keeping in mind that our near-term acquisition opportunities are rather limited and that our net interest-bearing debt target is DKK 2.0-2.5 billion, we expect to be able to buy back Company shares worth more than DKK 500 million in 2014. In order to maintain a high level of flexibility, this level of share buy-back is subject to change, should additional attractive acquisition opportunities present themselves.

All in all, the Group will continue to deliver growth in earnings in 2014. Following a 14% growth rate in the Group’s net profit and earnings per share (EPS) in 2013, we expect to see growth in EPS of 5-10% in 2014.

Lars Nørby Johansen                                                         Niels Jacobsen

Chairman of the Board                                                       President & CEO

The full Annual Report 2013 for William Demant Holding A/S totalling 88 pages will be published immediately after this announcement.

¨ ¨ ¨ ¨ ¨ ¨ ¨

Further information:                                                         Other contacts:

Niels Jacobsen, President & CEO                                   Stefan Ingildsen, SVP Finance

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

www.demant.com                                                            Rasmus Sørensen, IR Officer