November 7, 2012

Interim information, third quarter

Company announcement no 2012-10                                7 November 2012

 

Global launch of new, complete high-end hearing aid family from Oticon at turn of year

Third quarter marked by continuous mix shifts and difficult market conditions

 

  • Unfavourable mix shifts and challenging conditions in certain markets have in the past part of the second half-year curbed corporate growth, which is also marked by the fact that the Group's hearing aid activities have moved into the last phase of their current product and platform cycles.
  • The Group still expects overall revenue growth for 2012 of 5-9% — however with a contribution from acquisitions at the upper end of the previously announced range of 1-3 percentage points. We also still expect corporate revenue for 2012 to be favourably impacted by changes in exchange rates.
  • The Group's policy to let losses and gains from hedging of foreign currencies have full effect on its operating profit is expected to negatively impact revenue and operating profit (EBIT) for 2012 by an estimated DKK 140 million compared to 2011. Overall, we now expect to realise an operating profit (EBIT) for 2012 on par with or just short of the level realised in 2011.
  • If we disregard the negative effect of hedging of foreign currencies on our operating profit, we still expect corporate operating profit (EBIT) for 2012 to exceed the 2011 level.
  • The Group's hearing aid activities will see a broad spectrum of product launches next year: We thus expect 2013 to be a year of strong product launches. Already in January 2013, Oticon will launch a new, complete high-end hearing aid family that will generate additional sales momentum. Available in all the usual styles right from its introduction, the new product family will offer an array of completely new audiological user benefits based on the Group's third-generation wireless technology platform.

 

Market trends

In the third quarter, unit sales on the global hearing aid market saw weaker development than in the first half-year and are thus below the range of 2-4%, which is our expectation of market unit growth for the entire 2012. The average selling price on the market is still hampered by a less favourable product mix due to an attractive offering of hearing aids in the lower price segments. Also, the general price level is affected by fiercer competition than previously and uncertainty over the effect of announced changes in reimbursement systems in a number of European countries.

 

Based on available statistics, we believe that in overall terms, the major European hearing aid markets saw slightly negative unit growth in the third quarter as opposed to solid overall growth in the first two quarters of the year. Generally speaking, the European markets are characterised by uncertainty over future market conditions and reimbursement schemes — uncertainty that is particularly prevalent in countries such as Germany, Holland, Switzerland and Denmark. Unit sales in both the German and the French market developed flatly in the third quarter, whereas the UK saw slightly negative unit growth compared to the same period last year. Furthermore, the economic slowdown in Southern Europe, in particular, has resulted in a less favourable development in demand.

 

In the USA, the private market saw flat unit growth in the third quarter, whereas overall demand by VA (Veterans Affairs) has gone up by 4%. In overall terms, this means that unit growth in the USA has been 1% in the third quarter.

 

The Japanese market has shown positive unit growth of approx. 2%.

 

We believe that the intensified competitive situation, which has prevailed since the beginning of the year, has not changed notably, and it is still our assumption that the product mix is deteriorating — a trend which has been evident in the third quarter. With limited unit growth in the third quarter and continued pressure on the average selling price, we estimate that in terms of value, the hearing aid market saw slightly negative growth in the third quarter.

 

Several of the industry's major players used the recently held EUHA congress in Germany to show off their coming products, and in combination with the planned introduction of Oticon's new high-end family in January 2013, we expect the hearing aid industry's strong offering of products, which are based on different technological and audiological directions, to have a positive effect on market growth in 2013.

 

Hearing Devices

The Group's core business — wholesale of hearing aids — developed in the third quarter on par with or just short of market trends and has in the period under review generated negative organic growth in terms of value. In terms of growth, the mid-priced and low-end segments have done better than the high-end segment, which has had a negative impact on our average selling price in the period under review. In Norway, this autumn's transition to consignment stock in the public system has resulted in invoiced sales in the third quarter being considerably under the normal level. For the entire year, the changes in Norway alone are expected to have a negative operational one-off effect on the Group to the tune of DKK 40 million.

 

At the recently held EUHA congress in Frankfurt, the attendees took great interest in gaining insight into Oticon's audiological intent, which will also in the future ensure that we are able to deliver the right user benefits, so that the hearing-impaired can, to a greater extent than previously, spend their energy on participating actively in complex listening situations instead of spending all their energy trying to decode what is being said. Also as far as Oticon's future product launches are concerned, audiology and the individual needs of the users will be the focal points, as it is our firm conviction that the purpose of a hearing aid is to give the hearing-impaired the right support and relief all day long and in everyday life — but such support and relief must always match the different needs of the users.

 

The Group's hearing aid activities will see a broad spectrum of product launches next year: We thus expect 2013 to be a year of strong product launches. Already in January 2013, Oticon will launch a new, complete high-end hearing aid family that will generate additional sales momentum. Available in all the usual styles right from its introduction, the new product family will offer an array of completely new audiological user benefits based on the Group's third-generation wireless technology platform.

 

Driven by a competitive product portfolio led by the high-end products of the Chronos family and also driven by an increasingly strong profile, Bernafon, which is the Group's second hearing aid brand, saw favourable development in the third quarter of the year. Our third hearing aid brand, Sonic, which we acquired at the end of 2010, also succeeded in increasing its sales, and with the introduction at the EUHA congress of its latest product, Sonic Bliss, which will be released for sale towards the end of the year, Sonic has a solid foundation for also generating growth in the future.

 

In the third quarter, our retail activities followed the general trend in the markets where we are active, which has secured stable development compared with the same period last year. We are working continuously to optimise our retail operations and to adjust our business to the changes in market conditions and reimbursement schemes. This has also been the case in the third quarter.

 

Oticon Medical continues to generate excellent growth rates with increasing sales in both existing and new markets and is expected to be active in a total of 24 markets by the end of the year. The positive development we have seen in the period under review is not least a result of the successful launch of Oticon Medical's new implant system that ensures faster and better fitting of the users. The benefits of the new implant have just been documented in a clinical study with exceedingly positive results.

 

Other business activities

Diagnostic Instruments

Diagnostic Instruments saw positive development in the third quarter and generated significant acquired growth. The comparative period in 2011 was characterised by substantial tender sales, which is why realised growth compared with last year does not convey an accurate picture of underlying growth trends. The integration of the acquired SIDs (Special Instrument Distributors) in the USA and the acquired manufacturers, including MicroMedical, is progressing according to plan and will help ensure that Diagnostic Instruments will continue to capture market shares.

 

Personal Communication

Driven by solid development in Sennheiser Communications, our business activity Personal Communication generated healthy growth in the third quarter compared with the same period last year. Phonic Ear and FrontRow are still impacted by difficult market conditions, but as mentioned earlier, costs in these units are adjusted on a current basis to the actual level of activity. As far as Phonic Ear is concerned, it is worth mentioning that up until now, the majority of functionalities included in accessory products for hearing-impaired are now increasingly being integrated in hearing aids, which means that accessories are only to a less extent than previously sold as independent solutions.

 

Other matters

Capital structure

In the past part of the second half-year, the Company has repurchased a total of 90,868 shares worth DKK 48 million in total, which means that today we hold 1,582,071 treasury shares, or 2.7% of the share capital. Our relatively moderate share buy-back since mid-2012 should be viewed in light of the fact that presently, the Group commands an attractive pipeline of acquisition candidates. We will continue to use the share buy-back programme to direct corporate excess cash flow back to the shareholders, while ensuring that we keep our net interest-bearing debt at DKK 1.5-2.0 billion.

 

The ETG case

Since 2005, the Group has been party to a patent infringement case filed by the New York-based Energy Transportation Group (ETG). Charges were originally brought against the entire hearing aid industry based on two expired patents, which — according to the ETG — include certain aspects of the anti-feedback technology normally used in hearing aids. In the pending case against our Company, an appellate court (the Court of Appeals for the Federal Circuit) indicated in October 2012 that the jury had been presented with the correct particulars of the case, but the appellate court had not reconsidered the infringement. We have subsequently petitioned the appellate court to reconsider its position, which means that the case against us is still pending. In 2007, the Group made a provision to cover any damages as well as legal costs in this respect, of which a residual provision in the amount of DKK 94 million is recognised in the balance sheet. Add to this an additional contingent provision for accrued interests of DKK 35-40 million. If, when all comes to all, the court decides in favour of William Demant Holding, this provision will be reversed.

 

Impacts of hurricane Sandy

Last week, the Group's US headquarters in Somerset, New Jersey, were impacted by hurricane Sandy, which hit the east coast of the USA on 29 October. Fortunately, our employees and facilities, including buildings, equipment and ITE production, were only impacted by power outages and breakdown of communication lines in the region. However, our US head office manages a considerable part of the Group's total IT server capacity in North America, which means that several business systems, including phone, IT and order processing systems, have periodically been out of operation. Furthermore, a significant part of our North American ITE production is located in Somerset. Due to these interruptions, our North American activities have not worked for 3-4 days. We believe that the main part of any operating losses due to hurricane Sandy will be covered by our corporate insurance programme.

 

Expectations

Growth expectations of the global hearing aid market remain unchanged: Based on unit growth of 2-4% in the global hearing aid market in 2012 and a negative development in the average selling price of the same magnitude, we expect the global hearing aid market in 2012 to show zero growth in terms of value. However, we expect new high-end products to result in a more positive development in the average selling price on the market, but so far, there are not visible signs to this effect.

 

We expect to continue to increase our market share in 2012 and to generate overall revenue growth in 2012 of 5-9% — however with a contribution from acquisitions at the upper end of the previously announced range of 1-3 percentage points. Based on average exchange rates in the past part of the year, we expect corporate revenue in 2012 to be favourably impacted by changes in exchange rates. The full effect of this will, however, be postponed due to hedging.

 

The Group's policy to let losses and gains from hedging of foreign currencies have full effect on its operating profit is expected to negatively impact revenue and operating profit (EBIT) for 2012 by an estimated DKK 140 million compared to 2011.

 

With continuous mix shifts and challenging market conditions, we now expect to realise an operating profit (EBIT) for 2012 on par with or just short of the level realised in 2011. On publication of our interim report, we announced that the Group's operating profit (EBIT) for 2012 would exceed the level of 2011. If we disregard the negative effect of hedging of foreign currencies on our operating profit, we still expect corporate operating profit (EBIT) for 2012 to exceed the 2011 level.

 

For 2012, we expect the Group's effective tax rate to remain 25-26%.

 

 

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Other information:                                                             Other contacts:

Niels Jacobsen, President & CEO                                   Stefan Ingildsen, SVP Finance

Phone +45 3917 7100                                                       Søren B. Andersson, VP IR

www.demant.com                                                             Morten Lehmann Nielsen, IR Manager

 


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