William Demant Holding A/S
Interim information, third quarter

DGAP-News: William Demant Holding A/S

13.11.2014 / 08:15

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Company announcement no 2014-07              13 November 2014

Interim information, third quarter





Turbulent US market drives Oticon unit growth in the US at lower prices

Earnings guidance reduced by 3% to reflect US market development

Transition into a leading global hearing healthcare company continues





  -- The Group's core business - wholesale of hearing aids - realised unit
     growth of 8% year-to-date. Apart from the increased pricing pressure in the
     US, all our business activities have developed satisfactorily and in line
     with our plans.
  -- The addition of one manufacturer's premium hearing aid brand to a big box
     retailer in the US has created turbulence in the US hearing aid market.
     This has resulted in lower selling prices of Oticon products in the US, but
     also growing sales to independents, though such sales are partly offset by
     a reduction in Bernafon's unit sales to a big box retailer.
  -- In the third quarter, our retail activities generated satisfactory revenue
     growth, especially in Europe and Australia. In connection with the
     consolidation and integration of our US retail activities that followed the
     acquisition of numerous minor entities in the period from 2011 to 2013, we
     have standardised the financial procedures in these minor US entities. In
     this process, we have identified inaccuracies in certain balance sheet
     items with an isolated adjustment effect in 2014. Combined with an expected
     loss on a customer loan in the US, this leads to a total one-off adjustment
     of our EBIT in 2014 of around DKK -100 million.
  -- In the period under review, Oticon Medical continued to deliver
     double-digit sales growth rates exceeding market growth rates, both in
     bone-anchored hearing systems (BAHS) and in cochlear implants (CI). Oticon
     Medical continues its expansion in R&D and has increased its market
     reach. Major product launches are planned for 2015.
  -- Our Diagnostic Instruments business activity has improved the delivery
     bottlenecks caused by the transfer of production to a new manufacturing
     facility and by the upgrade to a new ERP system. In the past quarter, we
     have thus been able to ship more orders from our strong order book,
     generating significant organic growth, and we expect this positive trend to
     continue into the fourth quarter.
  -- The Group's earnings guidance has been reduced by 3% to reflect the US
     market development. Therefore, we now forecast a rise in earnings per share
     (EPS) of 2-7% (excluding the impact of one-off balance sheet adjustments)
     against previously 5-10%.



Market trends

In the third quarter, unit growth on the global market for hearing aids is
estimated to have exceeded the Group's general assumption of 2‐4% unit growth
in the market. 



The US market saw a mid-single-digit unit growth rate in the third quarter,
bringing year-to-date unit growth to the normal historical growth level. Once
again, unit growth in Veterans Affairs (VA) exceeded unit growth in the private
sector. The US market is currently turbulent, and we are seeing new dynamics in
a hearing aid market that has historically been characterised as stable. These
new trends seem to be a consequence of one manufacturer's decision to offer its
premium brand to a big box retailer and the turbulence this decision has caused
in other channels - especially in the independent channel. Furthermore, we have
for several years seen high growth rates in VA and in big box retailing,
resulting in no growth - or maybe even negative growth - in the independent
channel in the US. The new market conditions in the US are characterised by
lower average selling prices caused by channel mix shifts and increased price
competition. 



In the third quarter, we believe that in overall terms, unit growth in the
major European markets for hearing aids has been higher than the historical
average. Due to low sales in the third quarter of 2013, Germany continued to
show above-normal growth rates, however at a slower pace than in the previous
three quarters, and has now entered the fourth quarter with more demanding
comparative figures. The demand pattern of the NHS in the UK tends to fluctuate
on a quarterly basis, and despite strong year-to-date growth, the third quarter
was weak. 



All in all, we estimate that in terms of value, the global market for hearing
aids has seen flat to modest growth in the third quarter. 



Hearing Instruments

The Group's core business - wholesale of hearing aids - has year-to-date
delivered a satisfactory unit growth rate of 8%, and this positive unit sales
momentum has continued into the fourth quarter. As expected, this satisfactory
unit growth was mainly driven by products based on the Oticon Inium platform -
especially in the mid-priced and low-end product categories. We have been able
to take advantage of the current opportunities caused by the turbulence in the
US market due to a competitor's decision to offer their premium brand to a big
box retailer, and much of our growth has thus been in the independent channel.
On the other hand, Bernafon sales were below expectations, mainly due to the
loss of market share with a big box retailer in the US. 



As a consequence of the turbulent market conditions in the US, the Group's
selling prices in the US were reduced in the third quarter - and in fact more
than previously expected We are closely monitoring the trends in the US
wholesale market for hearing aids. In case the market dynamics in the US are
not only temporary, we will in the period up to the release of our Annual
Report 2014 consider taking certain initiatives with a view to optimising our
core business, thereby addressing the markets changes. 



Oticon's launch of competitive design instrument styles in September is
progressing very well, and the additions to the Alta, Nera and Ria families
have reinforced our unit growth momentum. The new styles perfectly meet the
demand for discreteness by first-time users, while offering all the
audiological features and wireless capabilities of the very power-efficient
Inium platform using small 10A batteries. At the recently held EUHA congress in
Hanover, Germany, Bernafon showcased its upcoming high-end product Juna. The
product is a significant strengthening of the Bernafon product portfolio and
should help Bernafon regain some of their sales momentum. 



In the third quarter, our retail activities generated satisfactory revenue
growth in line with our expectations, and growth rates in Europe and Australia,
in particular, were encouraging. The gradual improvement we have seen over the
past year can, among other factors, be attributed to the implementation of
optimised business processes, and this improvement has continued into the
fourth quarter. In general, traditional retailing in the US is impacted by the
presence of big box retailers, and we too experience this in our own US retail
activities. 



Oticon Medical

The Group's ongoing transformation from mainly being a hearing instrument
company to becoming a broader and even more growth-oriented hearing healthcare
company is a central part of our overall ambition and strategy. To achieve
this, Oticon Medical's journey towards becoming a leading global implant
company based on strong positions in bone-anchored hearing systems (BAHS) and
cochlear implants (CI) plays a crucial role. For many years to come, the solid
growth outlook in the implant market combined with our opportunity to gain
significant market shares will strengthen the Group's overall growth profile.
However, the expansion of our implant activities will naturally increase Oticon
Medical's costs in the short to medium term, especially since we have chosen to
primarily build these businesses organically. 



Again in the third quarter, Oticon Medical delivered double-digit sales growth
rates, exceeding market growth rates, both in BAHS and in CI. Oticon Medical
continues its expansion in R&D and has increased its market reach by virtue of
distribution power. Major BAHS and CI product launches are planned for 2015.
Neurelec has been successfully integrated into Oticon Medical, and the next CI
system will be launched under the Oticon Medical brand in 2015. In our Annual
Report 2014, we furthermore intend to present the revenue generated by Oticon
Medical separately along the same lines as disclosures made in respect of our
Hearing Devices and Diagnostic Instruments business activities. 



Diagnostic Instruments

Our business activity Diagnostic Instruments has improved the delivery
bottlenecks caused by the transfer of production to a new manufacturing
facility and by the upgrade to a new ERP system. In the third quarter, we have
thus been able to ship more orders from our strong order book, generating
significant organic growth, especially in balance equipment and clinical
audiometers. Going into the fourth quarter, we see continued strong momentum
and expect to gain further market shares. 



Other business areas

In the third quarter, Sennheiser Communications delivered very satisfactory
growth in revenue and earnings driven by the Call Center and Office (CC&O)
sales generated in especially Europe and the US. The Unified Communication part
of the overall business is increasing, and this trend is expected to continue
going forward. The Group's implementation of new IFRS accounting standards on 1
January 2014 eliminated the option of proportionate consolidation of joint
ventures, including Sennheiser Communications. However, Sennheiser
Communications will continue to contribute to Group earnings, and we will
continue to provide relevant information on this business. 



Other matters

Consolidation of US retail

Following a period of expansion of our US distribution activities due to a high
number of minor retail acquisitions in the period from 2011 to 2013, we have
now entered a phase of consolidating and integrating these retail activities.
Most of the acquired entities have their own operating processes, IT systems,
financial accounting systems etc., and the integration into one common system
is crucial in order for us to be able to run an efficient business. While
consolidating and standardising the financial procedures of the 70-80 acquired
retail entities in the US, we have identified inaccuracies in the balance
sheets of some of these entities, leading to adjustments of certain balance
sheet items in the acquired businesses. 



Furthermore, we expect to incur a loss on a customer loan in the US. The
expected loss relates to a non-current loan given to an optician chain to
support its expansion into hearing instrument retailing. The optician chain
went bankrupt, and subsequently, it has not been possible to take over the
business, as we would normally do with a hearing aid retailer. 



Each of the two one-off adjustments amounts to around DKK 50 million, and the
total amount of around DKK 100 million will negatively impact the Group's
operating profit (EBIT) in 2014. In our Annual Report 2014, these one-off
adjustments will be described in more detail, once we have further investigated
and corrected the issues identified. However, these one-offs have already now
caused us to further tighten the financial procedures in such acquired entities
and also underpin the importance of further consolidation into one common
finance and IT system. It is our clear impression that we have now identified
all major balance sheet inaccuracies and that the risk of additional one-offs
in this part of our business is limited. 



Capital structure

As of today, the Company has in 2014 bought back a total of 1,479,635 shares
worth DKK 707 million, bringing the total number of treasury shares up to
1,681,160, corresponding to 2.97% of the share capital. 



As mentioned in our Interim Report 2014 (first half-year), we expect continued
strong cash flow from operating activities, but rather limited acquisition and
investment opportunities in the near future. In the period from 2014 to 2016,
the Company consequently plans to buy back shares worth DKK 2.5‐3.0 billion of
which shares worth DKK 0.8‐1.0 billion are expected to be bought back already
in 2014, including the shares worth DKK 707 million repurchased year‐to‐date.
In the period from 2014 to 2016, we thus expect to see a modest and gradual
increase in the Group's gearing multiple towards a level of 1.5, measured as
net interest‐bearing debt relative to EBITDA. Should attractive acquisition or
investment opportunities present themselves during this period, the Company
will reconsider the targeted gearing level and the announced buy‐back programme
with a view to ensuring a high level of financial flexibility and value
creation in the Group. 



Outlook for the 2014 financial year

In 2014, we expect to deliver continued growth in both our business activities.
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 of acquisitions will be
offset by changes in exchange rates. 



In consideration of a weakened set of invoicing currencies compared to 2013 as
well as gains from our hedging activities, exchange rates based on February
currency assumptions are expected to negatively affect the Group's operating
profit (EBIT) in 2014 by around DKK 100 million. Of this amount, DKK 60‐70
million were realised in the first six months. Since the end of the first
half‐year, several of the Group's invoicing currencies have gained strength,
and if these higher levels remain for the rest of the year, the negative impact
of exchange rates on our operating profit (EBIT) in 2014 will be materially
lower than we initially anticipated. 



In 2013, the Group once again generated a strong cash flow, reflected in a cash
conversion ratio (CFFO/EBIT) of 73%. Also in 2014, we expect to deliver a high
cash conversion ratio. Keeping in mind that our near‐term acquisition
opportunities are rather limited, we expect to be able to buy back Company
shares worth DKK 0.8‐1.0 billion in 2014 as mentioned in our Interim Report
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. 



The turbulent US hearing aid market has resulted in lower selling prices of
Oticon products in the US, but also growing sales to independents, though such
sales are partly offset by a reduction in Bernafon's unit sales to a big box
retailer. The Group's earnings guidance has been reduced by 3% to reflect the
US market development. Therefore, we now forecast a rise in earnings per share
(EPS) of 2-7% (excluding the impact of one-off balance adjustments) against
previously 5-10%. 





                                  ¨ ¨ ¨ ¨ ¨ ¨ ¨





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
News Source: NASDAQ OMX



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Language:    English                     
Company:     William Demant Holding A/S  
 
 
             Denmark                     
ISIN:        DK0010268440                
 
 
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