Demant

Earnings Release • Feb 26, 2015

Company announcement no 2015-02 26 February 2015

Publication of Annual Report 2014

EPS growth of 5% within guided range of 2-7%. Underlying EPS growth of 11%

Free cash flow increased by 28%, reaching more than DKK 1 billion

This announcement includes the highlights of the Annual Report:

-- In 2014, consolidated revenue totalled DKK 9,346 million, matching a growth
rate of more than 6% in local currencies of which organic growth accounted
for more than half. Exchange rates had a negative impact on revenue of 2%.
-- The Group’s three business activities, Hearing Devices, Diagnostic
Instruments and Hearing Implants, achieved revenue growth rates in local
currencies of 5%, 11% and 36%, respectively.
-- The reported operating profit (EBIT) amounted to DKK 1,761 million,
equivalent to 1% growth. When adjusted for a negative exchange rate effect
of DKK 50 million and a one-off loss on a customer loan of DKK 40 million,
the underlying growth in EBIT was 7% compared with 2013. The underlying
profit margin was 19.6%.
-- The Group delivered 5% EPS growth, which is within the most recently
announced range of 2-7% EPS growth. The underlying EPS growth was 11%.
-- Cash flow from operating activities (CFFO) increased by 17% to DKK 1,495
million, corresponding to a cash conversion ratio of 85% (CFFO/EBIT). Free
cash flow grew by as much as 28%, amounting to DKK 1,044 million.
-- Oticon’s new Inium Sense platform is currently being launched in all
styles, at all price points and in all markets. This marks the biggest and
broadest product launch ever undertaken by Oticon and will support the
recent sales momentum achieved in our core business.
-- In 2015, we expect to continue to generate growth in all of our three
business activities, Hearing Devices, Diagnostic Instruments and Hearing
Implants. We are guiding for an operating profit (EBIT) for 2015 in the
range of DKK 1.7-2.0 billion.

“The fact that we have delivered no less than 28% growth in free cash flow and
reached a record level of more than DKK 1 billion is very satisfactory,” says
Niels Jacobsen, President & CEO of William Demant. “I am also pleased to see
how well we managed to navigate through the changed market dynamics in the US
hearing instrument market, thereby further strengthening our position in the
independent channel and gaining momentum as the year progressed,” Mr Jacobsen
states.

Market conditions and business trends

Hearing Devices

We estimate that global unit growth in 2014 was 5-6%, exceeding our normal
expectations of 3-4% unit growth. In our opinion, the average selling price on
the hearing aid market declined by 4-5% in 2014, primarily due to changed
market dynamics in the US, a new reimbursement system in Germany and generally
intensified competition. In terms of value, the overall market growth rate was,
in our estimation, slightly positive.

In 2014, our core business – the development, manufacture and wholesale of
hearing aids – realised an organic growth rate of 2%. This growth was driven by
a satisfactory unit growth rate of 8% that more than offsets the decline in the
Group’s hearing aid wholesale average selling price (ASP) of more than 5%. The
addition of one manufacturer’s premium hearing aid brand to a big box retailer
in the US lowered our own sales to this particular retailer up until late 2014
where it stabilised. These changes on the US market led to us launch commercial
initiatives in our core business in the first half of the year, resulting in
improved sales momentum in the second half. Because of the solid growth
achieved in the US, we have regained the market shares we lost at the beginning
of the year. Our market share with VA rose by a couple of percentage points in
2014, and a generally upgraded product offering has driven our improved
performance in this important channel.

Growth was mainly driven by competitive products in the low-end and mid-priced
segments and in the second half-year also by several product introductions
based on the Inium platform, including the three cosmetically attractive
wireless styles: designRITE, Invisible-In-the-Canal (IIC) and
Completely-In-the-Canal (CIC). Bernafon launched their high?end product Juna in
the fourth quarter of 2014, and this product has significantly strengthened
Bernafon’s product portfolio and has helped Bernafon regain some of their sales
momentum.

Oticon’s strong position in hearing care will be further strengthened by the
launch of the new Inium Sense platform. The new platform is currently being
launched in all styles, at all price points and in all markets and marks the
biggest and broadest product launch ever undertaken by Oticon. By constantly
learning more about the brain, we have been able to take BrainHearing(TM) to a
new level by adding new technologies and features, which deliver improved
signal processing that supports the way our brain processes sound. Inium Sense
delivers 30% more processing power than the previous platform, thereby
facilitating an extensive range of new features and new end-user benefits:

-- Soft Speech Booster(TM): A new feature that increases the understanding of
soft speech sounds by up to 20%.
-- Tinnitus treatment including Tinnitus SoundSupport(TM): State-of-the-art
tinnitus feature that sets new standards, as it is the first solution to
offer built-in ocean sounds in addition to a large number of sound options
and adjustment controls.
-- Water resistance: Nano-coated and IP58 certified water resistant
instruments.
-- Inium Sense Feedback Shield: Next-generation feedback management, offering
four times more efficient feedback suppression.

With Oticon Alta2, Nera2 and Ria2, we introduce a brand new generation of our
most popular Performance families, including a new smaller and more discreet
miniRITE style in all three families and at all price points. Combined with the
multiple, cosmetically attractive, wireless hearing instruments already
launched in the second half of 2014, these substantial product introductions
reinforce our competitiveness in 2015.

In the period under review, organic revenue growth in our retail activities was
in line with market growth in the markets where we operate. Especially Europe,
but also Australia, contributed to this organic growth.

Diagnostic Instruments

Our business activity Diagnostic Instruments realised revenue of DKK 975
million, or a satisfactory growth rate of 11% in local currencies of which 10
percentage points are attributable to organic growth. The global market for
diagnostic equipment is estimated to have grown by 5% in 2014, and the business
activity has thus significantly increased its market share.

As previously announced, the upgrade of our ERP system and the transfer of
production to a new manufacturing facility have, however, resulted in delivery
bottlenecks in Diagnostic Instruments. Most of the issues hit us in the first
half of the year, and most of the issues were resolved in the second half of
2014. We expect the delivery situation to be normal again in the first half of
2015.

Hearing Implants

In our Hearing Implants business activity, we are steadily working towards
fulfilling our long-term ambition of becoming one of the world’s leading
manufacturers of hearing implants. The business activity delivered a growth
rate of 36% in local currencies in 2014 of which 25 percentage points could be
attributed to organic growth. The acquired growth is related to the acquisition
of the French cochlear implant business Neurelec in April 2013, which is now
branded under the Oticon Medical name.

In 2015, we will reach a major milestone with the launch of the first Oticon
Medical cochlear implant system under the Neuro brand name. The Neuro system is
the result of a very ambitious implant and sound processor project. New and
very important implant features and also the integration of signal processing
and audiology features from Oticon hearing aids are key improvements. The Neuro
launch is the biggest activity in Oticon Medical ever, and the launch process
will require significant resources and take up to 18-24 months. In 2015, we
will furthermore launch a new surgery concept for bone-anchored hearing systems
that will make the procedure faster, even more cosmetically attractive and
fully reversible. Towards the end of the year, we will launch a new implant for
the Ponto system, which will enable faster loading and higher stability.

Other areas

Sennheiser Communications, our joint venture with Sennheiser KG, manufactures
both professional and consumer headsets for the gaming, mobile phone and CC&O
(Call Center and Office) segments. As a result of the Group’s implementation of
new IFRS accounting standards on 1 January 2014, Sennheiser Communications is
no longer proportionately consolidated into the Group’s financial statements,
but is instead recognised under Share of profit after tax, associates and joint
ventures. Therefore, Sennheiser Communications will continue to contribute to
Group earnings, and we will continue to provide relevant information on this
business.

In 2014, Sennheiser Communications realised a satisfactory 16% organic growth
rate, thereby exceeding the market growth rate. As mentioned in our Annual
Report 2013, sales in 2013 were positively impacted by the one-off sale of
Sennheiser Communications’ inventory to Sennheiser KG, which means that in
2014, underlying sales growth was even higher than realised sales growth.
Growth was especially pronounced in the CC&O segment driven by Unified
Communication (UC).

Financial review

In 2014, consolidated revenue totalled DKK 9,346 million, corresponding to a
growth rate of well above 6% in local currencies of which organic growth
accounted for more than half. Acquired growth can mainly be attributed to the
full-year effect of acquisitions made in 2013, since we have only made a small
number of acquisitions in 2014. Exchange rates had a negative impact on revenue
of 2%.

In connection with the consolidation and standardisation of the financial
procedures of 70?80 acquired retail entities in the US, we have identified
inaccuracies in the balance sheets of some of these entities, resulting in
adjustments of certain balance sheet items in the acquired businesses. These
adjustments affect the income statement, and a further analysis has concluded
that DKK -12 million relates to 2014. The remaining DKK -31 million relates to
prior-period errors and has in compliance with IAS 8 been restated in the
comparative figures for 2013, as it is not practically possible to determine
the specific prior period in which the errors occurred. These costs will not be
recognised as one-off costs, as opposed to what we have previously
communicated. As mentioned in our Interim Information on the third quarter of
2014, we have incurred a loss on a customer loan in the US. This one-off amount
totals DKK 40 million (against our previous expectation of around DKK 50
million) and has been recognised as a distribution cost in our 2014 financial
statements.

Operating profit (EBIT) for the year totalled DKK 1,761 million, or an increase
of 1% compared with reported EBIT in 2013. If adjusted for the negative
exchange rate effect of DKK 50 million and the one-off loss on a customer loan
of DKK 40 million, the underlying EBIT growth was 7%. The underlying profit
margin was 19.6%. Furthermore, the full-year effect of the acquisition of
distribution activities and Neurelec in 2013 had a significant dilutive effect
on our profit margin, so bearing this in mind, we find the development in our
profit margin satisfactory.

Earnings per share (EPS) were DKK 23.8, which is a rise of 5% on last year and
within the most recently announced guidance range of 2-7%. The underlying EPS
growth was 11%.

Consolidated cash flow from operating activities (CFFO) increased by 17% to DKK
1,495 million in 2014. This is equivalent to a very high cash conversion ratio
of 85% (CFFO/EBIT). The free cash flow amounted to DKK 1,044 million, or an
increase of as much as 28%.

Other matters

In 2014, the Company bought back 1,899,279 shares at a total amount of DKK 887
million. Year-to-date, the Company has bought back an additional 135,599 shares
worth DKK 64 million, bringing the Group’s total amount of treasury shares to
2,236,403.

On 17 February 2015, the Group announced that we have entered into exclusive
negotiations for the potential purchase of 53.9% of the share capital of
Audika, a leading network of hearing care providers in France, from the
controlling shareholder Holton at a price of EUR 17.78 per share. If
successful, the purchase of a controlling interest will commit William Demant
to commence a mandatory public tender offer for the remaining 46.1% of the
outstanding share capital of Audika, which is listed on Euronext in Paris.
Based on a price of EUR 17.78 per share, the entire transaction will amount to
an equity value of EUR 168 million. Audika will launch an information and
consultation process with the relevant employee representatives in accordance
with French law. Furthermore, the acquisition of the controlling interest in
Audika is subject to approval by the French competition authority. Timewise,
the mandatory public tender offer is expected to close in June 2015 at the
earliest, but more likely in the second half of 2015.

Outlook 2015

In 2015, we expect to generate growth in sales and earnings in the Group’s
three business activities: Hearing Devices, Diagnostic Instruments and Hearing
Implants.

As far as the hearing aid market is concerned, we expect to see unit growth of
3-4%, which will however be dented by a decline in the market’s average selling
price due to continued mix changes and fierce competition. In terms of value,
we expect to see flat to slightly positive market trends in 2015. The
anticipated growth in 2015 in our own hearing aid wholesale activities is based
on the solid momentum gained towards the end of 2014, which has continued into
2015 and has been further fuelled by Oticon’s major global product launch in
the first quarter of 2015. Oticon’s new products will from the very start be
globally available in all styles and at all price points.

In Diagnostic Instruments, we expect a continuation in 2015 of the sales
momentum we experienced in the second half of 2014 in a market that is expected
to grow by 2-4% in value.

In Hearing Implants, i.e. cochlear implants and bone-anchored hearing systems,
we expect to deliver double-digit growth rates in 2015 measured in value.

The appreciation of several of the Group’s invoicing currencies, most notably
the US dollar, is expected to have an estimated 4-5% positive impact on
reported Group revenue in 2015 based on exchange rates in early 2015 and
including the impact of exchange rate hedging. However, the resulting positive
exchange rate impact on the Group’s earnings will partly be offset by the
translation of the Group’s Swiss R&D cost base into Danish kroner. The full
positive impact on operating profit of the Group’s strengthened invoicing
currencies is postponed due to currency hedging.

Acquisitions made in 2014 and in 2015 up until today will impact revenue by
less than 1% in 2015. Our ongoing efforts to improve the Group’s efficiency
through the entire value chain will continue. We will thus build and implement
a new global ERP system, establish shared services for our back-office
functions, further centralise our ITE production and repair services and put
our new global distribution centre in Poland into operation. Also, our cost
base will continue to be impacted by our expansion in Hearing Implants,
especially driven by R&D and distribution activities. All these major
undertakings are meant to deliver value for the Group in the medium to long
term, but will in the short term, which means also in 2015, naturally have a
dilutive effect on the Group’s profitability, as it has also been the case in
recent years.

All in all, based on the Group’s expected revenue growth in 2015 and on our
continued efforts to improve our efficiency and to build a future growth
platform in Hearing Implants, we are guiding for an operating profit (EBIT) for
2015 in the range of DKK 1.7-2.0 billion.

The guidance provided above does not include any impact of the outcome of the
current negotiations to acquire Audika.

Lars Nørby Johansen
Niels Jacobsen

Chairman of the Board
President & CEO

The full Annual Report 2014 for William Demant Holding A/S totalling 90 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

                                2014    2013   2012   2011   2010  Developme
                                                                          nt
                                                                   2013-2014

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Key figures, DKK million

--------------------------------- ------- ----------
Revenue 9,346 8,959 8,555 8,041 6,892 4%
---------------- --------------
Gross profit 6,813 6,518 6,127 5,777 4,959 5%
---------------- --------------
Operating profit (EBIT) 1,761 1,736 1,653 1,709 1,430 1%
---------------- --------------
Net financial items -70 -72 -132 -103 -116 -3%
---------------- --------------
Profit before tax 1,691 1,664 1,521 1,606 1,314 2%
---------------- --------------
Profit for the year 1,327 1,286 1,151 1,199 988 3%
---------------- --------------
Assets 11,219 10,318 8,777 7,646 6,786 9%
---------------- --------------
Equity 5,584 5,056 4,059 3,304 2,443 10%
---------------- --------------
Cash flow from operating 1,495 1,282 1,272 1,381 826 17%
activities (CFFO)

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Financial ratios

--------------------------------- ------- ----------
Gross profit margin 72.9% 72.8% 71.6% 71.8% 71.9% -
---------------- --------------
Profit margin (EBIT margin) 18.8% 19.4% 19.3% 21.3% 20.7% -
---------------- --------------
Earnings per share (EPS), DKK 23.8 22.7 20.2 20.6 16.9 5%
---------------- --------------
Return on equity 24.7% 28.0% 31.8% 41.7% 49.5% -

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Key figures and financial ratios for 2013 have been restated due to new
accounting policies and due to errors in prior periods, they have been
corrected in the financial figures for 2013. Key figures and financial ratios
for 2010-2012 have not been restated. Please refer to Annual Report 2014 for a
further description.