Demant A/S

Søren Bergholt Andersson - Investor Relations Søren Nielsen - President and Chief Executive Officer René Schneider - Chief Financial Officer

Martin Parkhøi - Danske Bank Michael Jungling - Morgan Stanley Ines da Silva - Bank of America/Merrill Lynch Romain Zana - Exane BNP Paribas Oliver Metzger - Commerzbank Maja Pataki - Kepler Cheuvreux Christian Ryom - Nordea Markets Richard Wielechowski - Bernstein

Ladies and gentlemen, thank you for participating in this conference call held in connection with our interim management statement released this morning. The duration of this call will be around 30 to 40 minutes, including Q&A.

Today, the company is represented by Søren Nielsen, President and CEO as well as René Schneider, CFO and the IR team. I’ll now hand over to Søren.

Thank you, Søren and welcome everyone. We have at the end of our short presentation 15 minutes time.

Some key takeaways, a little update on the hearing device business, including retail, Hearing Implants; Diagnostics Instruments; Personal Communication; and a little update to the outlook and then as much time as possible for question and answers. Key takeaways.

Well, the highlight is the momentum we saw towards the end of ‘16, in the last part, has positively continued into the new year. Sales first 4 months have been very strong.

We have delivered a lot of organic growth across the group. Especially in the hearing aid wholesale, we have gained a significant market share we believe.

And this has been driven by two key elements solid units as well as continued ASP development by Oticon Opn. Retail have delivered satisfactory organic growth and combined with some acquisition continued to expand and we have seen improved performance in U.S., still have work to be done, but we believe we have kind of, let’s say, turned the curve.

In Hearing Implants, we have seen very positive growth momentum, especially in the BAHS business. but also the CI business.

We have seen satisfactory and broad-based growth in Diagnostic Instruments basically across all markets and a good development there. Based on this, we maintain our full year outlook; however, state that we believe EBIT is most likely to be in the upper part of the range, the range from DKK2.2 billion to DKK2.5 billion.

Hearing Devices, first, talking about how we have seen the market develop. There are some statistics and in some regions, and in others less, but we overall can say we are in line with our expectations.

However, talking about units, below the expected 4% to 6% growth, in U.S. we have seen 1% to 2% growth.

However, if corrected for number of working days, might more be like 3% to 4%. Europe is also below the 4% to 6%.

Germany have realized minus 3% growth in the market, whereas France is still doing 9%, 10% growth. And the rest, somewhere in between but all in all, we believe, below the 4% to 6% unit growth.

We still believe Asia developed positively, except Japan that have also seen a slightly negative development. On the ASP side, we believe we are a little above our expectations.

We believe that, with our own impact from Opn and other high-end launches from competition, we have in general seen an overall improvement of product mix, but on the other hand, we continue to see channel mix and fierce competition, as well as the way units have grown. Geography is also going towards lower ASP, and that has together impacted negatively.

And all in, putting all this together, we believe the value growth is in line with the expectations set out for the year. Looking at hearing device business in the group, very strong organic growth.

We have seen clear market share gains in hearing aid wholesale. Oticon Opn continues to receive outstanding feedback and remains the main driver.

Of course, we are still in the phase where we are before the launch last year, so comparison numbers are, by definition, very easy. It’s from 0 to a lot, but again looking at our overall share of premium and upper end devices, the product mix have significantly improved and continue to do so.

We continue to gain market share in a channel like VA and a lot of other channels. We continue to see Opn both 1, 2 and 3, but also the 1 continue to grow.

We have seen very strong overall unit growth. We have seen that in North America.

We have seen NHS grow. We have seen the distributor sales being in countries where we don’t have our own sales companies typically; named export sales companies delivering a lot of units and a relatively low ASP, however.

And then Oticon Opn in itself have also delivered a strong momentum and unit growth. And Sonic have also experienced actually a strong development but purely based on distributor sales.

Despite the unit growth actually in general being in a more modest ASP, the product mix improvement driven by Opn is still very significant. And therefore, despite of the high unit growth, we have also seen an overall improvement, continued overall improvement, of the ASP also remembering Bernafon and Sonic have a somewhat aging portfolio and therefore seen some pressure on ASP.

Solid growth in retail, UN – U.S. – sorry, Europe as well as Canada and most other markets, we have seen strong development.

U.S. has seen improvement.

We are no longer in negative organic growth, more close to 0, but again of course, still a lot to be done, but we see that we have at least flattened the business. And keep in mind this is still a very profitable business, so of course, we need to see organic growth going forward.

And we work hard on that, and I’m sure we will see that coming. Looking at Oticon Opn, we at AAA announced a number of new releases.

They will be launched in weeks early June. And the main addition are two important styles: a very small, cosmetically attractive miniRITE with a telecoil which is called for in many markets, especially Scandinavia but also U.S.

as well as a more conventional BTE in a very powerful and cosmetically attractive solution, the 13 PP. And this, together with the existing miniRITE, really covers broadly, adding tinnitus and a Speech Rescue function, which is a speech luring for very high frequency – or very large, high-frequency hearing losses to all price points, all styles also, the already sold, the Opn concept further gains strength and coverage.

And then in addition to that, we now also offer rechargeability that can be fitted to both the installed base as well as all new. It is a very flexible solution where the end user can choose between using a rechargeable solution; or from time to time, a normal conventional battery if you, for instance, are traveling and don’t want to bring on your charger et cetera.

It is a very unique product that combines Opn with that combined rechargeability, the best performing sound experience for the end user as well as 2.4 gigahertz diode streaming, with full Made for iPhones connectivity. And I really, really believe this is a very, very powerful combination.

And we also got very positive feedback on AudiologyNOW!, AAA about the flexibility and the rechargeability. Bernafon, Sonic is ready to launch.

That will also happen in weeks. It’s a broad range, 3 different styles, 3 different price points, 3 different performance categories from both brands, so a very broad-based introduction.

Both signal processing for both Bernafon and Sonic are based on traditional directionality and noise management but some very intelligent signal processing that through environmental detection can decide exactly which parameters to be set when and therefore very, very strong performance and much better utilization of directionality and noise management than ever seen before but totally different from the Oticon sound system. Both brands will introduce a full suite of 2.4 gigahertz Made for iPhone connectivity and, with that, bring both Bernafon and Sonic to the forefront of the industry.

Hearing Implants, a strong growth as well both in the bone-anchored part and the CI part but especially in bone anchored. With the Ponto 3 family, we have raised the bar, especially, the Super Power delivers outstanding performance and really pickup a lot of momentum in the marketplace.

And we continue to see growth in the product – Ponto 3 product line, especially driven by Super Power. The CI part, we see some improvements in some of the oil dependent markets, where we start to see tenders, of which we win some and therefore uptake on the old implant and at the same time continue to see Neuro broaden out.

We have full approvals now in France and in Brazil, which are two key markets for Oticon Medical. And we have seen growth as a result of that.

We see very excellent data. We shared some of them at AAA.

And there is no doubt that the performance of the Neuro system is very, very high and then keeping in mind that we towards at the end of this year will launch a new, very attractive processor. We really believe we are in good shape in this business area to continue growth over the coming years.

Diagnostic Instruments, broad-based growth. That comes from U.S., Asia and some oil-dependent markets but not one single thing.

That kind of does the trick. There was a broad range of new products presented as well at AAA both from Interacoustic, GSI and MedRx, all getting positive feedback and for sure, potential growth drivers for the coming periods.

Personal Communication, the cooperation with Sennheiser and Senheiser Communication also seen nice growth, especially in the CC&O business, but also positive momentum in the mobile segment due to recent product launches. Especially, these noise-cancellation headsets have done very, very well.

So summarizing before outlook, I think we are in good shape. I think we see the hearing healthcare strategy deliver results.

We see synergies between our different business areas and again a good strong start to the year. And with that, looking at the outlook for the year and most of it basically unchanged.

No change to the perception of how the market is going to develop. We see no particular reason for the slowdowns in the different markets that should recover.

So we believe that. We believe to generate growth in sales in all business areas.

And exchange rate, very little impacts, etcetera. The only thing that we adjusted and I am sure you already noted, is as I said initially that we now believe we will end in the upper half of – more likely to land in the upper half of the guided EBIT range from DKK2.2 billion to DKK2.5 billion after – or before the announced restructuring cost.

The restructuring cost is still assumed to be around DKK200 million. And with that, I will hand the word back to you, Søren and for Q&A.

Thank you. So I will pass on to the operator.

Hello, Martin Parkhøi, Danske Bank. Just one thing on the change to the upper end of the EBIT range and can you specifically mention if there is any or particular area of the business which have been the main driver for you now believing that you will land at the upper end.

And then in relating to this, is this change of wording to the guidance, is this only driven by the organic growth, the top line performance or were you also seeing some of the cost savings coming through faster than previously expected or guided. And then specifically on the diagnostics business, where you see suddenly see, it sounds like a big upwards say, previous years, what is this driven by, is it driven by you improving your commercial side or is it market growth or what is it?

Okay. Thank you, Martin.

I think it is broad based growth, but it is especially the organic growth in the hearing aid wholesale business that have been strong as well as medical and also slightly above plans and own expectations. It is mainly sales element.

And we do well on the restructuring cost, but there is no significant deviations from plans there. So it’s sales driven.

And diagnostic no, there is not a particular reason. It is new products.

It is some new uptakes in some markets and then also some of this is oil depending going back. But in general we feel good market conditions and see growth based on that.

But it’s the most modest also of the growth rates across the different business areas.

Okay. Thank you.

Thank you. Two questions please.

Firstly, on U.S. retail, on your own U.S.

retail, how long is it before the business returns to a more normal operating environment. And then secondly, on hearing aid devices, can you provide some high level sense of how fast the organic growth rate was in – or year-to-date during the first quarter, not a precise number, but if you can, maybe a little bit of a range, that would be useful?

Thank you.

Thank you. Speaking about U.S.

retail, I think what we can say, you can never say exactly when, but we are in the very end of the number of, for instance, IT system installments. We are doing many of the restructuring and getting one unit out of it.

Now it’s very much the sales management effort as well as marketing effort that we are focusing on. And things take time.

I can’t exactly how long, but I feel we have the right plans on the table and execute on them every day. On hearing aid devices, I don’t want to be specific, but we have seen good, solid growth, organic growth there.

I don’t want to get any close.

Okay. And then on the hearing aid side, can you comment a little bit on the phasing of the first half versus the second half in terms of the EBIT phasing of your business, has that now changed given your raising of – well, moving towards the upper end of the guidance?

It’s not that it fundamentally have changed between. We still have more in the second half, in the first half, but the comparison is very, very different.

And the run rate is slightly up from second half but not dramatically, but of course, compared to first half last year, we will do much better on the EBIT in the first half. And therefore, sequentially, it is more modest than you will see in first half over first half.

Thank you.

Hi, good afternoon. Thank you for taking my questions.

I just – I have a couple of questions on the potential over the counter hearing aids, so could you please give us an update on the discussions that you mentioned on the – on your statement this morning regarding the potential introduction of these products and do you have a view of when we can hear about the FDA on this, what kind of regulation framework is right in your mind, like you said on the statement?

Yes, I will be happy to comment on that. I don’t think we can say much news.

The process continues. There has been a number of investigations and hearings.

I think everybody being listened to and we of course, present our view on how things are. The starting point has been a discussion on affordability and accessibility.

And I think we all tend to agree now that yes, there is a group of people with relatively mild hearing losses that typically don’t get a solution today. You can have many discussions why.

And if a category can be defined where you are still sure that what people are promised is what they get and that it is very simple in its form and the variability in adjustments are very simple. Then you could argue that it could happen without a professional, which is what the discussion is fundamentally about.

But the minute you move into more moderate hearing losses, the minute you have a more sophisticated hearing loss where hearing aids are already sold today, then it’s our strong argument that you should still see a professional and make sure there is a good quality fitting. I think we get more and more exceptions of that, but you never know.

It’s politics and it’s difficult to know exactly where it ends and lands. Our main argument is that FDA should still regulate this area considered medical devices, meaning that you cannot claim it does things you cannot prove and believe that there is a good security and safety of using the device, meaning your hearing loss is not damaged further or allergic reactions to the material it’s made of.

These are the kind of restrictions we are under, also a theme like the right to return. Hearing aids today in U.S.

can have a 60-day to 90-day return guarantee because the user has very limited chance of evaluating, what it is I am buying. You need to wear it for some days or some time in different environments to see if it actually solves the problem.

And I or we at least argue that it’s very important that you maintain this opportunity to return if you are not satisfied. And that’s a key component of hearing aids today, that you can actually return it and get your money back.

And I think that’s something that should also be allowed for potential OTC devices. And taking all this into play, we have to see where it ends, but I think it can go different ways, but I think it can only be seen then complementary somehow to the existing business.

Thank you very much. That’s really helpful.

Just a quick follow-up, what is the role that therefore you expect to play in these markets if the regulation falls where you think it’s right to fall?

We will comment on that when we know where the regulation fall. What I understand from the lawmaking in U.S., that even if things is decided now, it will take 1 year to 2 years before it really put into effect, which will give all of us plenty of opportunity to prepare for it.

Thank you very much.

Yes. Good afternoon.

Thanks. Two remaining questions.

The first one about the organic growth, you are very vocal about the development which seems better than initially planned, probably. Could you specify whether you have seen an acceleration versus the H2 2016 so far?

And the second question is regarding the AudioNova integration by Sonova, so the potential headwind, have you already started to feel this negative impact in ‘17? Thank you.

Yes. I would say that it’s not that we have seen a further dramatic acceleration, but we see the momentum continuing and we see a continued acceptance and opening of new doors due to the potential of Opn and the way it works and the way it spreads that it’s a very good hearing aid and more and more people try it out.

We see VA grow and so and so. Yes, a continued momentum, but not what I would call a strong acceleration, but good, continued momentum.

On Sonova, yes, we have already seen the preparation. And we have felt decline in sales to the Sonova or HAL AudioNova business and we expect that to accelerate further in the coming months, but again we have moved our effort and focus to other markets and channels and definitely believe we can pickup new business.

It is very low ASPs, this one. So, you don’t need to come and say it 1-to-1 units, far from and I believe we can recover that business.

That’s definitely in reach and the plans.

Okay, thank you.

Yes, hi. Thanks for taking the questions.

Two, I have. The first one is on your hearing implant business.

So you are talking about a market outperformance of a whole market implant business, so would you say the statement or also only for the cochlear implant business on a standalone base? And my second question just on CC&O, I assume you have followed also the results of both listed peers.

So would you describe your current growth as being similar or ahead of your peers?

Could you please, to make sure I answer correctly, repeat the implant question?

Yes. You ask – sorry, you commented that in your implant business, you achieved a market outperformance.

So would you say this statement only for the overall implant business or would you also state this for the cochlear implant business on a standalone basis?

I would say so much that there is no strong statistic we can base it on, so it is our sound judgment. We are only two players in the bone-anchored business and that’s easier kind of to judge.

And there we definitely believe we have gained a significant market share, but yes, we also believe we have done so in the implant business, but it’s not something where we have a very solid statistic material to base it on. On the CC&O, yes, we believe we are gaining shares there and do well.

Again, a lot of this is done in some larger deals and then supplies later on, so it can be a little difficult to judge exactly how it plays out, but yes, we believe we’re in good shape in that part of our business.

Okay, great. Thank you.

Hi, good afternoon. I have two questions.

The first one, on the Bernafon and Sonic product rollouts with the iPhone connectivity. Shall we assume that you are going to sell those at a – not on material pricing premiums to the older portfolio?

And then the second question is with regards to the VA, are you intending to introduce the new Opn products in the VA as well and will that be with a November window? Thank you.

Bernafon, Sonic 2.4 gigahertz, the new ones, yes, I hope that we can improve pricing, but again, it’s very channel-based. Some is kind of in fixed pricing and replace others, but yes, we should be able to get a – some premium.

But the most important will be the mix improvement, as we have also seen with Oticon. And I’m sure we’ll see the same with Bernafon, Sonic and coming from that, a improvement to the ASP of Bernafon and Sonic.

And VA, yes, the new products on Opn, one will be introduced in VA as soon as possible. Unfortunately, we didn’t get it into the May window, but of course, we will be positioned and ready for getting on from November 1.

Thank you.

Yes, hi. This is Christian Ryom from Nordea Markets.

A couple of questions from me. First, on medical, can you talk a little bit about what markets are driving your growth in cochlear implants and now that you have been in the market – or in some markets for a little over a year, are you starting to see hospitals coming back to make significant additional orders on the Neuro system?

And then secondly, on your new product announcements for Bernafon and Sonic, the 2.4 gigahertz Made for iPhone Bernafon hearing aid, when will that be available in Costco?

First, on medical, it is broad-based as many markets where things are growing. Of course, again, France and Brazil are current big markets and therefore important and therefore, in absolute numbers that’s also where we see a lot of the growth coming from.

But also, many of the new markets like Germany, Denmark etcetera show nice growth from basically starting from zero, but yes, we see repeated fittings and repeated sales. It is slow.

You need to see a few patients. Again, opposite of the markets where we have a solid position, the uptake is somewhat quicker.

And therefore, again, right now we see a good business in some of the markets where we have historically had a stronger position. But generally speaking, broad based.

Bernafon, Sonic in Costco, well, it’s up to Costco to choose. We are in discussion with Costco about Bernafon products and launches, but I cannot disclose any details on that.

Okay, thank you.

Hi, thanks for taking my questions. First, on Oticon Medical, could you just maybe make a comment about how we should be thinking about profitability of that business, where it is today and how we should think about profitability over the longer term or will it be accretive to some margins?

And then sort of related, if you can provide an update on the potential launch in the U.S., what’s the timeline on that at the moment? Thank you.

Yes. Well, we don’t comment on it, but we are still slightly loss-making in the medical business, but stable.

And as soon as sales are growing, we’ll see improvements. So I cannot tell you exactly when, but we have no doubt that we will see a good, profitable business there mid to long-term and I think that’s as far as we can take it today.

The preparation for the approval in U.S. is well on its way.

We still believe that to be towards the end or early into ‘19. And that’s fully in line with what we have said so far.

No changes to that plan.

Yes, thank you.

Okay, thank you very much. I think that concludes this call without any interruptions from fire alarms and other stuff.

In case you have additional questions, feel free to reach out to Mathias and myself and we will be happy to assist you. So once again, thank you for participating.

Thank you.