Hearing aids

Transcription

Hearing aids

BERENBERG EQUITY RESEARCH
Hearing aids
Sound growth
Tom Jones
Analyst
+44 20 3207 7877
tom.jones@berenberg.com
Graham Doyle
Analyst
+44 20 3465 2634
graham.doyle@berenberg.com
Frazer Hall
Specialist sales
+44 20 3207 7875
frazer.hall@berenberg.com
8 October 2013
Med. Tech/Services
For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and
our disclaimer please see the end of this document.
Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and
the disclaimer at the end of this document.
Table of contents
Sound growth
4
Executive summary
5
William Demant - Here comes the growth
10
Executive summary
11
Key risks to our Buy case
15
William Demant key share price drivers
16
Earnings outlook – 14% EPS growth
26
Share price history
34
Valuation and target price
35
Financials
43
Sonova - Prospects priced in
47
Executive summary – Good business, expectations priced in
48
Key share price drivers
49
Earnings outlook – steady growth
68
Share price history
76
77
Financials
83
Hearing Aid Industry analysis
87
The cochlear and bone-anchored hearing aid markets
133
Diagnostic audiology
138
William Demant company profile
140
Sonova company profile
150
Disclosures in respect of section 34b of the German Securities
Trading Act (Wertpapierhandelsgesetz – WpHG)
159
Contacts: Investment Banking
162
Hearing aids
Med. Tech/Services
Sound growth
● In this note, we initiate coverage of the hearing healthcare sector with
a Buy rating on William Demant and a Hold rating on Sonova.
● William Demant – underappreciated growth.
o Buy case is quite simple: We think the market is underestimating
●
●
●
●
the earnings potential of the company. We expect the company to
achieve a 2014E-2018E EPS CAGR of 14%. Our estimates are
3%, 7% and 11% above Bloomberg consensus in 2014, 2015 and
2016, respectively, mainly as we believe the market is
underestimating Demant’s margin potential, as well as the EPS
accretion it can achieve through capital deployment.
o Valuation full, but earnings can drive shares higher: At 19.3x
our 2014E EPS for 14% EPS growth, a significant
re-rating is unlikely, in our view. However, we expect the stock to
hold its forward multiple over the next 12 months and for the midteens EPS growth to drive the shares higher.
o DKK605 price target offers 14% upside: Our DCF-derived price
target implies a 2015E PE multiple of 19.0x, not too far from the
current 2014E multiple and in line with five-year averages. So
while the multiple is full, we think earnings can drive the stock
higher.
Sonova – good company, but growth is in the price.
o Good news in the price: In a tough market, we think Sonova will
be one of the industry winners. However, we think this potential is
not lost on investors.
o No room for multiple expansion: As for Sonova, we see limited
scope for multiple expansion with the stock currently trading at
22.0x our 2013/14E EPS estimate for a 2013/14E–2017/18E EPS
CAGR of 10.7%.
o Earnings upgrades unlikely: We think current consensus
estimates reflect the top end of a range of reasonable outcomes.
We are more conservative. Our EPS estimates are 4-6% below
Bloomberg consensus. We therefore see little scope for earnings
upgrades.
Steady market growth, but better to be had: The $4bn global
market for the wholesale manufacture of hearing aids is growing 2-4%
per annum, with negative price offsetting 4-5% volume growth.
However, we believe that both William Demant and Sonova are well
positioned to take share, push into adjacent markets, expand margins
and achieve a double-digit earnings growth rate over the next four
years.
Potential reflected in Sonova’s share price, but not that of
Demant: To summarise, we think that both William Demant and
Sonova can leverage their scale and industry-leading positions into
significant earnings growth over the next four to five years. For
Sonova, this potential is reflected in the share price, in our view, but
for William Demant we do not think this is the case.
We therefore rate William Demant a Buy and Sonova a Hold.
William Demant
Holding A/S
Buy
Current Price
Price Target
DKK 529.5
DKK 605
08/10/2013 Copenhagen Close
Market cap DKK 28,967 m
Reuters
WDH.CO
Bloomberg
WDH DC
Sonova Holding AG
Hold
Current Price
Price Target
CHF 110.30 CHF 119
CHF 7,333 m
SOON.VX
SOON VX
08/10/2013 Virt-X Close
Market cap
Reuters
Bloomberg
8 October 2013
Tom Jones
Analyst
+44 20 3207 7877
Graham Doyle
Analyst
+44 20 3465 2634
graham.doyle@berenberg.com
Frazer Hall
Specialist Sales
+44 20 3207 7875
4
Hearing aids
Med. Tech/Services
Executive summary
William Demant and Sonova are, in our view, two of the leading hearing health
companies in a global market worth $15bn. Both companies’ bread and butter
business is the manufacture and wholesale of traditional hearing aids, a $4bn
subsection of the overall market. However, both have a significant retail presence,
which accounts for 20-30% of their revenues. Both also operate in the $1bn
cochlear implant market, although William Demant’s presence is somewhat
smaller. However, William Demant has a strong audiological diagnostics business.
The market for core hearing aids is relatively mature, with global volume growth of
around 4% offset by modest price declines. However, both companies have the
potential to deliver faster revenue growth via share gains, retail acquisitions and
tapping into adjacent markets, not least the cochlea implant market, which, at $1bn,
is a quarter of the size of the wholesale hearing aid market, but is growing at a rate
of 10-15% per annum.
William Demant – our preferred investment
We believe William Demant is on the cusp of a significant acceleration in earnings
growth that is not factored into expectations or the share price. Our EPS estimates
for 2014, 2015 and 2016 are 3%, 7% and 11%, respectively, above Bloomberg
consensus.
Driven by new products, easing of reimbursement headwinds, entry into new
adjacencies, margin expansion, a falling tax rate and channelling of excess capital
into buybacks, we expect William Demant to deliver a 14% EPS CAGR between
2014E and 2018E, for which the stock currently trades at 19.3x our 2014E EPS
estimate.
While this is admittedly a high multiple, it is not excessively high by historical
standards, nor for the growth on offer. We also think investors will be rewarded
for backing quality.
We therefore initiate on William Demant with a Buy rating. Our DCF-derived price
target of DKK605 per share offers 14% potential upside.
Sonova a good company, but expectations in the price
Sonova is a well-positioned, well-managed company within the hearing healthcare
market. We think it is one of the most innovative and forward-thinking of the six
major manufacturers. However, we think this position is well understood by the
market.
At 22.0x our 2013/14E EPS estimate for a 10% 2014E-18E EPS CAGR, we
believe that the stock is fairly rated. We also believe that current earnings
expectations are toward the top end of a reasonable range of forecasts, with our
EPS estimates 4-6% below consensus over the next three years.
We therefore see limited scope for either a positive re-rating or earnings-driven
upside.
Therefore, despite its attractions, we rate Sonova a Hold.
5
Hearing aids
Med. Tech/Services
Industry snapshot
Hearing Instrument industry snapshot
Hearing Instrument industry snapshot
Hearing instrument market value (c.$5.4bn)
Hearing instrument sales volume by region
North
America,
3.1m, 29%
South
America,
0.75m, 7%
OTC
amplifiers,
$50m
Bone
anchored
hearing
aids,
$125m
Eastern
Europe,
0.75m, 7%
Hearing
aids,
$4,200m
Asia, 1.8m,
17%
Cochlear
implants,
$1,000m
Africa,
0.2m, 2%
Western
Europe,
3.7m, 34%
Market highly concentrated (value)
Hearing aid volume growth
16m
Others, 5%
Widex, 8%
Oceana,
0.4m, 4%
14m
Sonova, 24%
Starkey,
11%
12m
10m
2006-2012
CAGR
4.4%
2012-2020E
CAGR
4.5%
8m
6m
GN
ReSound,
13%
Siemens,
17%
William
Demant,
22%
4m
2m
0m
Investment summary
Earnings and valuation summary
o Hearing aids is a concentrated market with reasonable
volume growth, but tough pricing. Faster growth
available in adjacent markets e.g.cochlear implants
William Demant - Buy PT DKK605
o Currently trading at 19.3x our 2014E EPS estimate for a
14% 2014E-2018E EPS CAGR.
o DKK 605 price target is DCF based (YE 2014E) and
implies 2015E PE of 19.0x, in line with 5 year average
o Earnings growth comes from 1) share gains 2) faster
growing adjacent markets 3) acquistions and 4) margin
expansion. There will be winners and losers.
Sonova- Hold PT CHF 119
o Currently trading at 22.0x our 2013/14E EPS estimate
for a 2013/14E - 2017/18E EPS CAGR of 11%.
o CHF119 target price DCF based (March 2014) and
implies a 2014/15E PE of 21.3x.
o William Demant - Buy. Market underestimatiing earnings
potential. Expect share price to be driven by earnings
upgrades as mutliple already full.
o Sonova - Hold - Good company, but reasonable earnings
expectations and full multiple limit upside.
Source: Berenberg, Company reports
6
Hearing aids
Med. Tech/Services
Understanding the market – a brief background
The hearing device market is worth around $15bn and breaks down as illustrated in
the two charts below. The left-hand chart shows the entire market, including the
retail component. The right-hand chart illustrates the size of the wholesale market
for hearing aids, cochlear implants and other hearing devices.
Hearing device market - $15bn
Wholesale market size by device
Component
manafacturers
5-8%
Hearing aids
$4,200m
Retail
60-70%
Cochlear
implants
$1,000m
Bone anchored
hearing aids
$125m
Wholesale
20-30%
OTC
amplifiers,
$50m
Source: Berenberg estimates
The key market for William Demant is the wholesale market for hearing aids (i.e.
manufacturer → dispenser). This is a $4bn market dominated by six key players,
three of which are listed, as the chart below illustrates.
Wholesale hearing aid market share 2012 (value)
Others,
5%
Sonova,
24%
Widex, 8%
Starkey, 11%
GN ReSound,
13%
Siemens
17%
William
Demant,
22%
Source: Berenberg estimates, Company data
Volume growth is reasonable
In volume terms, the global hearing aid market has grown at a CAGR of about 4%
in unit terms, a rate we expect to accelerate marginally over the next 10 years. Key
volume drivers are the ageing population, increased binaural (two ears) fittings and
greater penetration into what is a substantially underpenetrated market (of the US
hearing loss population, only about 26% use a hearing aid).
7
Hearing aids
Med. Tech/Services
Global hearing aid unit volume growth
16m
2012-2020 CAGR
4.5%
14m
2006-2012 CAGR
4.4%
12m
10m
8m
6m
4m
2m
0m
2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013E
2014E
2015E
2016E
2017E
Pricing is less encouraging
Prior to the global financial crisis, hearing aid price growth averaged low single
digits. However, the financial crisis created some downward pressure on ASPs, as
did the contemporaneous growth in large retail chains and buying groups.
Resurgent competition from industry laggards further added to the pressure.
Pricing is now low single-digit negative, as shown below, and we expect it to stay
that way.
Global average wholesale hearing aid ASP trends
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
H1 2013
Which means it’s all about share and adjacent markets
Given the above volume and pricing trends, growth in wholesale hearing aids is all
about share gains and/or pushing into adjacencies, such as diagnostics, retail and
hearing implants. As the chart below shows, Sonova and William Demant have
been net share gainers in the wholesale market over the last five years, a trend we
expect to continue.
8
2018E
2019E
2020E
Hearing aids
Med. Tech/Services
Wholesale hearing aid market share trends (value)
30%
William Demant
25%
Sonova
20%
Siemens
15%
GN ReSound
10%
Starkey
Widex
5%
Others
0%
2008
2009
2010
2011
2012
Sustained growth feasible despite tough market
So, to summarise, the wholesale hearing aid market is characterised by reasonable
volume growth and tough pricing, but for those companies with competitive
advantages, sustained, above-market growth through share gain is achievable, in
our view. In addition, this growth in the core wholesale hearing aid business can be
enhanced by pushing into adjacent markets such as retail and diagnostics, as well as
other allied areas such as cochlear implants.
New entrants not a major threat
There are very high technological- and infrastructure-related barriers to entry in the
hearing aid business. On the technology side, a successful wholesaler needs
expertise in sound processing, in particular, as well as miniaturisation of
microphones, speakers, battery technology and integrated circuits. The existing
manufacturers also have considerable brand value which is hard to replicate. Good
after-sales support and customer service are also important, and surprisingly
difficult to deliver. Margins and returns, while adequate, are not excessive, meaning
that for any new entrant there is likely to be a fairly long period before reaching an
acceptable level of return.
Indeed, there have been no successful new entrants into the wholesale hearing aid
market since 1978, although several large electronics companies have tried.
Sonova’s growth in the price, William Demant’s is not
We examine industry trends more thoroughly in the latter half of this report, but
now consider the individual investment cases for William Demant and Sonova.
In conclusion, we think William Demant’s earnings growth prospects are being
overlooked by the market, whereas for Sonova we believe market earnings
expectations are essentially correct, if not slightly high. With both stocks on similar
multiples (high teens), we see little scope for a further upwards rerating of either.
However, in William Demant’s case, we expect the stock to be driven higher by
upwards earnings estimate revisions.
9
William Demant Holding A/S
Small/Mid-Cap: Med. Tech/Services
Here comes the growth
● We believe William Demant is in the early stages of a period of
●
●
●
●
accelerating earnings growth that is reflected neither in consensus
estimates nor the share price. We therefore initiate on William
Demant with a Buy rating and a DCF-based price target of DKK605,
14% above last night’s close.
Revenue drivers abound. The wider hearing aid market offers
relatively limited, albeit stable, 2-4% market growth. However, William
Demant is in the early stages of one its broadest product roll-outs and
is well positioned to take share, in our view. Easing reimbursement
headwinds, opportunities in adjacent markets and bolt-on acquisitions
offer further revenue growth opportunities. We therefore expect
William Demant to achieve a 2014E-2018E revenue CAGR of 7%.
EPS growth potential underestimated. Our 2014, 2015 and 2016
EPS estimates are 3%, 7% and 11% higher than consensus,
respectively. Driven by 7% revenue growth, expanding margins and a
falling tax rate, we estimate that William Demant can deliver a doubledigit net income CAGR. By maintaining a modest level of leverage
and channelling its solid free cash flow into buybacks, we anticipate
that the company will deliver a 14% 2014E-2018E EPS CAGR.
Valuation not a barrier to positive share price performance. At
19.3x our 2014E EPS, William Demant’s stock is not especially cheap,
but for 14% growth it is not unduly expensive by med tech standards,
in our view.
Earnings the key driver. We are confident that if market EPS
estimates move up toward our own numbers over the next 12-18
months, the stock will sustain its current forward multiple of 19.3x, if
not expand slightly. Our DKK605 DCF-based price target implies a
2015E PE of 19.0x, no much more than the current 2014E multiple.
We are thus confident that if the company delivers our earnings
estimates, which is where the true risk to our thesis lies, then our
DKK605 price target is well within range. William Demant is an
earnings story, not a re-rating story, in our view.
Y/E 31.12., DKK m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
CPS
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Cash flow RoEV
Source: Company data, Berenberg
2012
2013E
2014E
2015E
2016E
8,555
1,890
1,653
1,153
2,406
20.23
20.23
16.63
0.00
71.6%
22.1%
19.3%
0.0%
24.9%
3.8
17.3
19.8
26.2
3.9%
9,142
2,083
1,843
1,324
2,000
23.40
23.40
18.65
0.00
72.6%
22.8%
20.2%
0.0%
24.2%
3.6
15.7
17.7
22.6
4.3%
9,853
2,360
2,076
1,502
2,250
27.39
27.39
22.71
0.00
72.8%
23.9%
21.1%
0.0%
24.5%
3.3
13.8
15.7
19.3
4.9%
10,518
2,636
2,311
1,697
2,250
31.77
31.77
26.54
0.00
73.0%
25.1%
22.0%
0.0%
24.7%
3.1
12.4
14.1
16.7
5.6%
11,141
2,873
2,504
1,865
2,250
36.00
36.00
32.50
0.00
73.0%
25.8%
22.5%
0.0%
24.5%
2.9
11.4
13.0
14.7
6.4%
10
Buy (Initiation)
Current price
Price target
DKK 529.50
DKK 605
08/10/2013 Copenhagen Close
Market cap DKK 28,967 m
Reuters
WDH.CO
Bloomberg
WDH DC
Share data
Shares outstanding (m)
Enterprise value (DKK m)
Daily trading volume
57
31,680
75,800
Performance data
High 52 weeks (DKK)
Low 52 weeks (DKK)
Relative performance to
1 month
3 months
12 months
530
450
SXXP
OMX
Copenhagen
2.0 %
3.4 %
-0.4 %
1.9 %
-19.2 %
-17.9 %
Key data
Price/book value
Net gearing
CAGR sales 2012-2016
CAGR EPS 2012-2016
5.5
37.8%
6.8%
15.5%
Business activities:
Hearing aid manufacture and
wholesale; hearing aid retail;
cochlear implants, audiology
diagnostics
Non-institutional shareholders:
Oticon Foundation 54%
8 October 2013
Tom Jones
Analyst
+44 20 3207 7877
Frazer Hall
Specialist Sales
+44 20 3207 7875
Executive summary
Investment thesis
Our view on William Demant is simple. While other manufacturers have gained
investor attention with novel yet commercially untested technologies and/or
marketing strategies, we think William Demant’s earnings potential has been
overlooked.
Driven by new products, easing of reimbursement headwinds, entry into new
adjacencies, margin expansion, a falling tax rate and channelling of excess capital
into buybacks, we believe William Demant is on the cusp of a significant
acceleration in earnings growth. Overall, we expect it to deliver a 14% EPS CAGR
between 2014E and 2018E, for which the stock currently trades at 19.3x our 2014E
EPS estimate. While this is admittedly a high multiple, it is not excessively high by
historical standards, and we think investors will be rewarded for backing quality.
We therefore initiate on William Demant with a Buy rating. Our DCF-derived price
target of DKK605 per share offers 14% potential upside.
Earnings potential underestimated
Our EPS forecasts are 3%, 7% and 11% higher than Bloomberg consensus in
2014E, 2015E and 2016E (the last year for which we have a reliable estimate). This
means we expect a 2013-2016E EPS CAGR of 15.4% versus consensus of just
12%. While our revenue forecasts are slightly higher than consensus, it is our
margin and buyback assumptions that drive the bulk of the difference. William
Demant quite rightly tends to focus on absolute profits rather than margins. As a
result, we think investors are overlooking the company’s margin potential.
Secondly, despite a very clear policy from the company, we don’t think consensus
estimates properly reflect William Demant’s cash flow potential, nor the associated
boost to EPS it can achieve through buybacks.
Sentiment on an upswing
While investor attention is, in the very near term, likely to focus on competitor
products (mainly iPhone-compatible hearing aids), we think sentiment toward
William Demant will improve in the next 12-18 months as it emerges from the
pressures of reimbursement changes in key markets, and is vindicated for sticking
with a more measured new product launch timetable – a decision which has
recently resulted in some share loss.
Valuation full, but still room to go
At its current 2014E PE of 19.3x for a 14% EPS CAGR, we would concede that
the stock is not cheap; but for the earnings potential on offer, we don’t think the
current valuation is unreasonable. With improving earnings momentum and
sentiment, we think the stock can at least hold its multiple. Applied to our 2015E
EPS estimate of DKK31.77, this 18.5x would yield a share price of DKK588, not
far off our DCF-based DKK605 price target.
To summarise, we think William Demant’s earnings potential is
underappreciated. If the company can deliver our above-consensus
estimates, we expect the current multiple to hold, thereby driving the shares
higher.
11
We discuss each of William Demant’s key share price drivers in more detail below,
but, to briefly summarise, we see the following as likely to be the key share price
drivers in the next 12-18 months.
1. New products. William Demant is in the early stages of one of the
broadest new product roll-outs in its history. New products are essential to
gaining market share, which ultimately drives growth in this industry. The
company is, in our view, on the cusp of reversing the trend of share loss it
has recently experienced in the mid- and low-performance categories. The
new product roll-out is also quite broad based, with the company bringing
out new products across its three brands.
a. Oticon Inium roll-out key: Oticon is William Demant’s
premium brand, and has recently released its new Inium platform
(March 2013). This was restricted initially to its highest
performance device, the Oticon Alta. Inium offers double the
memory of its predecessor (RISE II), allowing for wireless
connectivity binaurally between fitted aids and external devices via
a streamer. This connectivity comes at power consumption rates
of up to 10x lower than competitor platforms based on 2.4GHz
technology. By choosing to restrict Inium to only the highest
performance level while other manufacturers were launching new
platforms, Oticon ceded some share at lower performance levels.
However, the company recently launched a mid-range device,
Nera, on the Inium platform which we expect to reverse this
trend. In addition, we believe the phased roll-out will ultimately
yield the highest possible sales through the life cycle of Inium.
Oticon is also launching several other products which should help
drive share.
b. Bernafon has new products too. Bernafon is William Demant’s
more value-conscious brand and it, too, is in the early stages of a
phased roll-out of a new range. The high-end Acriva 7 and Acriva
9 were released in April this year. Two mid-range products are due
for launch in H2.
c. Sonic also coming to the party. William Demant’s third brand,
US-focused Sonic, is also launching two mid-priced products in
H2 this year.
William Demant is in the early stages of a strong launch cycle, in our view.
We therefore expect it to take share, and believe this can support and even
expand its premium P/E multiple versus its peers.
2. Retail/capital deployment. We estimate that William Demant has c1,200
retail outlets, which account for 20-25% of group revenues. It and Sonova
are the only wholesalers fully committed to the retail space (GN ReSound
has a significant indirect retail presence through the Beltone franchise
network and a smaller direct retail presence). The retail segment of the
market captures 60-70% of the of the overall value chain in hearing aids
(although probably accounts for more than 60-70% of costs). With the
retail market growing at 2-3% annually, we believe William Demant can
sustainably grow retail at 6-8% in the medium term, with at- or abovemarket growth supplemented by acquisitions. We estimate 70% of the
$10bn retail market is in the hands of small private companies and
12
individual firms, meaning there is ample scope to make bolt-on
acquisitions, in our view.
3. Market ignoring Neurelec. William Demant purchased Neurelec earlier
this year. This is a small French cochlear implant company with a c2.5%
market share of the $1bn cochlear implant market. Although this market is
dominated by the Australian company Cochlear, which has a 60% share,
we believe there is still room for Neurelec’s offering to compete. Neurelec
offers some unique selling points, such as being the only binaurally-capable
system on the market.
In our view, Neurelec has a quality product and, to date, has lacked the
distribution capability that William Demant possesses. William Demant
has previously entered niche markets and used quality products to gain
decent market share within a relatively short timeframe. When it entered
the bone-anchored hearing aid market in 2009 it had no experience, yet by
2012 it had 25% of the market. We believe the market is not giving
William Demant any credit for this purchase, mainly as Neurelec, at the
time of the acquisition, was a very minor player. Cochlear implants is
undoubtedly a more competitive market than bone-anchored hearing
systems, but we think William Demant should be able to take a c5% share
within five years. This would offer DKK500m in revenue, or add 1.3pp to
growth rates per annum.
4. Annualising of reimbursement headwinds. William Demant’s
performance has recently been hampered by its over-exposure to markets
hit by reimbursement cuts and under-exposure to some of the more
attractive markets. We believe the annualising of reimbursement changes,
particularly in Denmark, the Netherlands and Norway, will remove a
headwind which has been largely responsible for the company’s lacklustre
performance versus its peers of late.
In addition, we think the company’s new portfolio should allow it to gain
share in the US, China and Japan which are growing strongly and, to this
point, have been under-penetrated by William Demant. We would
highlight the Dept. of Veteran’s Affairs in the US as a potential
opportunity to improve US penetration (William Demant currently has
c9% share of this contract versus c50% with Sonova, and we anticipate a
renegotiation of the contract in 2014). In addition, the Australian Hearing
(a state-owned hearing service provider) contract is currently being
renegotiated, and its administrators intend move it from a mainly singlesource (currently Siemens) contract to a broader multi-source market. We
estimate this this contract is worth c$50m annually.
5. Improved operational efficiencies. William Demant concerns itself with
absolute profit generation rather than percentage margins and, as such, we
believe the market may be underestimating the margin potential for the
company. We believe there is scope for considerable margin expansion
over the next five years due to the following factors.
a. Portfolio synergies: We believe the company has the broadest
offering in hearing health, and that there are considerable
synergies to be shared between the different businesses. We would
highlight potential R&D synergies between the hearing aid
business and Oticon Medical (bone-anchored hearing systems and
13
cochlear implants), as well as revenue synergies between the
hearing aids business and the diagnostics business.
b. Leveraging scale: William Demant is the second-largest player in
the industry by volume and value. As the industry becomes more
segmented and patient requirements more specific, we believe
those with the scale to fund broader R&D, tailor marketing
strategies and utilise retail outlets to provide product
differentiation can take share.
c. Efficiency projects: The company has multiple on-going
efficiency projects, including a new shared services function and a
new global distribution and supply chain being established in lowcost Poland.
Earnings summary – 7% top line, 14% bottom line
We discuss William Demant’s earnings in more detail further on in this note, but,
to summarise here, we think it will deliver a 2014E-2018E revenue CAGR of 7.0%,
driven by growth of its new portfolio, retail business acquisitions, stable diagnostics
growth and growth in Oticon Medical, mainly from increased penetration into
cochlear implants.
At the EBIT level, we expect a 2014E-2018E CAGR of 9.2%, 220bp faster than
the top line due to the positive margin drivers detailed above.
Minor improvements in interest expense/income helped by an expected decline in
the income tax rate of c200bp means 9.2% EBIT growth yields 10.2% net income
growth over the 2014E-2018E timeframe.
We expect William Demant to carry out significant buybacks to the tune of
cDKK5bn over the period 2014-18. Our 10.2% net income CAGR therefore
translates into a 2014E-2018E EPS CAGR of 13.5%.
William Demant earnings summary
DKKm
2011A
2012A
2013E
2014E
2015E
2016E
2017E
2018E
CAGR '14E-'18E
Revenues
Growth
8,041
16.7%
8,555
6.4%
9,142
6.9%
9,853
7.8%
10,518
6.7%
11,141
5.9%
12,089
8.5%
12,907
6.8%
7.0%
EBIT
Margin
Growth
1,709
21.3%
19.5%
1,653
19.3%
-3.3%
1,843
20.2%
11.5%
2,076
21.1%
12.7%
2,311
22.0%
11.3%
2,504
22.5%
8.3%
2,741
22.7%
9.5%
2,956
22.9%
7.8%
9.2%
Net income
Growth
1,198
21.2%
1,153
-3.8%
1,324
14.8%
1,502
13.4%
1,697
13.0%
1,865
9.9%
2,045
9.7%
2,213
8.2%
10.2%
EPS
Growth
20.57
21.5%
20.23
-1.7%
23.40
15.7%
27.39
17.0%
31.77
16.0%
36.00
13.3%
40.69
13.0%
45.53
11.9%
13.5%
14
Key risks to our Buy case
While we rate William Demant a Buy, there are risks to our investment case. The
following is not an exhaustive list, but represents what we see as the key risks for
the share price.

Pricing risk: William Demant sells to a wide range of markets, including
to government entities, commercial insurers and private payers. There is a
risk that any increase in government austerity in Europe and the US, in
particular, or increased competitive pressure on commercial insurers,
would adversely affect pricing. With steady, but low volume growth in the
hearing instrument industry, any incremental increase in pricing pressure
would materially impact group margins.

Market share loss: Economies of scale are particularly relevant in the
hearing aid market. For this reason, the competition for market share is
intense as company margins tend to be highly leveraged to share. Any
disruptive new technology from an existing competitor or disruptive entry
from a new competitor could have a damaging effect on group
profitability.

Loss of large contracts: As in most healthcare segments, public entities
and large private payers account for a meaningful portion of the market.
Any loss of contracts from these types of consumers could materially
affect the top line and would affect our investment case. Customers of
particular note for William Demant include the NHS (National Health
Service) in the UK and the VA (US Department of Veterans Affairs). That
said, the company’s top five customers account for less than 10% of total
revenue.

Product liability: While the potential for hearing aids to cause harm is
negligible, the same is not true for bone-anchored hearing aids or cochlear
implants. Any product failure could expose the company to significant
legal costs and liabilities for the company, as well as reputational damage,
as some companies in the industry have found out.

R&D cycle shortening: William Demant spends c8% of revenue annually
on R&D. If innovation becomes more of a competitive threat and
competitors launch new ranges more frequently, thus shortening product
cycles, there would be a risk of rising R&D costs. It would likely become
more difficult to generate a return on that R&D over the shorter product
cycle.

Costs/margin: A large part of our positive investment case is based on
our view that William Demant can generate better margins than those
which we believe are priced into the stock. Whether it is driven by lowerthan-expected revenue or higher-than-expected costs, failure to deliver our
margin expectations would limit share price upside, in our view.
However, on balance, we think the upside risks to earnings and the share
price outweigh the downside risks.
15
William Demant key share price drivers
William Demant is our preferred hearing aid stock, and the only one we rate a Buy.
We see the following factors as potential share price drivers in the next 12-18
months.
1) Upcoming roll-out of new products
2) Further expansion of retail activities
3) Growth in the nascent cochlear implant business
4) Annualising of reimbursement changes in key markets
5) Improving operational efficiency
Key Share Price Driver No.1: New products – on the cusp of an
upswing
We believe that William Demant is about to enter a period of improving new
product momentum and is in the early stages of one of the broadest new product
roll-outs in its history. Share gains are critical to driving growth in this industry, and
share gains require new products. Having lost some share in certain performance
categories in the last 12 months, we think William Demant is on the point of
reversing these trends, leading to improving revenue momentum and margins.
Slow and steady may be a better approach
William Demant is in the early stages of the roll-out of its new Inium platform.
Unlike Sonova, it chose to initially restrict the new platform to its highest
performance level, the Oticon Alta.
As a consequence, we think William Demant has lost some share to other
manufacturers who have recently launched new platforms at all performance levels
(Sonova), or have launched new platforms more gradually but are more advanced
in the process of filtering the new technology down through the various
performance levels. However, we think this dynamic will reverse in H2 2013 and
2014, driving strong sales growth. William Demant has a goal of taking one
percentage point of share per annum over the long term, which we believe it will
achieve with its more measured approach.
New platform launched in H1 2013
William Demant launched its new platform, Inium, in March 2013. Inium is the
follow-on platform to RISE II, which was sold as Agil, Acto and Ino at the three
different performance levels.
The Inium platform has double the memory of RISE II to allow for more
personalisation of settings; it has expanded sound processing features and provides
wireless connectivity using near field magnetic induction at power consumption
rates up to 10x lower than 2.4GHz based hearing aids (ie GN’s Resound Verso).
The streamer itself communicates to external devices on 2.4 GHz but battery life is
not really an issue for the streamer.
Inium also offers the following advancements on RISE II.

Improved performance. Inium features include: i) Speech Guard E. This
offers improved speech eligibility in situations where there are multiple
speakers; ii) Spatial Sound Premium. This means extended band with,
16
binaural sound processing and spatial noise management and is designed
to preserve the natural differences in sound levels between the ears that
aid localisation; iii) improved feedback control. Feedback control is a
perpetual challenge, as cancelling feedback typically results in the
cancellation of some of the incoming new sounds. Most of these features
are aimed at improving speech understanding, arguably the key
requirement of hearing aid users.

Reduced listening effort: The aforementioned features are designed to
reduce the cognitive effort required when using a hearing aid, something
which can lead to fatigue in difficult listening situations.

Improved personalisation: More style options, greater ability to
customise settings for various situations enabling the audiologist to better
customise the hearing aid for listening preferences, residual auditory
function, lifestyle and age (branded YouMatic).
Further roll-out of the Inium platform should narrow the gap to peers
Oticon recently launched Nera on the Inium platform in the mid-performance
level, and we suspect this product will receive a fair degree of marketing effort
from William Demant at the upcoming European Union of Hearing Aid
Acousticians (EUHA) meeting in October. Nera is being launched at two price
points (Nera Pro and Nera), and as far as we can tell differs from Alta mainly by
not having the SpeechGuard E feature enabled, as well as having slightly lowerperforming versions of the Spatial Sound, Free Focus and YouMatic features
(branded Advanced as opposed to Pro on Alta).
Whether or not William Demant chooses to launch an Inium-based product at its
lowest performance level at EUHA remains to be seen. Given that the company
has opted for a phased roll-out, it doesn’t make a lot of sense to launch the lowend product one month after the mid-range product, and we suspect the company
may wait until the AudiologyNow! meeting in Orlando in March 2014.
Several other Oticon products slated for launch
As well as the Nera mid-range hearing aid, William Demant is launching the Oticon
Sensei, an Inium-based paediatric product, additional styles for the Alta family and
further functionality for ConnectLine (Oticon’s streamer that connects hearing aids
to various external devices such as Bluetooth devices, telephones and now the
television).
Bernafon not missing out on the party either
Bernafon is William Demant’s second brand, aimed at the more value-conscious
customer. Bernafon launched two high-end products, the Acriva 7 and Acriva 9, in
April this year, so it, too, is in the early stages of its launch cycle. Acriva has
improved speech intelligibility and noise reduction and enhanced customisation
features versus the previous high-end products, the Chronos 7 and 9.
As with the Oticon products, William Demant is pursuing a staged roll-out with the
Carista 3 and Carista 5, two mid-range products due for launch in H2 2013.
Sonic coming to the party
Sonic is William Demant’s third brand, acquired through the purchase of Otix
Global, and is mainly a US-focused business. It, too, has two mid-price products
due for launch in H2 2013, the Sonic Charm 40 & 60, as well as a new behind-theear product, Sonic Bliss.
17
New products support premium valuation
The conclusion we draw from this is that William Demant is in the early stages of
one of its strongest launch cycles in recent times. New products are key to gaining,
or at least retaining, share – which is also the route to delivering the kind of abovemarket growth rates that the lofty >20x current year P/E multiples hearing aid
stocks, including William Demant, currently demand.
Key share price driver No.2: Retail/capital deployment
William Demant has been one of two manufacturers that has more extensively
forward integrated into the retail chain (the others being Sonova and, to a degree,
GN, although it has a slightly different approach – with most of its retail units
being run under a franchise model). All told, we think William Demant operates
around 1,200 retail outlets.
Retail remains a substantially underpenetrated opportunity
Historically, the major manufacturers of hearing instruments restricted themselves
to development, production and wholesale distribution activities, leaving the actual
dispensing to the end user for others to do, principally audiologists working for
either a chain of dispensers or as independent practitioners. However, the vast
majority of the value chain in hearing aids (we estimate 60-70%) lies not with the
manufacturer but with the dispenser/retailer, as the chart below shows.
Hearing instrument value chain
60-70%
20-30%
5 -8%
0%
20%
40%
Component manufacturers
60%
80%
Wholesale
100%
Retail
Source: Berenberg research
Some have rushed in where others have feared to tread
The retail aspect of the hearing aid industry is thus a significant slice of a c$15bn
pie (the total value of the hearing aid market including retail). The major
manufacturers were once reluctant to enter the retail market for fear of alienating
their customer base by becoming a direct competitor, but the size of the retail
opportunity is so significant that it has become difficult to ignore, particularly by
those companies looking to drive growth. So while some manufacturers have
aggressively pushed into retail (Sonova and William Demant were both early
movers, and have had a retail presence for more than decade), some have been
more cautious (Starkey) and others have so far stayed away (Widex and Siemens).
GN has entered the retail market, but in a slightly different way. The company has
a policy “not to compete against [its] own customers with aggressive forward
integration”, and of its c1,500 outlets, it owns fewer than 100, the remainder being
run under the Beltone franchise it acquired in 2000. What this means is that less
than 5% of GN’s booked revenue is from retail, as it books sales to Beltone as
wholesale revenues. But it is likely, in our view, that it has significant control
(through franchise support) over a far larger block of revenue than that which
18
flows through the P&L. As we estimate retail revenues come at lower margin than
wholesale hearing aid revenues, this is an important difference when making
comparisons between different companies.
Retail has worked so far
Despite the theoretical concerns about alienating their customers, thus far, at least,
both Sonova and William Demant have, in our view, been vindicated: their
wholesale businesses appear to have been largely unaffected by their respective
presences in the retail market, and both have consistently taken share over the last
10 years. Indeed, of the audiologists we have spoken to, we did not detect
widespread hostility toward wholesaler-owned hearing aid retailers. Audiologists
want good products, and generally don’t seem to be averse to using those made by
theoretical retail competitors. One concern we have heard from audiologists is that
the manufacturers may begin to sell instruments to their own retail outlets at prices
well below those offered to independents, in turn allowing manufacturer-owned
retail to undercut independents. However, we have so far not detected significant
differences in prices charged by manufacturer-owned retail and independent
audiologists. In our discussions with both Sonova and William Demant, it is clear
to us that neither company has any intention of pursuing this strategy.
The rewards are obvious
Hearing aid retail can be a reasonably profitable business. The most accessible data
comes from the two listed retailers, the French company Audika and the Italian
company Amplifon, which, despite relatively high exposures to challenging
European markets, still generate c12% EBIT margins and low-to-mid-teens
ROICs. While both are large entities (the French group Audika has 500 stores
spread across France and Italy, and the larger Italian group Amplifon has 3,237
owned stores and 1,665 affiliated stores spread across 20 countries), we think they
are a reasonable proxy for the wholesaler-owned retailers as we believe that what
the latter lack in scale they make up for by being very selective and using their
intimate knowledge of end-user preferences. We thus believe the wholesaler-owned
retailers are, in the fullness of time, capable of generating mid-teens margins, if not
better. This is likely to be dilutive to overall group margins, as we believe both
cochlear implants and wholesale hearing instruments can yield mid 20s EBITA
margins. However, the retail business can still generate a decent return on capital
and comfortably clear the costs of capital as, unless one starts acquiring significant
real estate, the capital requirements are relatively low.
Retail already a reasonable part of William Demant’s business
William Demant does not precisely break out the contribution that its retail
activities makes to its overall business, but we estimate that this accounts for
somewhere between 20% and 25% of group revenues. For 2012, this would imply
retail sales of DKK1,700m-2,100m (roughly $310m-390m), making it a fairly
significant part of William Demant’s operations.
Key retail brands in the William Demant stable include HearingLife (USA and
Australia), Hidden Hearing (UK, Ireland, Greece and Portugal), ListenUp (Canada)
and Van Boxtel (the Netherlands).
Retail offers room for growth
Growth in the wider retail market is typically in the 2-4% range, as c4% long-term
volume growth is offset by slight declines in pricing. However, we think that with a
modicum of acquisitions William Demant can keep its retail business growing in
19
line with the combined 6-8% long-term growth we believe it can achieve in the
hearing aid and hearing implant business as a whole (itself driven by industry-wide
volume growth, slight share gains and, once cochlear implants are factored in, slight
increases in average selling prices).
If we assume organic growth of 3% in retail, to lift this to 6-8% would require
acquisition-driven growth of 3-5% if measured at the retail level, or 0.75-1.25% at
the group level. Retail opportunities typically change hands for 1-2x sales, so to
deliver 1pp of growth at the group level the company needs to acquire around
DKK600m of revenue over the next five years. While William Demant typically
aims to pay nearer 1x sales, even at 2x sales the DKK1.2bn this would cost is less
than 15% of the cumulative free cash flow that we estimate William Demant will
generate in the 2014E-2018E timeframe, so we see little issue with affordability.
The other question is availability. Is there sufficient retail sales volume available for
purchase? We think so. Globally, the retail market is worth around $10bn, of which
around $3bn is already in the hands of publicly-traded companies or other hearing
aid manufacturers, none of which are realistically available for purchase. This does,
however, leave a further $7bn per annum. With William Demant requiring no more
than DKK125m per annum, or $22m, to drive 1pp of top-line growth, we really
are talking a drop in the retail ocean. We don’t, therefore, see availability as an
issue.
Conclusion: retail growth can complement hearing instrument growth
In summary, we think that through a combination of modest organic growth and
relatively undemanding levels of acquired growth, William Demant can sustain
growth in its retail operations in the 6-8% range, and thereby keep pace with the
growth we expect in the remainder of the group.
Key Share Price Driver No.3: Neurelec
Oticon Medical, William Demant’s implant business, recently significantly
expanded its scope when, in April this year, it entered the cochlear implant
business by acquiring French company Neurelec for €57.5m in cash. This brought
cochlear implants into the portfolio to complement William Demant’s boneanchored hearing solutions business – where it has 25% market share and is a firm
No.2 in that market.
Small, but promising
In 2012, Neurelec had sales of just €18.5m, giving it a global market share of
around 2.5% and making it a tiny minnow compared to industry leader Cochlear
(around 64% share), No.2 player Med-El (18% share) and Sonova’s Advanced
Bionics (15% share). However, Neurelec has been in business over 20 years, has
built a reputation for quality (cf. Cochlea and Advanced Bionics, that have both
suffered recalls in recent years), and, despite its relatively low global market share,
has captured much more significant share in selected markets, most notably France
and Italy.
The cochlear implant market is currently worth c$1bn, so William Demant certainly
has plenty to aim for, as even miniscule market share gains will have a dramatic
effect on Neurelec’s growth. At the group level, the impact is initially likely to be
more modest, but every 50bp of cochlear implant market share William Demant
can capture adds DKK25-30m, or around a third of a percentage point to group
growth – in a relatively modest growth world, this cannot be ignored.
20
Neurelec products have some interesting USPs
Neurelec is a small player in the cochlear implant market, but that doesn’t mean it
doesn’t have some competitive products or an interesting pipeline. The key features
of its products and pipeline are shown in the table below.
William Demant/Neurelec cochlea implant portfolio
Product
Key Features
Digisonic SP
Main implant line
Smallest footprint on market
Only binaural system on the market
Does not require bone bed drilling
Digisonic SP Evo
New atraumatic electrode array
20 platinum full band electrodes
Launched December 2012
Long (24mm) electrode array
Saphyr
4th generation sound processor
Available in SP and CX formats
4 different settings for different situations
Saphyr + Micro Contralateral
Utilises a microphone on the opposite ear and two
internal electrode arrays to allow true binaural
hearing
Saphyr Neo
New sound processor in controlled launch phase
Source: Neurelec, William Demant
Neurelec potential under appreciated by the market
However, with time, we think William Demant has the potential to make much
more significant inroads into the cochlear implant market. Neurelec has good
products, but has lacked the distribution power and perhaps the processor
technology to be competitive on a global scale, instead restricting itself to certain
markets where its local success is indicative of the potential, in our view. William
Demant already has the regulatory, marketing (through its bone-anchored hearing
systems business) and R&D infrastructure to be competitive on a global scale. We
therefore do not think it impossible that William Demant can reach a modest 5%
share of the global market five years from now, by which time we think the global
cochlear implant market will be worth around $1.8bn per annum. 5% of this equals
close to $90m in revenue, or DKK500m at today’s rates. From a base of
DKK8,555m in 2012, this would add 1.1pp of growth per annum.
William Demant has form in this space
In our view, the market has been largely dismissive of William Demant’s entry into
the cochlear implant market, mainly as the acquired revenues of cDKK140m were
a drop in the ocean compared to group revenues of DKK8,555m in 2012.
However, we are less dismissive. William Demant entered the surgical hearing
correction space in 2007, when it created Oticon Medical. It then launched a boneanchored hearing system called Ponto in 2009, and from that standing start had by
2012 captured 25% of the market for such devices. With cochlear implants,
William Demant is not coming from anywhere near a standing start. The
infrastructure is already in place in Oticon Medical, and Neurelec has been in
business for 20 years. By leveraging its core hearing aid business, particularly on the
sound processing side, we think William Demant can become a reasonable force in
this market. We don’t expect the company to achieve the market shares of Sonova
and Med-El any time soon, but it is certainly possible, in our view.
21
So, in conclusion, while on balance we think Neurelec is likely to only be a
modest contributor to group growth rates, we think it is potentially much
more significant than the market is currently giving William Demant credit
for.
Key share price driver No.4: Annualising reimbursement headwinds
William Demant’s performance relative to its peers has been hurt recently by
under-exposure to some of the faster-growing markets, as well as overexposure to
markets that have been troubled by reimbursement pressures. The table below
illustrates the key markets where William Demant is relatively over-exposed to
challenging markets and relatively under-exposed to faster-growing markets.
William Demant geographic exposure
Country
Market growth WDH local share versus
WDH global share
USA
Japan
China
Australia
Holland
Korea
Denmark
Norway
Turkey
+
+
+
+
+
<
<
<
>
>
>
>
>
>
Share vs market
growth dynamic
+
+
Source: William Demant, Berenberg estimates
As can be seen, there are several large markets where local growth versus local
market share dynamics fall out negatively for William Demant (the countries with a
negative sign in the far-right column of the above table). If we sum up the share of
world units that these markets account for, it becomes apparent that just over 40%
of the global market has the wrong growth/exposure dynamic for William Demant.
However, in certain countries, this pressure has stemmed from reimbursement
changes which should start to annualise out in H2 2013.

Denmark: Reimbursement in Denmark used to average around
DKK6000 ($1,100) per ear, but earlier this year was reduced to DKK4,000
for the first ear and DKK2,250 for the second. This effectively halved the
reimbursement available for binaural fittings and cut monaural
reimbursement by a third. So while this reimbursement will continue to
affect H2 2013, it should annualise out in 2014.

Netherlands: The Netherlands used to work on a voucher system.
Patients received a voucher for around €500 to spend as they wished.
However, this has now changed to a system where the patient pays for
25% of the cost of the hearing aid, the type of hearing aid being
determined by various eligibility criteria. The net result is that while
reimbursement has potentially increased, especially for higher-performance
hearing aids, the dispensing criteria have pushed patients down the
performance spectrum, and hence exerted downwards pressure on ASPs.
Again, these changes became effective in 2013, so should annualise in
22
2014.

Norway: The situation in Norway is somewhat different, as
reimbursement has not been reduced but the system has moved to one of
consignment stocking. This basically means that manufacturers have to
ship batches of hearing aids but only get paid, and can then book revenue,
when the device leaves stock. This effectively delays the booking of some
revenues, but should not have a long-term effect on the market. The
changes affected H2 2012 and H1 2013, and so should have limited impact
in H2 2013
All told, we estimate that the reimbursement changes in the Netherlands and
Denmark will result in a DKK50-80m impact in H2 2013, a headwind of 1-2% on
yoy growth rates. However, thereafter, we think these headwinds should largely
annualise out.
Turning to the other notable markets where the balance of William Demant’s share
versus local growth dynamics is unfavourable, the challenges are somewhat more
country-specific, and likely, in our view, to improve only gradually.

USA: William Demant is relatively underexposed in the largest market in
the world, which also happens to be showing some of the better growth.
There are no quick fixes, but we think the raft of new products William
Demant has across all three brands can help build share in the near term.
Additionally, there is scope for William Demant to improve its position
within the Dept. Veteran’s Affairs. The VA buys around 600,000 units per
year at prices close to global average wholesale ASPs (we estimate around
$350 per unit), and at present we think William Demant holds about an 89% share of this volume. The VA typically renegotiates its contract every
five years, the last occasion being in 2009. With its relatively low share in
the VA contract, William Demant perhaps has more to gain than others in
this programme (most notably Sonova, which commands around half that
volume).
William Demant’s supply contract to Costco is also a potential source of
US expansion. Operating 450 shop-in-shop stores in Costco outlets is a
significant presence, and does raise the prospect of a decent boost to
volume growth, albeit at relatively low prices.

Japan/China: We lump these two markets together, as this is simply an
execution issue, in our view. With an improving product portfolio, William
Demant has a near-term opportunity to gain share in these markets, the
main issue being its ability to sell in them.

Australia. Australia is a market that, not unlike the UK, has a reasonable
public as well as private side. The Australian Hearing contract is currently
up for negotiation with the intention to move from largely being a single
supplier (currently Siemens) to a more balanced multisource contract. We
estimate that this contract is for somewhere between 100,000 and 140,000
units per annum, and is worth around $50m. William Demant therefore
has an opportunity to gain share in what is a somewhat stagnant market.
Key share price driver No.5: Improved operational effectiveness
William Demant does not typically give margin targets, mainly because it does not
have any. The company has repeatedly stated that its primary focus is absolute
profit generation and, as long as it is making a comfortable margin on its cost of
23
capital, it is not bothered what percentage margin that profit comes at.
However, we think there is scope for William Demant to expand margins and/or
improve its profitability, be that measured in absolute terms or as a percentage of
sales. Over the next three to five years, we believe William Demant can leverage
the following aspects of its business to drive profit growth.
1) Leverage its breadth of offerings. William Demant has the broadest
portfolio of hearing health businesses of any of the major manufacturers.
As well as simply offering more diversification than other manufacturers,
we think there are considerable synergies between the businesses from
both a revenue and cost perspective. In particular, there are noteworthy
R&D synergies between the hearing aid business and Oticon Medical
(bone-anchored hearing systems and cochlear implants) and decent
revenue synergies between the diagnostics business and the hearing aid
business. Extracting these synergies underpins the rationale for moving
from single-brand/single-business structures to multi-brand/multibusiness structures.
Product offerings of major manufacturers
Traditional HAs
     
IIC/extended wear
Cochlear implants
 
 
Bone conducting
systems
Diagnostics


Middle-ear implants
Source: William Demant
2) Leverage its scale. Scale matters in this industry. As the No.2 player by
both volume and value, William Demant is well positioned, in our view.
Scale enables the company to meet the increasing importance of R&D, to
address different customer segments, to develop company-specific
marketing strategies, meet increasing complex regulatory requirements and
maintain a flexible infrastructure.
3) Benefit from various efficiency projects. William Demant has recently
implemented a new shared services function (named DGS) to improve
group-wide efficiency. Ongoing projects include expansion of in-the-ear
manufacturing in Poland, establishing a new global distribution in Poland
(where 90% of its hearing aids across all three brands are made), improving
the enterprise resource platform, simplifying the global supply chain and
expanding a number of other regional support functions. These initiatives
sound fairly inconsequential and non-specific, but as anyone who has
worked in a large customer-facing service business will know, they can
have a significant bearing on productivity. While they may not reduce costs
24
on an absolute basis, they do have the potential to deliver more revenue
off the same cost base, in our view.
4) Adapt to shifting sales patterns. There are five main channels for
distributing hearing aids: i) Government; ii) independents; iii) own retail;
iv) retail chains; and v) external distributors. Recently, the Government
channel has been under some pressure from a volume perspective, and
independents have been flattish while retail and external distributors have
been growing. However, between them, Government channels and
independents represent 60% of the market. Historically, William Demant
has had a larger focus on Government-type buyers than its peers,
especially the NHS in the UK, and slower market growth in these channels
has taken the edge off the growth William Demant has achieved in retail
(both owned and chains) and through external distributors (mainly
emerging markets, in our view). William Demant’s sales trends are largely
reflective of the wider market, in our view, and show an increase in
purchases made by professional buyers in chains and major retailers. While
this trend has a bearing on price, there are offsetting share gains to be had
and, on balance, we think William Demant’s scale and breadth of offering
(three hearing aid brands, diagnostics and implants) makes it better
positioned than others to capitalise on this trend and drive profit growth,
even if it does limit margin expansion.
Initiatives should support margins and profit growth
We discuss the outlook for William Demant’s margins and earnings more fully in
the Earnings Outlook section, below, but the conclusion we draw here is that, if we
look back at the last five to seven years of William Demant’s business, it has largely
been a story of assembling a portfolio of assets, brands and business. The next five
to seven years are, in our view, more likely to be a story of leveraging those assets
into sustained profit growth.
25
Earnings outlook – 14% EPS growth
A summary of our earnings outlook for William Demant is given in the table
below. Overall, we expect solid mid single-digit revenue growth to be leveraged to
9.5% pre-tax profit growth. At the bottom line, we expect slight improvements to
the tax rate to deliver 10.2% net income growth.
William Demant has a policy of keeping net debt between DKK2.0bn and
DKK2.5bn. We expect it to generate reasonable free cash, but as it does not pay a
cash dividend of note, we anticipate that any FCF over and above that used for
acquisitions will find its way back to shareholders via a buyback. We therefore
expect a 10.2% net income CAGR between 2014E and 2018E, but EPS growth of
13.5% over the same timeframe.
A summary is provided below, together with an explanation of the key assumptions
driving our forecasts.
More detailed financial tables are laid out at the back of the William Demant
section of this note.
William Demant profit and loss account (DKKm expect per share data)
(DKK m)
Revenue
Cost of goods
Gross Profit
2011A
8,041
-2,264
5,777
2012A
8,555
-2,428
6,127
2013E
9,142
-2,503
6,639
2014E
9,853
-2,680
7,173
2015E
10,518
-2,840
7,678
2016E
11,141
-3,008
8,133
2017E
12,089
-3,264
8,825
2018E CAGR '13-'17 CAGR '14-'18
12,907
7.2%
7.0%
-3,485
9,422
7.4%
7.1%
R&D
Distribution costs
Admin expenses
Associates
EBIT
-633
-2,959
-482
6
1,709
-652
-3,319
-515
12
1,653
-690
-3,578
-534
5
1,843
-764
-3,779
-562
7
2,076
-841
-3,944
-589
8
2,311
-891
-4,122
-624
8
2,504
-967
-4,449
-677
9
2,741
-1,016
-4,737
-723
10
2,956
10.4%
9.2%
Financial income
Financial expenses
Profit before tax
40
-143
1,606
44
-176
1,521
51
-148
1,745
42
-145
1,973
43
-153
2,201
44
-161
2,387
46
-169
2,617
47
-171
2,832
10.7%
9.5%
Tax
Net profit
-407
1,199
-370
1,151
-422
1,323
-474
1,499
-506
1,695
-525
1,862
-576
2,042
-623
2,209
11.4%
10.2%
Minorities
WDH shareholders
1.0
1,198
-2.0
1,153
-0.7
1,324
-2.6
1,502
-2.9
1,697
-3.2
1,865
-3.5
2,045
-3.8
2,213
11.5%
10.2%
EPS
Growth
20.57
22%
20.23
-2%
23.40
16%
27.39
17%
31.77
16%
36.00
13%
40.69
13%
45.53
12%
14.8%
13.5%
Revenue expectations
We expect William Demant to generate revenues of DKK9,142m in 2013E,
increasing to DKK12,907m by 2018E, ie a CAGR of 7.1%. Our key assumptions
on revenues are as follows.

7.4% CAGR in hearing instruments. William Demant does not break
out revenues between Oticon Medical, the implant business, and those of
Oticon, Bernafon and Sonic, the hearing aid businesses. Thus, making
individual forecasts by product line is: 1) challenging, as we do not know
the current mix; and 2) futile, as we can’t readily track it in the future.
26
However, our overall revenue forecast factors is the following.
o
A solid performance from Inium. William Demant is in the
process of launching its new platform, Inium, in the mid-level
performance category. We believe this will allow it to regain some
of the share it has lost recently in this category to other
manufacturers who have launched new platforms at all
performance levels simultaneously.
o
Modest share gains. Looking slightly ahead to the longer term,
we expect about half of the growth in hearing instruments to
come from organic growth in wholesale hearing aid sales. We
expect market volume growth of just over 4%, with price negative
to the tune of 2-3% per annum. Therefore, our revenue estimates
imply 2-3pp of growth from share gains. In market share terms,
this equates to around 40-60bp of share per annum, which we
think is reasonable to expect, leaving room for upside if William
Demant can achieve its stated goal of taking one percentage point
of market share per annum.
o
2-3pp from acquisitions. We continue to expect William
Demant to make acquisitions in the retail space. For 2013E, 2.5pp
of growth requires the acquisition of DKK214m in revenue. Our
forecasts assume an acquisition spend of DKK500m, so, even at
the top end of normal transaction prices of c2x sales, our revenue
contribution from acquisitions is less than that implied by our
acquisition spending estimate. We are therefore confident that
William Demant can deliver 2-3pp of growth by acquisition
measured over the long term.
o
1-2pp from cochlear implants. William Demant acquired a
cochlear implant business (Neurelec) in April 2013 which achieved
revenues of around DKK140m in 2012, making it a relatively
small part of Group revenues. However, by leveraging its presence
in diagnostics and hearing aids, and with its global marketing and
regulatory infrastructure, we think William Demant can make
modest market share gains in the $1bn (DKK5.5bn) cochlear
implant market. While a 1% contribution to group growth in
2013E would necessitate close to 60% growth in cochlear implant
revenues, it would equate to just an incremental 1.5% of the
cochlear implant market. We don’t expect the cochlear implant
business to make much of a contribution to group revenue growth
in the near term, but over the course of the next five years we
think it entirely possible that it can contribute an average of 1-2pp
of growth at the group level.

5% diagnostics and 7% personal communications growth. At just
9.9% and 3.5% of 2012 sales, respectively, these two reporting lines are
less important drivers of growth. There is little visibility in Diagnostics, but
we estimate market growth to be in the region of 2-4%. With one of the
broadest ranges of diagnostic equipment in the industry plus its significant
scale, we are confident that William Demant can do slightly better.
Personal communications has posted a 6% CAGR over the last five years,
and with an improving economic outlook we think it can achieve a slightly
better growth rate over the next five.
Our overall revenue forecasts are summarised in the tables below.
27
Berenberg revenue expectations for William Demant
DKK14,000m
DKK12,000m
DKK10,000m
DKK8,000m
DKK6,000m
DKK4,000m
DKK2,000m
2008A 2009A 2010A 2011A 2012A
Hearing devices
2013E
Diagnostic Instruments
2014E
2015E
The chart below illustrates the contribution to group revenue growth that we
expect each reporting line to make. As can be seen, diagnostics and personal
communications are somewhat irrelevant when compared to hearing devices. That
said, we would not underestimate the effect of the diagnostics business on hearing
instrument sales. There are considerable synergies between the two businesses,
particularly from a customer intelligence perspective. Indeed, we believe William
Demant has one of the best CRM (customer resource management) systems in the
industry as a result of its diagnostics business.
DKK14,000m
DKK12,000m
DKK10,000m
DKK8,000m
DKK6,000m
DKK4,000m
28
2017E
Personal Communication
Berenberg 2012A/13A-2017E/2018E revenue bridge
2016E
2018E
Margins – potential underappreciated
William Demant’s margins are an underappreciated part of the investment story, in
our view. The company does have some structural differences to other
manufacturers that weigh on margins – mainly related to sales and geographic mix.
It also tends to think in terms of absolute EBIT rather than EBIT as a percentage
of sales (the right way, in our view, as what matters is the absolute EBIT generated
for every DKK of capital invested, not the percentage margin). As a result, we
think expectations for William Demant’s margins are relatively conservative. We
believe the company can do better than consensus estimates, and are of the
opinion that management thinks so too.
Indeed, as the table below highlights, our revenue forecasts for William Demant
are not that dissimilar to consensus, and certainly within the realms of normal
forecast error and/or FX fluctuations. However, our EBIT margin assumption is,
at 22.5% in 2016E, 162bp higher than consensus.
Berenberg versus Bloomberg consensus
DKKm (Except per share data)
2013E
2014E
2015E
2016E
Berenberg
Revenues
EBITDA
EBIT
Margin %
Net income
EPS
9,142
2,083
1,843
20.2%
1,323
23.4
9,853
2,360
2,076
21.1%
1,499
27.4
10,518
2,636
2,311
22.0%
1,695
31.8
11,141
2,873
2,504
22.5%
1,862
36.0
9,255
2,104
1824
19.7%
1,309
23.2
9,866
2,302
2005
20.3%
1,471
26.6
10,484
2,471
2164
20.6%
1,611
29.8
11,142
2,855
2324
20.9%
1,704
32.4
-1.2%
-1.0%
1.0%
45 bps
1.1%
0.9%
0.7%
-0.1%
2.5%
3.6%
75 bps
1.9%
2.9%
3.0%
0.3%
6.7%
6.8%
133 bps
5.2%
6.4%
6.7%
0.0%
0.6%
7.7%
162 bps
9.3%
11.1%
11.1%
Consensus
Revenues
EBITDA
EBIT
Margin %
Net income
EPS
Berenberg vs consensus
Revenues
EBITDA
EBIT
Margin %
Net income
Adjusted Net income
EPS
Source: Berenberg estimates, Bloomberg
Its hard to tell precisely why we differ from consensus on William Demant’s
margins, but we suspect that consensus is likely to be factoring in only a modest
recovery and a broad continuation of past trends. However, we think William
Demant can deliver 360bp of margin expansion between 2012A and 2018E for the
following reasons.

Improved retail margins. At present, we think William Demant’s retail
margins are acting as a drag on overall group margins. Over the next five
years, we think the company can lift retail margins from high single-/low
double-digit levels (our estimate) to something nearer the mid-teens level.
Assuming William Demant keeps retail as roughly the same percentage of
29
sales over this timeframe (we estimate around 20-25%), this adds 125bp to
group margins.

Improved margins in hearing aids from mix. William Demant has long
had exposure to large buyers, with the commensurate pressure on margins.
However, over the next five years, we expect growth in other areas to
outpace that of these large low-priced contracts (such as the NHS), with
the ensuing positive mix effect driving margins

Operational efficiency. We have already covered this in detail in the
share price driver section relevant to William Demant. However, to
reiterate, we think William Demant can drive margins by:
o
Leveraging its breadth of offerings. The company has the
broadest portfolio of any hearing healthcare company, with
significant presences in hearing aids (all performance categories, all
form factors and all price points), bone-anchored hearing systems,
diagnostics, other related areas and, most recently, cochlear
implants.
o
Leveraging scale. William Demant is, in our view, well
positioned to leverage its scale both within its key hearing
instruments and diagnostics business and between areas like
hearing aids and cochlear implants. Scale-based synergies exist in
R&D, marketing and regulatory functions. In addition, the ability
to launch in all styles globally within a short period of time is a
significant cost advantage over more regionally focused
competitors.
o
Benefiting from efficiency projects. The company’s stated aim
is “…to have the most the lean and efficient set-up…”, and it has
recently implemented a number of measures in distribution,
customer service, global supply chain and local/regional shared
service functions, as well as made efforts to improve its global
enterprise resource platform (ERP).
On the flip side, pricing is likely to remain a headwind to margins. In addition, as
product cycles across the industry shorten, both pre-launch R&D and post-launch
marketing costs are, on a per-product cycle basis, likely to continue to rise.
However, we believe William Demant has a highly efficient R&D infrastructure,
and its decision to maintain a more measured launch approach by introducing new
technology the old fashioned way, one performance level at a time, is likely, in our
view, to ultimately yield the best balance of revenues versus costs across the
product cycle.
Tax and interest – the tax rate can improve, interest stable
William Demant has a stated goal of keeping debt in the DKK2.0-2.5bn range. As
such, we don’t expect any significant shift in interest expenses until funding costs
increase, which we model two to three years from now. On the tax side, we think
William Demant can make improvements to its tax rate, partly from a change in the
tax rate in Denmark which is due to fall from the current level of 25% to 24.5% in
2014, 23.5% in 2015 and 22% in 2016. Accordingly, we model William Demant’s
tax rate dropping from 24.3% in 2013 to 22% in 2016E. Given that the company’s
tax rate is already below the national rate in Denmark, we think there is room for
further improvement than that reflected in our forecasts.
30
Buyback adds 4pp of growth
William Demant has a policy of maintaining debt in the range of DKK2.0-2.5bn.
As it does not pay a cash dividend, excess capital is returned to shareholders via
buybacks. As we expect William Demant to generate a reasonable level of free cash
flow, even after deducting a reasonable sum for on-going acquisitions, we
anticipate that it will continue to buy shares back over the next five years. The
precise timing of buybacks is difficult, but we think it is prudent to model them,
and for simplicity we do so in a more or less linear fashion over our forecast
period.
These buybacks lever the 10% 2014E-2018E net income CAGR to 13.5% at the
EPS level.
Cash requirements
William Demant generates good free cash flow, and has not had a down year since
1995 (even then it was a one-off effect). We believe the company will generate
sufficient cash internally to meet both its internal and external investment
requirements in the next five to ten years. The company’s outlays have typically
been spread relatively evenly across internal reinvestment and acquisitions, with
excess cash distributed to shareholder via buybacks.
Acquisitions accounted for c39% of cash outlays over the period 2008-12. The
company diversified away from the hearing aid space during this period by
acquiring audiometer manufacturers Amplivox (2008) and Grason-Stadler (2009).
It also moved into the bone-anchored hearing aid space through internal
investment. We do not believe there are any major deals to be done in the sector,
as the company is already reasonably diversified. We certainly do not expect any
transformational deals.
In terms of redistribution to shareholders, 21% of cash outlay over this period was
used for buybacks. The company favours buybacks over dividends, having never
distributed a dividend. The stated reason in historical annual reports has been that
buybacks “pave the way for a more dynamic planning of dividend policies”.
Although it does not have a specific target with regards to capital returns to
shareholders, the company targets net interest-bearing debt of DKK2.0-2.5bn or
c1.0x 2012 EBITDA. Buybacks were reinstituted in 2011 following suspension of
the programme in autumn 2008 due to the credit crunch.
To us, William Demant’s cash requirements appear eminently sustainable. The
company generates significant cash from operations (DKK1.27bn in 2012) to allow
it to continue to carry out buybacks. Its capex requirement has typically run at
c25% of operating cash flow, or c4% of sales.
We would therefore not be concerned about its ability to return cash to
shareholders or carry out opportunistic acquisitions.
31
William Demant cash outlay (2008-2012)
Other
DKK 1,010m,
17%
Buybacks
DKK 1,226m,
21%
Capex
DKK 1,400m,
23%
Aqusitions
DKK 2,316m,
39%
Source: Berenberg, William Demant
Working capital requirements
William Demant has historically required working capital of c20% of sales. This
looks reasonable to us, as it has generated net margins of c15% and free cash flow
as a percentage of sales has averaged 10% over the past decade.
In addition, working capital has remained pretty stable, at c20%, something we do
not expect to change in future.
William Demant working capital
25%
20%
15%
10%
5%
0%
-5%
Working capital as % of sales
FCF as % sales
Net margin
Source: Berenberg, company reports
Debt sustainability
William Demant has taken a disciplined approach to leverage, historically keeping
net debt/EBITDA to less than 2.0x. This leaves it relatively unlevered to interest
rates, with a 1% rise in rates negatively impacting pre-tax income by only 1.1%.
However, the company has recently increased its target net debt range slightly, to
DKK2.0-2.5bn. This range is consistent with its 2012 year-end net debt figure of
DKK2.4bn or 1.3x 2012 EBITDA. Due to its strong cash generation, we think the
company’s debt position is sustainable, and we do not envisage this becoming an
issue. Importantly, this makes a reduction in the buyback programme unlikely.
From a pensions perspective, the company operates mainly with a defined
contribution plan. It is only in Switzerland and Holland that it is required by law to
have a defined benefit plan. This plan had a small deficit of DKK65m (2012),
32
which we do not believe to be meaningful, although it has increased from
DKK26m in 2008.
William Demant net debt/EBITDA
2.0x
1.8x
1.6x
1.4x
1.2x
1.0x
0.8x
0.6x
Source: Berenberg, company reports
33
Share price history
William Demant share price performance and commentary
700
A combination of a poorer outlook for the
hearing aid market , wider equity market selloff and an unsuccesfull product launch
drives stock down, as do earnings
downgrades
600
500
Purchases OTIX Global for
c.$70m (DKK400m). Builds out
its US business by adding the
Sonic Innovations brands
Solid earnings performances
driven by double digit revenue
growth from new products
maturing consolidates the strong
share performance
Poor operational performance in H1 2013 as profit
misses and little colour is given on new products to
replaces aging lines.
DKK
400
Stock underperforms the rest of
the market even as gains are
made in market share as margins
soften falling nearly 200bp from
2011 to 2012
300
Recovery in margins from
trough in 2008 of 19.4% to
nearly 21% by 2010 led by an
impressive range of new
products launched late 2009 to
early 2010
200
100
0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Buys Neurelec for
DKK428m, (c.$75m)
to enter the cochlear
implant market
Jan-13
Jul-13
Source: Berenberg estimates, Bloomberg, William Demant
William Demant was heavily affected by the financial crisis, as general equity market scepticism and poor operational performance – characterised by low earnings
growth in 2007 and a sizeable decline 2008 – drove the shares down c50% over two years (January 2007– January 2009). The company then matched the market
with its recovery, as EBITA margins picked up from lows of 19.4% in 2008 to nearly 21.0% by 2010. This was driven by improved economic conditions and an
portfolio of new products launched in 2009-2010. The company continued to add to its hearing aid offering when it bought OTIX Global in late 2010 for
cDKK400m, gaining the Sonic Innovations brand which has a strong North American focus. Although William Demant managed to make inroads into the hearing
aid market, gaining 5% market share between 2005 and 2012, this came at a cost, with margins falling 570bp over the same period and 140bp since 2010. That said,
absolute EBIT grew 6%, with 8% CAGR over the same period. As a result of this lack of conversion of strong top-line growth into margin enhancement, the stock
has not performed as well as the rest of the market since 2012. While the bolt-on purchase of Neurelec in 2013 may have offered some excitement for investors as
the company entered the lucrative cochlear market, the profit miss in H1 and a lack of clarity on pipeline has left the stock flat this year.
34
William Demant is not, on most metrics, what most would regard as a cheap stock.
Currently trading at 19.3x our 2014E EPS estimate, it is at first glance one of the
most expensive stocks in our med tech universe. However, we do think the fact
that it operates in a relatively stable industry, possesses a number of sustainable
competitive advantages and remains positioned to continue to take share just about
justifies a premium valuation. We therefore do not think investors should be put
off at the start by what looks like a relatively expensive PE multiple.
Our target price of DKK605 is based on our discounted cash flow model for
William Demant which we discuss in more detail below. However, before doing
that, we briefly consider other valuation approaches and, more importantly, why
they are perhaps less relevant for William Demant.

Price/earnings: Aside from DCF, P/E-based valuation methods are
probably the most applicable to William Demant. The company has a
clean reporting framework, with negligible one-offs and little to no
capitalised R&D, making EPS a reasonably fair representation of its
earnings profile, in our view. At 19.3x our 2014E EPS estimate for a
2014E-2018E EPS CAGR of 14%, we do not think William Demant is
particularly expensive for the growth on offer, although we concede that
our forecasts factor in a CAGR about 4pp higher than consensus, and one
could argue that, on consensus forecasts, the current 2014E PE of 19.3x
fairly represents the c10% CAGR in EPS implied by consensus over the
2014-2018 timeframe (we say ‘implied’ as one needs to extrapolate the
consensus 2016 EPS forward to 2018).

EV/EBITDA: We do not find EV/EBITDA particularly useful for
valuing hearing aid companies, mainly as different tax rates, different levels
of indebtedness and variances in capitalised R&D levels make crosscompany comparisons difficult. William Demant does screen as expensive
on an EV/EBITDA basis, in our view, as it does with PE-based
approaches. However, we would use the same arguments in favour of it
deserving a premium EV/EBITDA multiple as we would in favour of it
having a premium P/E ratio.

Sum-of-the-parts: 87% of William Demant’s 2012 revenue was generated
from sales of hearing instruments (hearing aids, cochlear implants, boneanchored hearing systems and accessories), so attempting to employ any
kind of sum-of-the-parts based valuation is futile.

Dividend-based methods: William Demant does not pay a cash
dividend.

Discounted cash flow: We base our price target on our discounted cash
flow analysis for William Demant. DCFs have obvious flaws, not least
their sensitivities to discount rates, terminal growth rates and forecasts at
the far end of the explicit forecast period. However, we prefer to use a
DCF model, as we think it better reflects the longer-term cash flow
potential and allows the cash deployed in on-going acquisitions, on which
some of the growth in EBITDA is dependent, to be fairly reflected in the
valuation, something a straight P/E-based approach wouldn’t fully
capture.
35
We therefore set a DCF-based target price of DKK605 per share.
P/E – hearing aids are expensive, but have been for some time
The last 12 months have seem a modest re-rating
William Demant’s 12-month forward P/E (ie based on a rolling 12-month forward
EPS number, as opposed to the next calendar year’s EPS) has averaged just under
19x over the last 12 months, but at present is close to its 12-month high of c20x. In
the main, we think this reflects wider equity market conditions.
William Demant 12-month forward P/E ratio – last 12 months
21.0x
20.5x
20.0x
19.5x
19.0x
18.5x
18.0x
17.5x
17.0x
William Demant forward P/E
1 year average
Source: Bloomberg
The last three years have been volatile
Over the last three years, William Demant’s 12-month forward P/E has ranged
from 17x to 21.6x but, as the chart below shows, is currently not far off the average
over the last three years of 19.3x.
36
William Demant 12-month forward P/E ratio – last three years
22.0x
21.0x
20.0x
19.0x
18.0x
17.0x
16.0x
3 year average
Source: Bloomberg
And is sitting pretty much on the average of the last five years
If we look at the trends over the last five years, then William Demant’s PE is not
far off the average, which itself includes the depressed period in 2008/9 when the
global recession affected the entire hearing aid market and William Demant’s
margins and earnings growth came under pressure (EPS grew just 2.8% in 2007
and declined by 21.4% in 2008, before staging a partial recovery in 2009 when EPS
rose 17.5%).
Our point is that while William Demant’s PE is relatively high by wider med tech
standards, it is more or less at average levels. With the company in the middle of
one of its strongest ever product roll-out programmes, we believe the multiple is
sustainable in the short to medium term.
37
William Demant 12 month forward P/E ratio – last five years
26.0x
24.0x
22.0x
20.0x
18.0x
16.0x
14.0x
12.0x
10.0x
5 year average
Source: Bloomberg
EV/EBITDA – looks equally expensive
William Demant’s historical 12m forward EV/EBITDA multiple tells much the
same story as the P/E ratio – it is expensive, but has remained so for some time.
The last three years are arguably the most relevant years to look at, as the years
immediately before 2010 reflect the financial crisis and the depressed equity
markets that ensued. As the chart below illustrates, aside from the odd brief
excursion, William Demant’s EV/EBITDA multiple has broadly been in the 1315x range, with the majority of the time spent in a narrower band between 12.75x
and 13.5x.
William Demant 12-month forward EV/EBITDA – last three years
16.0x
15.0x
14.0x
13.0x
12.0x
11.0x
10.0x
William Demant EV/EBITDA
3 year average
Source: Bloomberg
38
Looks rich compared to the rest of med tech too
When compared with the rest of our med tech coverage universe, William
Demant’s PE and EV/EBITDA multiples are very much toward the top end of
the range. However, when those multiples, particularly the P/E ratio, are compared
to the growth we expect, they are much nearer the middle of the pack. Relative to
the other hearing instrument companies, William Demant also looks relatively
expensive, but we think this a degree of market scepticism regarding the earnings
outlook for GN Store Nord relative to consensus and a degree of optimism
regarding Sonova’s outlook.
39
William Demant peer group comparisons
PE
2014E
2015E
EPS
EV/EBITDA
Growth
2013E 2014E 2015E '13-'17
Company
2013E
GN Store Nord
Sonova
William Demant
Carl Zeiss
Celesio
Coloplast
Drägerwerk
FMC
Fresenius SE
Gerresheimer
Getinge
Grifols
Grifols B shares
Lifewatch
Nobel Biocare
Rhoen-Klinikum
Sartorius
Smith & Nephew
Sorin
Stada
Stratec
Straumann
Tecan
Sector weighted avg.
Hearing Aid weighted avg.
Hearing Aid weighted avg. (ex-WDH)
William Demant
Vs. sector
Vs. Hearing Aid (ex-WDH)
24.0x 19.1x 16.7x 14.8x 12.5x 11.5x
22.0x 19.7x 17.6x 14.7x 13.1x 11.8x
22.6x 19.3x 16.7x 15.7x 13.8x 12.4x
19.7x 18.8x 16.7x
9.4x
8.7x
7.9x
18.8x 15.8x 13.8x 10.3x
9.6x
9.1x
24.4x 21.5x 19.8x 15.3x 14.1x 13.1x
12.3x 10.8x
9.4x
6.8x
6.1x
5.5x
17.4x 16.8x 14.6x 10.8x 10.6x
9.5x
15.7x 14.0x 12.4x
9.3x
8.7x
7.9x
16.5x 14.2x 12.2x
7.3x
6.6x
6.0x
14.2x 12.4x 10.7x 11.1x
9.5x
8.4x
23.8x 19.4x 16.3x 13.3x 11.3x 10.1x
17.7x 14.5x 12.1x
nm
nm
nm
31.9x 17.0x 11.1x 11.8x
8.6x
6.2x
29.4x 22.2x 15.2x 14.6x 12.0x
9.7x
23.6x 38.5x 29.6x 11.6x 29.9x 23.0x
19.0x 16.2x 14.0x
9.7x
8.7x
7.8x
15.7x 14.0x 12.3x
9.3x
8.3x
7.4x
17.5x 13.9x 11.4x
8.5x
7.4x
6.4x
13.3x 11.0x
9.8x
9.0x
7.9x
7.4x
23.5x 20.7x 18.0x 15.6x 13.2x 11.5x
21.8x 19.0x 14.9x 16.5x 13.6x 11.1x
23.0x 18.5x 14.3x 13.9x 11.1x
9.0x
18.5x 16.7x 14.5x 11.2x 10.7x
9.5x
22.6x 19.4x 17.1x 15.1x 13.2x 11.9x
22.6x 19.5x 17.3x 14.8x 12.9x 11.7x
22.6x 19.3x 16.7x 15.7x 13.8x 12.4x
22.6% 15.5% 14.9% 40.3% 29.4% 30.1%
0.0% -0.9% -3.7% 6.3% 7.1% 6.0%
Discounted cash flow – our preferred methodology
Despite their obvious flaws, we prefer to use a DCF model for our valuation of
William Demant. In our view, it more fairly represents the cash flow potential of
the company than a P/E-based method otherwise might. We also find that it
allows easier comparisons between companies, particularly if it involves those with
a tendency to book “one-offs” on a repeated basis (which William Demant tends
not to do). In addition to the earnings and cash flow assumptions detailed in the
Earnings Outlook section, above, our DCF valuation is based on the following
assumptions.

7.4% EBITDA growth over the 10-year forecast period. This
encompasses 9.7% EBITDA growth in the 2014E-2018E period, as we
expect William Demant to benefit from new product launches, growth in
cochlear implants and improvements in margins. In the later five years of
our DCF forecast period, we model in 5.3% growth. However, with
judicious deployment of capital into allied areas or any meaningful
technological advances, we think William Demant is more than capable of
achieving mid/high single-digit levels of EBITDA growth in the latter
half of our forecast period..
40
30.4%
10.7%
14.8%
8.9%
13.2%
9.3%
12.4%
12.6%
12.4%
13.3%
12.8%
17.0%
17.0%
42.1%
27.2%
-2.2%
15.4%
11.1%
18.5%
13.8%
16.4%
16.7%
18.6%
13.0%
16.3%
17.1%
14.8%
1.8%
-2.2%
PEG
Ratio
0.8x
1.8x
1.3x
2.2x
1.4x
2.6x
1.0x
1.4x
1.3x
1.2x
1.1x
1.4x
1.0x
0.8x
1.1x
nm
1.2x
1.4x
0.9x
1.0x
1.4x
1.3x
1.2x
1.4x
1.4x
1.5x
1.3x
-4.7%
-13.2%
Sales
Growth
'13-'17
8.0%
6.2%
7.2%
6.6%
2.2%
5.8%
4.6%
7.6%
7.1%
5.4%
5.5%
7.8%
7.8%
8.2%
6.2%
nm
6.7%
5.0%
5.6%
6.6%
13.4%
9.2%
9.3%
6.5%
6.9%
6.8%
7.2%
0.7%
0.5%

27.0% terminal EBITDA margin. The relatively high margin in the
latter period of the forecast period reflects our belief that, by then, there
will be a handful of large incumbent manufacturers with barriers to entry
that are even more significant than at present.

8.3% cost of equity. Based on a risk-free rate of 2.0%, a beta of 0.7x and
an equity market premium of 8.5%, just over 8% may look like a relatively
low cost of equity, but this is mainly a function of current risk-free rates
and the relatively low sensitivity of William Demant’s share price to wider
movements in equity markets.

4.3% net cost of debt: This is our estimate of the gross cost of debt
across the forecast period, taxed at the Group’s average expected
corporate tax rate over the same period (which we expect to decline by
around 200bp to 22% after recently-enacted changes to Danish tax
legislation).

2.5% terminal growth rate: This reflects a mature market where volume
growth is offset by price pressure.
A summary of our discounted cash flow is provided below.
William Demant discounted cash flow analysis
(DKK m)
Operating profit
D&A
EBITDA
Margin
Capex
Essential acquisitions
Working capital
FCF
Tax rate
Taxes
Post Tax FCF
Discount factor
Discounted cash flow
Sum of NPV
Terminal Value
Enterprise value
Net debt
Minorities
Equity Value
S/O
Value per share (DKK)
2014E
2,076
283
2,360
23.9%
2015E
2,311
325
2,636
25.1%
2016E
2,504
369
2,873
25.8%
2017E
2,741
413
3,154
26.1%
2018E
2,956
462
3,418
26.5%
2019E
3,143
510
3,653
26.7%
2020E
3,299
563
3,862
26.8%
2021E
3,447
615
4,062
26.9%
2022E
3,600
671
4,272
26.9%
2023E
3,761
739
4,500
27.0%
-345
-350
-156
1,509
-394
-368
-169
1,705
-390
-386
-119
1,979
-453
-405
-209
2,087
-452
-425
-187
2,353
-512
-447
-182
2,512
-504
-469
-178
2,711
-567
-492
-175
2,827
-555
-517
-185
3,015
-624
-543
-196
3,137
-24.0%
-362
1,147
-23.0%
-392
1,313
-22.0%
-435
1,543
-22.0%
-459
1,628
-22.0%
-518
1,835
-22.0%
-553
1,959
-22.0%
-596
2,115
-22.0%
-622
2,205
-22.0%
-663
2,351
-22.0%
-690
2,447
100%
1,147
93%
1,215
86%
1,322
79%
1,291
73%
1,347
68%
1,331
63%
1,330
58%
1,284
54%
1,267
50%
1,221
12,757
22,611
35,368
2,250
12.4
33,106
55
605
10 year yield
beta
Market premium
Cost of equity
Net cost of debt
D/(D+E)
E/(D+E)
WACC
DCF-implied price target achievable
Our DCF-based price target is calculated on our year-end 2014 estimates, and thus
represents the level we think the share price can reach by the end of next year.
At that point, the market will likely be looking ahead to 2015 estimates and,
assuming our forecasts don’t change, at our DKK605 target price the stock will be
41
2.0%
0.7x
8.5%
8.3%
4.3%
7.4%
92.6%
8.0%
trading at a 12m forward PE of 16.7x. By historical standards, this does not look to
be an excessive multiple, in our view, particularly if William Demant is in a period
of accelerating revenue growth and is on track to achieve margins and earnings that
exceed current consensus estimates, which we believe to be the case.
In short, William Demant is expensive, but we believe it deserves to be so as: i) we
think it will deliver earnings greater than current expectations; and ii) it can grow
into its multiple yet still deliver a positive share price performance.
42
Financials
Revenue summary
Sales (DKK m)
Hearing devices
Total Sales
2011A
7,075
686
280
8,041
2012A
7,410
844
301
8,555
2013E
7,921
876
346
9,142
2014E
8,579
909
365
9,853
2015E
9,173
955
390
10,518
2016E
9,723
1,000
418
11,141
2017E
10,598
1,045
446
12,089
2018E
11,340
1,092
475
12,907
Growth CER
Hearing devices
Total Sales
2011A
14.5%
30.3%
9.4%
15.5%
2012A
2.0%
18.0%
5.0%
3.5%
2013E
8.5%
6.1%
16.3%
8.6%
2014E
9.8%
5.3%
7.0%
9.2%
2015E
6.9%
5.0%
7.0%
6.7%
2016E
6.0%
4.8%
7.0%
5.9%
2017E
9.0%
4.5%
6.7%
8.5%
2018E
7.0%
4.5%
6.5%
6.8%
Growth reported
Hearing devices
Total Sales
2011A
16.0%
28.1%
8.1%
16.7%
2012A
4.7%
23.0%
7.5%
6.4%
2013E
6.9%
3.7%
14.8%
6.9%
2014E
8.3%
3.9%
5.6%
7.8%
2015E
6.9%
5.0%
7.0%
6.7%
2016E
6.0%
4.8%
7.0%
5.9%
2017E
9.0%
4.5%
6.7%
8.5%
2018E
7.0%
4.5%
6.5%
6.8%
Product split
Hearing devices
Total Sales
2011A
88.0%
8.5%
3.5%
100.0%
2012A
86.6%
9.9%
3.5%
100.0%
2013E
86.6%
9.6%
3.8%
100.0%
2014E
87.1%
9.2%
3.7%
100.0%
2015E
87.2%
9.1%
3.7%
100.0%
2016E
87.3%
9.0%
3.7%
100.0%
2017E
87.7%
8.6%
3.7%
100.0%
2018E
87.9%
8.5%
3.7%
100.0%
Geographical split
Europe
North America
Pacific Rim
Asia
Other
Total
2011A
40.4%
38.0%
10.2%
7.3%
3.9%
100.0%
2012A
38.9%
39.1%
10.3%
7.6%
4.1%
100.0%
2013E
38.9%
40.1%
9.7%
7.5%
3.8%
100.0%
2014E
39.5%
40.0%
9.4%
7.4%
3.7%
100.0%
2015E
39.1%
40.5%
9.4%
7.4%
3.6%
100.0%
2016E
39.1%
40.5%
9.4%
7.4%
3.6%
100.0%
2017E
39.1%
40.7%
9.4%
7.3%
3.5%
100.0%
2018E
39.0%
40.8%
9.4%
7.4%
3.5%
100.0%
Geographical growth
2011A
Europe
10.4%
North America
18.3%
Pacific Rim
31.3%
Asia
20.0%
Other
7.0%
Total
15.6%
Source: Berenberg estimates, Company reports
2012A
1.0%
4.0%
-2.0%
7.0%
16.0%
2.9%
2013E
8.1%
11.0%
6.0%
6.8%
-0.9%
8.5%
2014E
9.6%
10.0%
8.0%
7.0%
5.0%
9.2%
2015E
5.5%
8.0%
7.0%
7.0%
5.0%
6.7%
2016E
5.9%
6.0%
6.0%
6.0%
5.0%
5.9%
2017E
8.5%
9.0%
8.0%
8.0%
6.0%
8.5%
2018E
6.6%
7.0%
7.0%
7.0%
5.0%
6.8%
43
2013E-18E CAGR
7.4%
4.5%
6.6%
7.1%
P&L
(DKK m)
Revenue
Cost of goods
Gross Profit
2011A
8,041
-2,264
5,777
2012A
8,555
-2,428
6,127
2013E
9,142
-2,503
6,639
2014E
9,853
-2,680
7,173
2015E
10,518
-2,840
7,678
2016E
11,141
-3,008
8,133
2017E
12,089
-3,264
8,825
2018E CAGR '13-'17 CAGR '14-'18
12,907
7.2%
7.0%
-3,485
9,422
7.4%
7.1%
R&D
Distribution costs
Admin expenses
Associates
EBIT
-633
-2,959
-482
6
1,709
-652
-3,319
-515
12
1,653
-690
-3,578
-534
5
1,843
-764
-3,779
-562
7
2,076
-841
-3,944
-589
8
2,311
-891
-4,122
-624
8
2,504
-967
-4,449
-677
9
2,741
-1,016
-4,737
-723
10
2,956
10.4%
9.2%
Financial income
Financial expenses
Profit before tax
40
-143
1,606
44
-176
1,521
51
-148
1,745
42
-145
1,973
43
-153
2,201
44
-161
2,387
46
-169
2,617
47
-171
2,832
10.7%
9.5%
Tax
Net profit
-407
1,199
-370
1,151
-422
1,323
-474
1,499
-506
1,695
-525
1,862
-576
2,042
-623
2,209
11.4%
10.2%
Minorities
WDH shareholders
1.0
1,198
-2.0
1,153
-0.7
1,324
-2.6
1,502
-2.9
1,697
-3.2
1,865
-3.5
2,045
-3.8
2,213
11.5%
10.2%
EPS
Growth
Diluted EPS
Growth
20.57
22%
20.57
22%
20.23
-2%
20.23
-2%
23.40
16%
23.40
16%
27.39
17%
27.39
17%
31.77
16%
31.77
16%
36.00
13%
36.00
13%
40.69
13%
40.69
13%
45.53
12%
45.53
12%
14.8%
13.5%
14.8%
13.5%
Margin analysis
Gross margin
R&D
Distribution costs
Admin expenses
EBIT
Tax
Net Margin
2011A
-71.8%
-7.9%
-36.8%
-6.0%
21.3%
-25.3%
14.9%
2012A
-71.6%
-7.6%
-38.8%
-6.0%
19.3%
-24.3%
13.5%
2013E
-72.6%
-7.5%
-39.1%
-5.8%
20.2%
-24.2%
14.5%
2014E
-72.8%
-7.8%
-38.4%
-5.7%
21.1%
-24.0%
15.2%
2015E
-73.0%
-8.0%
-37.5%
-5.6%
22.0%
-23.0%
16.1%
2016E
-73.0%
-8.0%
-37.0%
-5.6%
22.5%
-22.0%
16.7%
9,642
2017E
-73.0%
-8.0%
-36.8%
-5.6%
22.7%
-22.0%
16.9%
0.0134
2018E
-73.0%
-7.9%
-36.7%
-5.6%
22.9%
-22.0%
17.1%
Y-oY growth
2011A 2012A
Sales
16.7%
6.4%
Cost of goods
17.1%
7.2%
Gross Profit
16.5%
6.1%
R&D
2.9%
3.0%
Distribution costs
19.8% 12.2%
Admin expenses
7.3%
6.8%
EBIT
19.5%
-3.3%
Profit before taxes
22.2%
-5.3%
Net Profit
21.3%
-4.0%
EPS
21.5%
-1.7%
2013E
6.9%
3.1%
8.4%
5.8%
7.8%
3.6%
11.5%
14.7%
15.0%
15.7%
2014E
7.8%
7.1%
8.0%
10.7%
5.6%
5.2%
12.7%
13.1%
13.3%
17.0%
2015E
6.7%
6.0%
7.0%
10.2%
4.4%
4.9%
11.3%
11.5%
13.0%
16.0%
2016E
5.9%
5.9%
5.9%
5.9%
4.5%
5.9%
8.3%
8.5%
9.9%
13.3%
2017E
8.5%
8.5%
8.5%
8.5%
7.9%
8.5%
9.5%
9.7%
9.7%
13.0%
2018E
6.8%
6.8%
6.8%
5.1%
6.5%
6.8%
7.8%
8.2%
8.2%
11.9%
44
Balance Sheet
Balance Sheet (DKK m)
2011A
2012A
2013E
2014E
2015E
2016E
2017E
2018E
Assets
Inangible Assets
PPE
Investments in associates
Receivables from associates
Other investments
Other receivables
Deferred tax assets
Other non-current assets
Total Non-Current Assets
2,055
1,276
96
83
9
487
278
953
4,284
2,648
1,372
278
124
12
623
268
1,305
5,325
3,030
1,607
328
124
20
654
278
1,405
6,042
3,402
1,810
381
126
21
674
290
1,491
6,703
3,785
2,036
436
129
21
694
301
1,581
7,402
4,178
2,229
494
132
22
715
313
1,675
8,082
4,583
2,459
554
134
22
736
326
1,773
8,814
4,998
2,657
618
137
23
758
339
1,875
9,530
Inventories
Trade receivables
Receivables from associates
Corporation tax
Other receivables
Unrealised gains on financial contracts
Prepayments and accrued expenses
Cash
Current Assets
1,082
1,711
5
46
140
0
90
288
3,362
1,014
1,754
12
88
142
31
104
307
3,452
1,063
1,904
12
51
155
31
110
320
3,645
1,138
2,079
13
52
158
31
117
345
3,932
1,206
2,248
13
51
168
31
123
368
4,208
1,253
2,381
13
53
178
31
130
390
4,428
1,368
2,583
14
58
193
31
140
423
4,811
1,470
2,758
14
62
207
31
149
452
5,143
Total Assets
7,646
8,777
9,687
10,635
11,609
12,510
13,625
14,674
Equity and Liabilities
Share Capital
Other Reserves
Equity, WDH shareholders
Equity, minority interests' share
Total Equity
58
3,242
3,300
4
3,304
58
4,003
4,061
-2
4,059
58
5,237
5,295
-3
5,293
58
5,778
5,836
-5
5,831
58
6,618
6,676
-8
6,668
58
7,388
7,446
-11
7,434
58
8,297
8,355
-15
8,340
58
9,167
9,225
-19
9,206
Interest bearing liabilities
Deferred tax liabilities
Provisions
Other liabilities
Non-current liabilities
1,011
113
195
190
1,509
76
148
122
136
482
76
158
143
146
524
76
169
149
157
552
76
181
156
169
582
76
194
163
182
615
76
208
171
195
649
76
222
178
210
686
Interest bearing liabilities
Trade payables
Corporation tax
Provisions
Other liabilities
Unrealised losses on financial contracts
Prepayments and accrued income
Current liabilities
1,301
405
45
37
746
127
172
2,833
2,637
351
54
36
936
26
196
4,236
2,244
416
84
43
877
9
197
3,870
2,519
451
95
45
922
9
210
4,252
2,542
476
101
47
961
10
222
4,359
2,564
501
105
48
999
10
233
4,461
2,597
543
115
50
1,067
11
253
4,636
2,626
578
125
52
1,121
11
269
4,781
Total Liabilities
4,342
4,718
4,394
4,804
4,941
5,076
5,285
5,468
Total Equity and Liabilities
7,646
8,777
9,687
10,635
11,609
12,510
13,625
14,674
45
Cash flow statement
Cash Flow Statement (DKK m)
Operating profit
Non-cash items etc Inc D&A
2011A
1,709
253
2012A
1,653
237
2013E
1,843
240
2014E
2,076
283
2015E
2,311
325
2016E
2,504
369
2017E
2,741
413
2018E
2,956
462
Change in receivables etc
Change in inventories
Change in trade payables
Change in provisions
Cash flow excl. net financials and tax
-112
-71
117
-2
1,894
-31
89
-81
-84
1,783
-270
-49
67
28
1,859
-172
-75
48
8
2,168
-182
-68
37
9
2,432
-148
-47
37
9
2,724
-197
-116
60
9
2,911
-181
-102
51
10
3,195
Financial income received
Financial expenses paid
Realised FX gains and losses
Corporation tax unpaid
Cash flow from operating activities
35
-123
-2
-423
1,381
38
-171
2
-380
1,272
51
-148
0
-344
1,418
42
-145
0
-454
1,611
43
-153
0
-486
1,835
44
-161
0
-511
2,097
46
-169
0
-557
2,230
47
-171
0
-604
2,468
Acquisitions
Divestments
Investments in/disposals of intangibles
Investments in PPE
Disposal of PPE
Investments in other non-current assets
Disposal of other non-current assets
Cash flow from investing activities
-330
5
-2
-407
25
-212
105
-816
-682
0
-14
-329
19
-273
107
-1,172
-500
0
-20
-343
0
-58
0
-921
-500
0
-21
-345
0
-53
0
-919
-525
0
-22
-394
0
-56
0
-997
-551
0
-23
-390
0
-58
0
-1,023
-579
0
-24
-453
0
-61
0
-1,118
-608
0
-26
-452
0
-64
0
-1,149
Repayment of non-current liabilities
Proceeds from borrowings
Buyback of shares
Other adjustments
Cash flow from financing activities
-131
0
-301
-5
-437
-148
42
-497
3
-600
-393
0
-84
-7
-484
275
0
-954
11
-668
23
0
-850
12
-814
22
0
-1,087
13
-1,052
33
0
-1,127
14
-1,079
29
0
-1,333
15
-1,290
Cash and cash equivalents, start
-955
-846
Cash flow for the year net
128
-500
FX
-19
8
Cash and cash equivalents, end*
-846
-1,338
Source: Berenberg estimates, Company reports, *net of borrowings
-1,338
13
0
-1,325
-1,325
25
0
-1,301
-1,301
23
0
-1,277
-1,277
22
0
-1,255
-1,255
33
0
-1,222
-1,222
29
0
-1,194
46
Sonova Holding AG
Prospects priced in
•
•
•
•
We expect Sonova to be one of the industry winners in the long run.
However, we think that its prospects are well understood and fairly
priced into the stock. We therefore rate Sonova a Hold.
Limited upside potential. Our DCF-based price target of CHF119
per share offers just 8% upside from last night’s close. Even this
relatively modest upside implies a multiple of 22.0x our 2013/2014E
EPS estimate of CHF5.02. For an 11% 2013/14E-2017/18E EPS
CAGR, this does not leave room for multiple expansion, in our view.
Good company, good opportunities. We think Sonova is one of the
more innovative companies in the hearing health industry. The
company is innovative from an R&D perspective, but is also not
afraid to use novel marketing strategies, nor to use its balance sheet to
lead the industry forward.
Opportunities and risks exist. Sonova has several positive share
price drivers – good products, potential to gain market share,
expanding margins and reasonable cash flows, to name four.
However, there are also risks, not least the potential to add to the
existing CHF250m provisions related to an on-going product liability
issue in the US over cochlea implants.
•
Prospects in the price. With the stock already trading at 21.1x
consensus 2013E/2014E EPS, we do not see much room for multiple
expansion. As our EPS estimates for 2014/15E and beyond are 4-6%
below consensus, we also see limited scope for earnings upgrades. We
therefore see little potential for near-term share price performance.
•
Downside risks not particularly significant. Despite the lofty
multiple, our slightly below consensus earnings expectations and the
aforementioned product liability issue, we do not see any near-term
downside triggers of note. We therefore do not advocate a more
negative stance than that implied by our Hold recommendation and
price target, which is slightly above current levels.
Y/E 31.03., CHF m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
CPS
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Cash flow RoEV
Source: Company data, Berenberg
2012/13 2013/14E 2014/15E 2015/16E 2016/17E
1,795
238
157
111
-186
1.66
4.72
4.57
1.60
69.1%
13.3%
8.7%
1.5%
17.5%
4.0
30.1
45.7
23.4
5.4%
1,888
486
394
335
-296
5.02
5.02
4.77
1.76
69.6%
25.8%
20.9%
1.6%
16.9%
3.8
14.7
18.2
22.0
5.9%
1,995
546
433
369
-307
5.60
5.60
4.76
1.96
70.1%
27.4%
21.7%
1.8%
17.5%
3.6
13.1
16.5
19.7
6.1%
47
2,132
610
477
408
-220
6.26
6.26
4.35
2.19
70.3%
28.6%
22.4%
2.0%
19.7%
3.4
11.8
15.0
17.6
5.7%
2,269
670
516
443
-185
6.94
6.94
6.29
2.43
70.4%
29.5%
22.7%
2.2%
21.8%
3.2
10.7
13.9
15.9
7.5%
Hold (Initiation)
Rating system
Absolute
Current price
Price target
CHF 110.3
CHF 119.00
08/10/2013 Virt-X Close
Market cap CHF 7,333 m
Reuters
SOON.VX
Bloomberg
SOON VX
Share data
Shares outstanding (m)
Enterprise value (CHF m)
Daily trading volume
67
7,147
156,000
Performance data
High 52 weeks (CHF)
Low 52 weeks (CHF)
Relative performance to SXXP
1 month
-3.2 %
3 months
-2.7 %
12 months
-3.6 %
117
92
SMI
1.9 %
7.2 %
-5.0 %
Key data
Price/book value
Net gearing
CAGR sales 0-2015
CAGR EPS 0-2015
4.0
-16.0%
5.9%
55.6%
Business activities:
Hearing aid manufacture and
wholesale; hearing aid retail;
cochlear implants
Non-institutional shareholders:
Beda Diethelm 10%
Andy Rihs 6%
Hans-Ueli Rihs 6%
8 October 2013
Tom Jones
Analyst
+44 20 3207 7877
Frazer Hall
Specialist Sales
+44 20 3207 7875
Sonova Holding AG
Executive summary – Good business, expectations priced in
We see Sonova as a well positioned, well managed company within the hearing
healthcare market. However, we think this position is well understood by the
market. We also believe that current earnings expectations, both those of the sell
side reflected in Bloomberg consensus and those of the buy side implied by the
current 2013/14E PE of 21.1x, are toward the top end of a reasonable range of
forecasts. We therefore see limited scope for either a positive re-rating or earnings
upgrades. Therefore, despite its attractions, we rate Sonova a Hold.
Good business in a good space
The hearing instrument industry is not without its challenges, not least pricing, but
it also enjoys highly supportive demographics, low penetration rates and plenty of
scope to drive revenues through innovation. Sonova has a highly competitive range
of hearing aids spread across all price points and performance categories, it has a
competitive cochlear implant business which is on course to support significant
margin expansion for the group, it is one of more innovative marketers in the
industry, and, in Lyric, it has a truly differentiated product in the market place.
Thus we conclude Sonova is well positioned in a reasonably attractive market.
Valuation reflects position and prospects
However, at 22.0x for a 2013/14E-2017/18E EPS CAGR of 11%, we believe
Sonova’s growth expectations are largely reflected in the price. Our DCF-derived
price target of CHF119, just 8% above last night’s closing price, also tells the same
story, in our view.
Earnings expectations leave little room for upgrades
Our earnings estimates are also 1-6% below those of consensus, and reflect the
company achieving the lower end of its mid-term EBITA margin guidance of the
“mid twenties”. Although we do expect good margin progress, modelling margins
to increase from 21.5% in FY2012/13A to 24.1% in FY2016/17E, we expect
generalised price pressure, shortening R&D cycles and additional investments in
retail operations to limit margin expansion. At present, we believe the current
Bloomberg consensus reflects a best-case outcome for Sonova. We thus see little
room for earnings estimate upgrades to drive the shares higher.
Key risks not in the price
In our view, the biggest risks to Sonova’s earnings are: i) failure to improve retail
margins; ii) failure to improve cochlear implant margins; and iii) the potential for
liabilities related to the 2006 recall of its HiRes 90K cochlear implant to exceed the
current provision of CHF250m. We do not believe that either current earnings
expectations or the stock’s multiple reflect these risks.
48
Sonova Holding AG
Key share price drivers
We discuss each of Sonova’s key share price drivers in more detail below, but, to
briefly summarise, we see the following as likely to be the key share price drivers in
the next 12-18 months.
Positive share price drivers
1. Lyric. Lyric is novel form of invisible-in-canal hearing aid that can be
worn for up to 120 days without removal. It sits deep within the ear canal
and is all but invisible to others. We believe this is a truly differentiated
product in the market which, as well as well as being an attractive offering
to the more motivated (and wealthy) patient, is also a key lead generator
for the core hearing aid business. All told, we estimate Lyric will account
for around a quarter of Sonova’s revenue growth over the next five years.
2. Marketing power. Sonova is, in our view, one of the best marketers in
the industry. This matters. Not only do we think it is an effective seller of
its products through standard channels, but it is also not afraid to be the
first mover, with novel marketing strategies. Three good examples are as
follows.
a) The all-out launch. Sonova’s decision to launch its new Quest
platform at all performance categories at once, going against the
received wisdom that says new technologies should be rolled out
at the highest performance level before trickling down to lower
price/performance levels.
b) The subscription model for Lyric. Here, users pay a fixed
monthly, quarterly or annual fee and receive a new device as and
when they need it. This compares to simply buying a new hearing
aid every four to five years.
c) The Flex concept being rolled out in Sonova’s Unitron
business. This allows a customer to buy a hearing aid and then,
for a fee, have it upgraded to the next performance level.
The jury is still out on how effective these strategies will prove to be in the
long term, but for now they definitely mean Sonova is on the front foot in
the marketing battles that go on for share in this industry. Share gains are
crucial to delivering the kind of growth investors expect as, in our view,
neither market unit growth of c4% nor pricing (currently slightly negative)
are enough to deliver the earnings growth reflected by the share price.
3. Margin expansion. The company has provided a mid-term (ie 2016/17)
EBITA margin target of the “mid twenties”, and progress towards this
goal will be required to support the share price, in our view. Sonova has
several potential sources of margin expansion over the next few years, not
least the following.
a) Share gains. Further share gains will allow Sonova to benefit
from the natural operating leverage inherent in its business.
b) Cochlear implants. Sonova’s cochlea implant business was more
or less at breakeven in 2012/13A, with EBITA of CHF1.8m on
revenues of CHF147. Over the next four years, we expect
cochlear implant revenues (plus accessories and upgrades) to rise
49
Sonova Holding AG
to CHF247m and margins to rise to 15.5%, thus yielding an
incremental CHF37m in EBITA. This, alone, will provide 155bp
of margin expansion by 2016/17E, in our view, almost all the
margin expansion we expect by that time.
c) Retail margins. In the short term, we expect Sonova’s retail
operations, which account for 30% of Group revenues, to be a
drag on margins due to the costs involved in repositioning stores
under the unified Connect Hearing brand. However, longer-term,
we think the retail business can support margin expansion for the
group.
On the flip side, we see pricing as likely to continue to exert
downward pressure on margins. We also believe shortening product
life cycles are likely to diminish returns on R&D and launch spending,
in turn putting downward pressure on margins. Thus, while we expect
Sonova to only deliver the low end of its margin goals, on balance we
think margin expansion will support the share price in the near term.
Mixed share price driver – retail
We see Sonova’s retail business as both a potential positive and negative share price
driver. In the near term, it will likely be a drag on group margins, but this has been
well flagged by the company and will not, or should not, come as surprise to
anyone. Longer term, as we stated above, we believe there is decent potential to
expand retail margins. However, Sonova’s presence within the retail market is not
without risk. Firstly, as the market consolidates, competition is, in our view, likely
to intensify, especially from a price perspective. In addition, we think that by
implementing standard operating procedures across all stores, something which is
the key to delivering better margins, Sonova runs the risk the losing the personal
touch that many hearing aid customers seek and pay for.
Negative share price drivers
1. Cochlear implant liability. Sonova remains subject to an undisclosed
number of product liability suits related to the 2006 recall by Advanced
Bionics (AB – now owned by Sonova) of a certain batch of HiRes 90K
cochlear implants. While the recall occurred before Sonova acquired
Advanced Bionics, the liability came with the assets, and Sonova (or, more
specifically, Advanced Bionics LLC) remains liable. While the majority of
cases have so far been dealt with under the product’s warranty and AB’s
product liability insurance, a recent jury ruling in Kentucky that awarded
$6.25m in punitive damages prompted Sonova to increase its provision by
CHF198m to CHF250m. Sonova is understandably unwilling to disclose
exhaustive detail regarding the number of on-going cases. Nonetheless,
while we estimate that the current provision is likely to prove broadly
adequate, there does remain a significant risk that further provisions may
be required. As such, we think the cochlear implant liability is likely to
remain an overhang on the shares for some time.
2. Pricing. As discussed in the front section of this report, we think pricing
is likely to remain a headwind for the industry for the foreseeable future.
While not our base assumption, there is a real risk that pricing worsens
from the current level of around -3%, especially if some of the weaker
players in the industry, most notably Siemens, can finally get more
competitive. Share gains are crucial to growth, and, to date, hearing aid
50
Sonova Holding AG
companies have historically used new product innovation to drive/support
pricing and make share gains. However, if innovation rates slow, which is a
real risk, in our view, we think the industry may fall into the trap of
competing for volume with price. This is a whole different ball game to the
current situation where manufacturers compete for volume and price with
new products, and one which could potentially result in more adverse price
conditions.
Positives just about outweigh the negatives
On balance, we think the positive share price drivers for Sonova marginally
outweigh the potential negative drivers. We thus expect the share price to
remain at or slightly above current levels over the next 12-18 months.
However, due to the stock’s relatively full multiple and earnings
expectations that are slightly too high, we do not see much scope for more
positive share price performance, hence our Hold rating.
Earnings growth outlook – 6% top line, 11% bottom line
We discuss Sonova’s earnings in more detail further on in this note. However, to
summarise here, we think the company will deliver a 2013/14E-2017/18E revenue
CAGR of 6.2%, driven by growth in cochlear implants, Lyric, retail acquisitions
and hearing aid volumes, offset by negative pricing in hearing aids.
At the EBITA level, we expect a 2013/14E-2017/18E CAGR of 8.4%, just over
220bp faster than the top line due to the positive factors we expect to lift margins
(detailed above).
Improving interest costs/income marginally offset a trend towards a slightly higher
tax rate, such that we expect 8.4% EBITA growth to yield 9.1% net income growth
over the 2013/14E-2017/18E timeframe.
With the bulk of Sonova’s free cash flow likely to go into dividends, acquisitions
and debt pay-down, we see limited scope for large scale buybacks. Therefore, our
9.1% net income CAGR translates into a 2013/14E-2017/18E EPS CAGR of
10.7%.
Sonova key earnings figures
CHFm
Revenues
Growth
2010/11A 2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E CAGR '13/14-'17/18
1,617
7.8%
1,620
0.2%
1,795
10.8%
1,888
5.2%
1,995
5.7%
2,132
6.9%
2,269
6.4%
2,401
5.8%
6.2%
Adjusted EBITA
Margin
Growth
327
20.2%
-22.3%
315
19.5%
-3.7%
386
21.5%
10.6%
423
22.4%
4.0%
463
23.2%
3.6%
507
23.8%
2.6%
547
24.1%
1.3%
584
24.3%
0.8%
8.4%
Adjusted Net income
Growth
267
-26.1%
254
-4.8%
315
23.8%
335
6.4%
369
10.4%
408
10.3%
443
8.8%
473
6.8%
9.1%
Adjusted EPS
Growth
4.03
-25.5%
3.79
-6.2%
4.72
24.7%
5.02
6.4%
5.60
11.5%
6.26
11.9%
6.94
10.7%
7.53
8.6%
10.7%
Source: Berenberg estimates, Sonova Company reports
51
Sonova Holding AG
Key share price drivers in detail
We see the following factors as potential share price drivers in the next 12-18
months.
1) Novel hearing aid, Lyric
2) Retail business
3) Innovative marketing and commercial activities
4) Cochlear implant liability
5) Margin expansion
Key share price driver No.1: Lyric – invisibility and convenience
Lyric is a novel form of the invisible-in-the-canal (IIC) hearing aid that was
developed by Insound Medical, a Californian company acquired by Sonova in early
2010. Lyric sits deep within the ear canal, approximately 4mm from the tympanic
membrane. This is much deeper than traditional in-the-ear (ITE) hearing aids, and
indeed most other IIC hearing aids. Its other unique selling point, and a key
differentiating feature from nearly all other hearing aids, is that it can be worn
continuously, without the weekly battery changes associated with traditional
hearing aids, day and night, for extended periods. The FDA label allows it to be
worn for up to 120 days, although in practice most users change them every 2-3
months. Sonova also sells Lyric under a subscription model, but its relatively high
price means that the economics for the patient are more or less the same over time
as buying a new high-end hearing aid every 14-15 months, about three times as
frequently as would otherwise be the case for the average user. Thus, the costs are
roughly 3x that of a conventional high-end hearing aid, but Lyric also offers
significant benefits that conventional hearing aids do not.
Lyric is a truly differentiated product
There are other invisible products on the market, such as Starkey’s SoundLens,
Siemens’ Eclipse XCEL 301 & 701, the Widex iic, Unitron’s (a Sonova brand)
microCIC and GN’s Resound Verso IIC, but these are typically just very small
versions of in-the-ear (ITE) hearing aids that sit a little deeper in the ear canal.
However, we view Lyric as best in class, mainly as it can theoretically be worn for
up to 120 days straight. In addition, it is all but impossible to see a Lyric hearing aid
once it has been inserted and the sound quality is, as far as we can tell from
discussions with audiologists, relatively good – despite the fact that it is a twochannel analogue device. Located deep in the ear canal, Lyric sidesteps a lot of the
issues that affect traditional hearing aids, such as directionality and wind noise. The
comfort level is good, as the device does not have a hard shell; there is also no need
to remove the hearing aid to shower. In addition, many IIC hearing aids rely on the
extraction cord for the user to remove them, which can break, generally
necessitating a visit to an audiologist. Finally, the soft construct of Lyric means
there is no need to custom-make each hearing aid, improving margins for the
manufacturer and reducing hassle for the patient/audiologist.
Lyric opens up a hard-to-penetrate market segment
Around 95% of all those with hearing loss are at the mild to moderate end of the
spectrum (roughly 65% mild and 30% moderate). It is for these patients that the
52
Sonova Holding AG
total economic cost of owning and using a hearing aid often does not outweigh the
benefits, in our view.
Hence, as the chart below shows, only just over half those with moderate hearing
loss have a hearing aid, and for those with mild hearing impairment the figure is a
measly 8% of the mild population – or 5% of the overall hearing-impaired
population.
Hearing instrument penetration in US by hearing loss severity
% of hearing impaired
70%
60%
50%
40%
30%
20%
10%
52%
8%
76%
0%
Mild
Moderate
User
Severe/Profound
Non-user
Source: Company data.
Lyric opens up a different demographic
The vast majority of non-user, hearing-impaired people are in the 45-74 year age
bracket, an age where there is perhaps more stigma associated with the use of a
hearing aid (in percentage terms, the under-44s have a lower penetration rate, but
as this age group represents just 18% of the hearing-impaired population, the
absolute contribution this group makes to the total number of non-users is less
significant, as the chart below illustrates).
Hearing instrument penetration in US by age
70%
60%
50%
40%
30%
20%
10%
0%
Under 44
45-74
User
Source: Company data.
53
Non-user
Over 75
Sonova Holding AG
All adds up to 20-22m potential users in the US
There are around 48m people with hearing loss in the US. Around 25%, or 12m of
these, already use a hearing aid, leaving a market potential of 36m non-users. Add
to this the replacement cycle for hearing aid users and we believe there are close to
40m potential Lyric users in the US alone. Of these, around three quarters, or 30m
people, have the right type and severity of hearing loss for Lyric – of which about
three quarters have the right shape to their ear canal to be able to use Lyric. We
therefore estimate that there are a total of 20-22m potential users in the US, and
nearly double that in potential “ears”.
Multi-billion dollar market opportunity.
We estimate that the annual subscription fee for Lyric is around $1,800-$2,500 per
annum per ear (maximum of seven devices). With 40m potential ears this would
make the US alone a market worth up to theoretical $72bn, even before one
considers any ASP uplift that could be achieved by switching some of the existing
12m traditional hearing aid users in the US onto the Lyric platform! However, this
is clearly a nonsensical number as it assumes 100% uptake and no price deflation.
If we assume a 10% penetration rate and stable price then this makes Lyric
potentially a c$7bn market. Some of this revenue would clearly end up with the
dispenser, but assuming Sonova retains 30-40% of the economics – slightly more
than is usually the case for the wholesale of traditional hearing aids where the
manufacturer usually retains about 25% of the economics – it still leaves a $2.02.5bn revenue opportunity for this type of hearing aid, plus whatever Sonova can
capture through its retail operations. Double this figure and add a little to estimate
the global opportunity and we are back to Lyric being around a $6-7bn opportunity
for Sonova and the industry, in our view.
Lyric faces the same challenges to uptake as regular devices
However, one needs to bear in mind that these figures are just the market potential.
We don’t expect Sonova to generate anywhere near this kind of revenue, as that
would require significant penetration and 100% market share. But even at a
relatively conservative 5% share of a 10% penetrated market, we are looking at
$300-350m in potential incremental sales per annum. Thus, we think Sonova’s
initial target of $200-300m of sales five years from acquisition (ie in FY ‘15/16)
looks possible, although we note that this target was provided by the prior
management team and has not been reiterated by the current management. From a
base of CHF1,620m in FY 2011/2012, if we assume Sonova can achieve $250m of
Lyric sales by FY ‘16/’17, then we are talking about a 3% CAGR in Group sales
just from Lyric alone.
Lyric is a good pull-through for normal hearing aids in Sonova’s retail
channel
Due to its small size and convenience, Lyric is a good incremental lead generator
for an audiologist and can drive conventional hearing aid sales, in our view. The
main problem for an audiologist/hearing aid retailer is not the number of hearingimpaired people; the difficulty is getting them to admit they need a hearing aid and
then to do something about it. The retort “I can hear fine and I don’t want the
hassle of a hearing aid” is one we are sure anyone with an elderly relative has heard.
However, Lyric potentially tips the balance as the perceived inconvenience is lower.
In addition, even if these people are among the 15m or so people in the US with
mild/moderate hearing loss that aren’t candidates for Lyric, once they have started
to seek treatment, conversion onto a traditional hearing aid is likely to be that much
easier.
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Sonova Holding AG
Therefore, even if a patient is unsuitable for Lyric, its attractions can serve to drive
footfall for the audiologist and overall hearing aid penetration in the
mild/moderate segment.
Lyric still a relatively young concept
Lyric was launched by Insound Medical in the US in early 2008. The product
generated $5m of sales in 2009 before the company was acquired by Sonova in
early 2010 for a $75m up-front cash payment (basically, the capital that had been
sunk into Insound up to that point) and potential earn-outs that, at the time of the
acquisition, were expected to total $175m-$275m. Sonova has since paid a lump
sum of $94m in cash to Insound Medical in place of any earn-outs.
At the time of acquisition in January 2010, Sonova stated a year 5 (ie 2015) sales
target of $200-300m at EBITA margins comparable to the group which, at that
time, were north of 25% (although we reiterate these targets have not been
reconfirmed by the current management). If we take FY2011/12 to be year 1 and
assume Sonova is currently about 10-15% of the way to the midpoint of its revenue
target, then, for FY2012/2013, we estimate Lyric would have accounted for around
1% of Group revenues, or CHF25m. At an assumed cost of $1,900 per ear per
year, 40% of which is assumed to accrue to Sonova, and a 70% binaural fitting rate,
we estimate that this means that Sonova would have had c35,000 “ears” and just
over 20,511 subscribers in FY 2012/2013A.
At this level, we suspect that Lyric is broadly at breakeven. On our estimates,
2015/16 sales of CHF122m would equate to cCHF34m in EBITA. This would, on
a pro-forma basis versus 2012/13, mean a contribution to group margin expansion
of 25bp. Lyric therefore offers a small additional source of margin expansion to
help Sonova reach its goal of a 25% EBITA margin in the CY2016/2017
timeframe. The other two are improving retail margins and improving margins on
cochlear implants. However, we expect the benefit that Lyric may bring to be
largely offset by pressure elsewhere in the wholesale business, and anticipate that
wholesale margins will be broadly flat over the medium term.
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Berenberg Lyric sales assumptions
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
Group sales (CHFm)
Growth %
1,620
0.2%
1,795
10.8%
1,888
5.2%
1,995
5.7%
2,132
6.9%
2,269
6.4%
2,401
5.8%
Lyric sales (CHFm)
Growth %
14
nm
25
75.0%
41
65.5%
62
50.3%
90
45.3%
122
15.0%
148
10.0%
Groups sales growth (CHFm)
Lyric growth (CHFm)
3
nm
175
11
92
16
107
21
137
28
137
32
132
26
% sales growth from Lyric
nm
6%
18%
19%
21%
23%
20%
1,792
0.00%
717
34,868
70%
1.7
20,511
75%
1,801
0.50%
721
57,430
75%
1.8
32,817
60%
1,815
0.75%
726
85,653
80%
1.8
47,585
45%
1,833
1.00%
733
123,246
85%
1.9
66,619
40%
1,856
1.25%
742
164,549
90%
1.9
86,605
30%
1,879
1.25%
752
197,459
90%
1.9
103,926
20%
Average subcription per ear (CHF)
Price growth
Revenue to Sonova per suscription (CHF)
Ears
Binaural fitting rate
Ears/subscriber
Subscribers
Subscriber growth
1,792
nm
717
19,925
70%
1.7
11,720
nm
Conclusion: a nice product to have
In summary, we think Lyric will be a significant contributor to both top-line
growth and margins in the medium term. However, we also think its relatively high
cost will ultimately limit the subscriber base.
Key share price driver No.2: Retail – more significant than it looks for
Sonova
We see Sonova’s retail activities as a key supporter of future growth. In the coming
years, we think retail can sustainably provide around 2-3pp of growth per annum
over and above that which Sonova can generate through the combination of its
traditional wholesale hearing instrument business or its more recent foray into
cochlear implants.
Sonova’s strategy makes sense
Sonova has a three-pronged approach to driving retail growth – organic growth,
new store openings and acquisitions.

Organic growth. Self-explanatory. Leads are driven by the wider factors
affecting overall hearing aid use (demographics, binaural fitting rates, etc),
local market conditions and the judicious use of marketing campaigns.
Perhaps more importantly, through standardised work flows and a solid
understanding of user preferences, lead conversion can still be increased.
It’s a fairly shocking statistic that, industry-wide, of those who actually
have hearing loss suitable for a hearing aid and who make it into a
dispenser, half will leave without making a purchase.

Acquired growth. Most hearing aid dispensers are fairly inefficient, with a
typical audiologist fitting no more than one device a day, and many
significantly less. Thus there is usually considerable scope to improve the
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Sonova Holding AG
performance of an acquired business. Very often, these are independent
retailers or small chains to which Sonova has been a supplier in the past.
Periodically, however, Sonova has made larger acquisitions in order to gain
critical mass in a new market as soon as possible.

De novo openings. Where local market conditions warrant it, Sonova will
open new stores that compliment the existing network. The average age of
a first-time user is 70, so location and proximity to the customer base can
be important factors, and sometimes a new, better-located store is critical
to driving growth.
Retail a significant growth driver, past and future
In FY 12/131, Sonova generated around CHF500m in sales from retail,
corresponding to c28% of group revenues. Exact numbers are hard to find, but we
estimate that the company has some 2,000 retail outlets globally. If we assume that
retail was around 20% of sales in the 2003/2004 timeframe, then over the last 10
years over 30% of the group’s revenue growth has come from its retail activities,
both acquired and organically grown.
Despite being such a significant part of the business, it doesn’t feature as highly in
investor presentations/analyst days as it might, in our view. However, this is
unsurprising, given the sensitivities of wholesalers forward-integrating into their
customers’ market. However, this does not detract from the contribution to
revenue growth that retail has made in the past and that we think it will continue to
make in the future.
Pulling it all together makes a lot of sense
Sonova calls its retail operations Connect Hearing, but underneath this divisional
title the company operates a significant number of brands. However, where it
makes sense to do so, the company is now pulling all the various brands together
under the Connect Hearing format. The best example is probably Canada. Sonova
entered this retail market in 2006, with the CHF29m acquisition of National
Hearing Services (trading as Island Hearing). By 2010, the group was operating
more than 20 different brands across Canada, but has since consolidated them
under a single unified brand. Sonova now operates over 100 outlets across Canada
under the Connect Hearing banner.
The company intends to execute the same strategy in markets where is operates a
fragmented portfolio. The US is ripe for such measures, and Sonova is already in
the process of consolidating its outlets in this market under the Connect Hearing
brand. However, where it has a very strong existing brand, such as Hansaton in
Austria, Lapperre in Belgium and possibly Boots Hearing Care in the UK, it will
likely retain the legacy brand name, although it will likely share some branding
features, such as the exclamation mark that forms part of the Connect Hearing
brand.
Shop-in-shop concept an easy way to build critical mass
Sonova has pioneered the shop-in-shop concept in the UK by partnering up its
David Ormerod Hearing Centres (DOHC) brand with the largest pharmacy and
health products chain in the UK, Boots. Currently, Sonova operates 360 shop-inshop outlets within Boots stores. The relationship was recently strengthened, with
1
April 2012 – March 2013
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Boots taking a 49% stake in a JV with DOHC. Boots gets another service to pull in
customers, while Sonova gets to benefit from the footfall that Boots stores already
bring. The partnership is clearly working, as Sonova now has around 25% of the
private market in the UK.
US Pharmacy giant Walgreens now has a 45% stake in Boots (and an option to
acquire the other 55% in 2015), and we would not be surprised to see this concept
rolled out in the US, particularly as key competitors William Demant, Siemens and
GN appear to be going down this route with the warehouse retailer Costco, which
operates 450 shop-in-shop sites across the US and a further 179 in other countries.
Continued runway for retail growth
The retail hearing aid market is highly fragmented in many regions and highly
inefficient nearly everywhere. Thus we believe there is considerable scope for
Sonova to drive organic growth in its retail business and continue to make selective
acquisitions.
2-3% organic retail growth…
On the organic side, the market is growing in the low single-digit range, 2-3%
perhaps, and we don’t see any reason why Sonova can’t at least keep pace with this,
if not do slightly better. We agree that this isn’t stellar growth, but the c1pp per
annum it could contribute to growth at the group level is growth nonetheless.
...plus up to 8-10pp more retail growth from acquisitions…
As far as acquisitions go, Sonova has earmarked CHF60-70m per annum for
further bolt-on acquisitions, nearly all of which is likely to end up being spent on
acquiring retailers, in our view. Assuming the company stays within its 1-2x sales
purchase price range, this equates to around CHF40-50m of acquired revenue per
annum. On a 2012/13A base of around CHF500m in retail sales, this yields 8-10pp
per annum of growth in retail just from acquisitions which, at the group level, tend
to be bolt-on in nature and contribute c2% growth at the Group level.
...all adds up to c3pp of growth per annum for the group
At just under 30% of overall group revenues, we estimate that retail can deliver a
fairly steady 3pp of revenue growth per annum at group level, and that is before
considering the potential growth larger scale M&A could bring. It doesn’t sound
like much, but, in our view, it provides a certain base level of fairly visible growth
to support the more volatile growth in the wholesale hearing instrument business.
Retail a drag on margin expansion in the short term, a driver in the long
term
In the short term, we expect retail to be dilutive to group margins due to lower
underlying margins and the current costs of rebranding the retail operations.
However, in the medium to long term, we expect retail to be a driver of group
margins. As retail grows, there is scope for considerable operational leverage which,
in our view, should help to lift group margins, even if an expanding retail presence
exerts downward pressure on group margins by virtue of the natural mix effect of
having a greater proportion of lower margin retail revenue.
Retail is still likely to remain dilutive to overall group margin, in our view, but that
doesn’t mean that improvements can’t help drive the group toward its 25% EBITA
margin goal.
However, in the very short term, we expect retail to restrain margin expansion,
mainly due to the cost of the rebranding exercise that Sonova is undertaking,
particularly in the US.
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Key share price driver No.3 – the innovative marketer
Sonova has also pioneered a number of innovative marketing strategies in its
wholesale hearing instrument business, as well as forward-integrating into the retail
chain. We think these strategies are: 1) the reflection of an increasingly challenging
operating environment, and are increasingly defensive moves as the traditional
route to hearing aid growth, taking share from Siemens and other smaller
manufacturers, has largely run its course; and 2) an example of what we see as
Sonova’s desire to be the innovator in the industry and develop new marketing
approaches.
The three strategies are the subscription model for Lyric, the roll-out strategy for
the new technology platform Quest, and the new Flex model being deployed in
Sonova’s second brand, Unitron.
Innovation 1: Lyric – subscription model the only way to go
Lyric is Sonova’s completely invisible hearing aid which we have already discussed
more fully above. What is different about Lyric is that it is typically sold on a
subscription model whereby users pay a monthly, quarterly or annual fee for a
one-, two- or three-year contract and receive regular changes as required (the label
allows wear of up to 120 days, but we understand it is not uncommon for more
frequent changes to be required.)
This usage pattern lends itself well to the subscription model, in our view. We
estimate that most users pay somewhere between $1,800 and $2,500 per annum per
ear and receive around 4-6 instruments per ear per year. If purchased individually
(were that an option), patients would be spending $500-600 every three months or
so, a significant sum to part with. Depending on how often the patient would
otherwise upgrade their hearing aids, we estimate Lyric works out at about 2-3x the
cost of a reasonable-quality device. The subscription model therefore helps to
overcome the psychological barrier users may face. It is much easier to get patient
buy-in for a product that costs $6 per day than one which costs $2,250 every 12
months, particularly as, for $2,250, a user could purchase a normal hearing aid at a
reasonably high performance level that could be expected to last at least 3-4 years.
We therefore see the subscription model used for Lyric less as an innovative
pricing structure than as a necessity in order to: 1) “sell” each unit at the price
needed to make the product profitable – as, in essence, Lyric is a disposable
hearing aid; and 2) overcome the pricing challenge of not knowing how many
Lyrics each user will require in a particular period.
Innovation 2: The all-in launch
When Sonova introduced its new Quest platform at the EUHA meeting in
October 2012, it took the bold step of launching the new platform at all
performance levels at once. This was a significant departure from the received
wisdom in the industry which, up until then, had held that new platforms should
first be launched at the highest performance level, with the commensurate uplift in
price, before being trickled down into lower performance levels over a period of
time, usually 12-18+ months. This approach was built on the launch of Spice in
October 2010 at three price points.
However, Sonova chose to launch at all performance levels at once. Aside from the
mistake of not launching the RIC (receiver-in-canal) form factor first (RIC has
rapidly become the most commonly placed type of hearing instrument), we see two
other issues with this strategy which are more meaningful.
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Sonova Holding AG
Issue 1: Quest is Spice 2.0
Our discussions with audiologists have led us to the view that, while Quest does
offer some advancement over Sonova’s previous platform (Spice), these changes
are more incremental than revolutionary, leading several observers to dub Quest
the Spice 2. If this is indeed the case, and we don’t doubt that Sonova would argue
strongly that it isn’t, then it may have been a sensible strategy to launch at all
performance levels at once in order to gain share in the mid- and lowerperformance levels while other manufacturers are still only selling their new
platforms at the higher performance levels. The growth achieved in the Advanced
and Standard Hearing instruments (Sonova’s classification for the two lower
performance levels) in the last two reporting periods of 5% and 4%, respectively,
would seem to support this argument. 5% and 4% may not sound particularly
impressive, but our belief is that this part of the hearing instrument market has
seen reasonable price pressure in the last 12-18 months, making mid single-digit
growth a decent performance, in our view. Therefore, we believe that Sonova’s allin launch strategy has defensive overtones, and is not purely an offensive move.
Issue 2: It’s the area under the curve that matters
While Quest and its new launch strategy has undoubtedly been a success so far, the
real test will only come when other manufacturers start to launch their new
platforms in the mid- and lower-priced performance categories. We are convinced
Sonova will cede some share back to other manufacturers when it moves its new
platforms down the performance spectrum. Indeed, William Demant has recently
launched Nera, a mid -performance level hearing aid, on its most up-to-date
platform, Inium. We therefore really won’t know how successful this strategy has
been until other manufacturers have launched and we have seen the sales impact
across the full product cycle. Our fear is that Sonova has effectively taken a spurt in
short-term growth while sacrificing longer-term earnings. However, if our concerns
(raised above) regarding the technological advances of Quest versus Spice are well
founded, Sonova’s strategy may well maximise sales volumes, albeit at a lower level
than might otherwise have been expected from a new platform launch. Time will
tell.
All-in launch should be more profitable
By launching at all performance levels at once, Sonova can mitigate the costs of
effectively re-launching the same technology three times over. Thus, for the
revenue it does generate, this should come at a higher margin. Whether this
strategy generates more profit in aggregate over the cycle remains to be seen, but in
the short term it is likely to provide a fillip to margins, in our view. With Sonova’s
shareholders clearly looking for a recovery in margins, the all-in launch strategy will
undoubtedly help meet those expectations. However, we continue to harbour
concerns that it will not generate the maximum level of absolute profits in the long
run.
Innovation 3: The Flex trial – a double-edged sword
Sonova recently rolled out what it calls the Flex trial approach for its Unitron
brand. Available for Quantum and Moxi products on the Era platform, Flex allows
users to start of with a low- to mid-range hearing device and then, for a fee,
upgrade to a higher performance level. This is achieved by the fitter through a
simple software switch, with the hardware remaining the same. This strategy, while
innovative, could prove to be a double-edged sword. The secret to maximising
profits is getting every user to part with the maximum amount they are happy to
spend on a hearing aid. (The same strategies are used in the auto-industry: a built-in
sat-nav, for example, typically costs 4x what it would to buy a comparable stand-
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Sonova Holding AG
alone device. Everyone knows that, so why does anyone take that optional extra?
Because different people are prepared to pay different sums for essentially the same
thing, and these pricing structures are designed to take advantage of that.)
So, on the one hand, the Flex trial gives Sonova the ability to drive customers up to
their highest tolerable price point; and so far feedback would suggest that Flex has
driven an average increase of about one performance level. However, the risk on
the downside is that some users may stick at a lower level they deem adequate
when they may otherwise have been prepared to pay a higher price for the same
technology. Good for customer satisfaction, but less good for the bottom line. We
think Sonova is well aware of these competing dynamics, and that this is one
reason why this sales strategy has so far been restricted to Unitron and has not
been deployed for the Phonak brand. The other reason is that Unitron is more of a
service brand whereas Phonak’s USP is all about products (not that Phonak has
poor service or Unitron poor products, both are competitive on both product and
service in our view).
Three challenges, three strategies
To conclude, we sit in the glass-half-empty camp with regard to these sales
strategies. Yes, they are innovative, and better to be the disruptor rather than the
disrupted. However, the fact that Sonova is deploying them at all, for none are
without risk, is in our view a reflection of some specific challenges Sonova is
facing, rather than a pioneering way to do business per se. We think that the
subscription model for Lyric is a reflection of what would otherwise be the
phenomenally-high selling price required to turn a profit on what is, in essence, a
disposable hearing aid. The decision to launch a new platform at all performance
levels is, in our view, a reflection of a more incremental step forward in technology;
and, finally, we believe the Flex programme is a response to the more challenging
pricing environment that prevails at the lower price points.
That said, it’s better to deal with these challenges head-on and implement
innovative approaches – and for that we applaud Sonova.
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Key share price driver No.4: Cochlear implant liability – a risk, but not
a big one
Sonova recently made an additional provision of CHF198m to cover liabilities
related to a 2006 product recall made by Advanced Bionics, a cochlear implant
manufacturer acquired in 2009. This raised the question as to whether the total
provision of CHF250m is likely to be sufficient. In summary, we think it is in the
right range, but we do see a risk that further moderate provisions may be required.
We thus expect this issue to remain an overhang for some time, but we think it is
largely reflected in the share price.
Sonova has a chequered history in the cochlear implant market
Sonova’s entry into the cochlear implant market has been something of a baptism
of fire, and a stern reminder of the differences between doing business in hearing
aids – which, although FDA-regulated, are really no more dangerous to patients
than a set of headphones – and doing business in the highly-regulated, higher-risk,
Class III medical device world of cochlear implants. Sonova acquired Advanced
Bionics (AB) in early 2010 for CHF510m, and despite the lofty purchase multiple
of 4.3x sales, the marriage of Sonova’s expertise in sound processing and AB’s
electrode technology looked to be one made in heaven. However, the pairing has
had a turbulent few years.
Flagship product recalled
First, in November 2010, Sonova initiated a voluntary worldwide recall of the
HiRes 90K cochlear implant after two recipients experienced loud sounds, severe
pain and shocking sensations eight to ten days after the device was activated
(cochlear implants are usually activated a few weeks after they have been
implanted). In both cases, the implants had to be surgically removed.
While no significant liability ensued, and in the end just two of the relevant 28,000
implanted HiRes 90Ks failed in this way, the recall effectively meant that Sonova
was off the market until early April 2011 in ex-US markets, and until September
2011 in the US. Accordingly, cochlear implant sales in fiscal H2 2010/11 were
negligible (c.CHF5m), and were just CHF39m in fiscal H1 2011/12 – about half
what would otherwise have been expected, in our view. All told, we estimate that
this issue resulted in around CHF90m of lost sales and at least CHF60m in lost
EBITA/cash flow.
An older recall then came back to haunt the company
Then, just as things looked like they were back on track, and operationally at least
they still are, a jury in Kentucky awarded $7.25m (including $6.25m punitive
damages) to a plaintiff in a product liability case related to the 2009 failure of a HiRes 90K cochlear implant that came from a batch recalled by Advanced Bionics
back in March 2006 (the patient had the device implanted just before the recall).
Although the implantation of this device pre-dated the acquisition of AB by
Sonova by more than three years, the liability still rests with Advanced Bionics
LLC, now a wholly-owned subsidiary of Sonova. Accordingly, this jury ruling
prompted Sonova to increase provisions for this matter by CHF198m to
CHF250m. Sonova subsequently appealed the jury verdict, which included both
punitive and compensatory damages. As jury verdicts are often watered down on
appeal, we think the company has a fair chance of seeing the $6.25m punitive
component significantly lowered.
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Is CHF250m enough? We think so
Just over 4,000 of the affected devices were implanted between 2003 and 2006 and
the issue was well known to Sonova at the time of the acquisition of AB in 2009,
the recall having been completed by that time. To date, around 1,400 devices have
been removed, and based on the current trends in failure rate (declining), the
company expects another 600-700 to ultimately fail. At issue has been that some
components assembled by one vendor (Astroseal, commonly referred to as Vendor
B) suffered from moisture ingress and subsequent failure. The vast majority of the
cases thus far have been settled under the terms of the product’s 10-year warranty,
and many of the remainder have been settled out of court, although the
aforementioned success of one plaintiff at a recent jury trial may give more
plaintiffs the confidence to seek compensation at jury trial, in our view. So having
initially made CHF52m of provisions, then more recently another CHF198m, the
obvious question is whether this CHF250m will be enough. In short, we think it
will broadly be sufficient, but only on the proviso that the jury damages awarded in
Kentucky are substantially reduced on appeal (we assume to around CHF4m per
case), and that future cases that go through the courts are resolved with total costs
along the same lines.
Further details underlying our assumptions are provided in the table below.
Estimated HiRes 90k product liability
Total implanted
Total expected failures
n=
4,000
2,000
Est. failures to date
Est. number failures resolved to date
Est. outstanding cases to date
Est. future expected failures
Total est. outstanding and expected failures
1,400
1,330
70
600
670
%
Net cost per case (CHFm)
Additional costs (CHFm)
0.0
0.3
0.4
0.4
0
21
252
273
Of Which:Est. outstanding failures
- expected to be resolved under warranty
- expected to be resolved out of court
- expected to resolved in court
Total est. outstanding failures
56
11
4
70
80%
15%
5%
100%
0.0
0.5
4.5
0.3
0
5
16
21
Est. expected failures
- expected to be resolved under warranty
- expected to be resolved out of court
- expected to resolved in court
Total est. expected failures
480
72
48
600
80%
12%
8%
100%
0
0.5
4.5
0.4
0
36
216
252
Total est. outstanding and expected
670
100%
0.4
273
As can be seen, we estimate the total liability to be around CHF273m, not
significantly more than the CHF250m which the company has provided for. Over
the expected timeframe of this situation (several years), the CHF23m differential is
neither here nor there, in our view, and one which could readily be buried by
expensing cases rather than drawing down the provision. We would, however,
make the caveat that this assumption is enormously sensitive both to the
percentage of patients seeking redress through the courts and to the size of the
eventual settlements. Each additional 1% of outstanding failures going through the
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courts and successfully receiving court-awarded damages would, on this analysis at
least, add CHF24 to the final bill. On costs, each additional CHF1m per case would
add CHF48m.
Even if provisions are enough, breakeven point is pushed out by at least
three years
Sonova initially paid CHF510m ($489m plus costs) for AB, and at the time of
acquisition set a goal of being accretive to earnings (before amortisation of
acquired intangibles) in the second year after closing, ie CY 2012. We now estimate
accretion in FY2014/2015 and a positive ROIC/WACC spread in FY 2016/17.
However, the November 2010 recall of the HiRes 90k meant that the cochlear
implant business did not generate any positive EBITA until FY 2012/13, and, even
then, a mere CHF1.8m. If we take the initial CHF510m cost and add on the
CHF60m in estimated cash losses related to the 2010 recall, and then the more
recent provision of CHF198m, then in aggregate the business “cost” some
CHF768m before it started to generate positive EBITA, ie some 51% more than
sticker price.
If we take this theoretical price and assume a cost of capital of 8%, then the
business needs to generate just over CHF60m in post tax earnings just to clear the
cost of capital. On a pre-tax basis this would, at Sonova’s very low 12-13% tax rate,
equate to CHF70m of pre-tax earnings. The business was just about at breakeven
at the EBITA level in FY 2012/13 on sales of CHF147m, so is clearly nowhere
near generating a positive ROIC/WACC spread at the moment. The obvious
question is, therefore, when will this happen? There are essentially two separate –
although not entirely disconnected – variables, the compound annual growth rate
in revenues and the margin achieved on those revenues. The faster the revenue
growth, the lower the margin needs to be at a certain point in time to reach
breakeven. The higher the margin, the lower the revenue growth rate needed.
The following two charts illustrate the point graphically – the first shows the
revenue CAGR needed to achieve breakeven, assuming a 25% EBITA margin in
the year in question. The second, and probably the more informative chart, shows
the margin needed to achieve breakeven in a particular year at a certain revenue
growth rate between FY12/13 and the year in question. What the charts both
show, in our view, is that breakeven on a ROIC/WACC spread basis is likely some
three years from now, at around the end of FY 2015/16 or early FY 2016/17 (i.e.
somewhere around Q1-Q2 in CY 2016).
Revenue CAGR needed at a 25% peak EBITA margin to break even
25%
20%
Positive
ROIC/WACC Spread
15%
10%
5%
Negative
ROIC/WACC Spread
0%
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Sonova Holding AG
Peak EBITA margin required at various sales CAGRs to break even
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Positive
ROIC/WACC Spread
Negative
ROIC/WACC Spread
5% CAGR
10% CAGR
15% CAGR
What the charts also illustrate, in our view, is that if either revenue growth falls
meaningfully short of a 10% CAGR or peak margins fall meaningfully short of
20%, the breakeven on a ROIC/WACC spread is unlikely much before the end of
this decade (and remember this analysis does not factor in the incremental capital
the business might require between now and whenever breakeven is reached).
Current management not at fault, and market unlikely to care
Having been through this analysis, it is also worth mentioning two other aspects of
this acquisition. Firstly, it was an acquisition conducted under the previous
management team and Chairman, so the current team is, to a degree, managing a
set of challenges that were not of its own creation.
Secondly, we think the market will likely overlook the fact that this deal is, in our
view, unlikely to yield a positive ROIC/WACC spread for at least another two to
three years, and will simply focus on the swing in earnings growth that this
acquisition can drive as Sonova’s cochlear implant business moves from barely
breakeven in FY 2012/2013 toward potential EBITA margins in the low-twenties
by 2016/17.
Liability and ROIC a concern, but market likely to focus on margins
In summary, we think the issue of further liability related to the 2006 recall of
certain HiRes 90k cochlear implants is unlikely to be a major share price driver,
positive or negative. Despite the initial hubris, we suspect this may be another one
of those concerns that, over time, moves from the forefront of investor thinking to
a section toward the back of the annual report. It does, however, remain an
overhang, in our view.
As for the acquisition of AB itself, despite our WACC/ROIC concerns, we believe
the market is more likely to focus on the earnings growth AB can contribute,
particularly as the swing in margins at AB is likely to be a key contributor to any
progress the company makes towards its goal of delivering a group-wide EBITA
margin in the mid-twenties by FY2016/17.
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Sonova Holding AG
Key share price driver No.5: Margin expansion
We discuss the outlook for Sonova’s margins and earnings more fully in the
Earnings Outlook section of this note. However, it is worth briefly mentioning this
aspect of the investment case at this point, as margin expansion is a key potential
driver of Sonova’s share price, in our view.
The company has set a target of returning EBITA margins to the mid twenties in
FY2016/17. Margins in 2012/13 were 21.5% (excluding CHF3.2m in Rixheim
closure costs, CHF2.6m in settlement costs related to a shareholder lawsuit and the
CHF197.8m provision related to the cochlear implant liability). Thus, to reach the
mid point of its goal, say 25% EBITA margins, Sonova needs to achieve 350bp of
margin expansion in the next four years.
Margin targets are achievable, but we are more cautious than others
Mid-twenties EBITA margins are not an impossible task, in our view. Margins were,
after all, in the high twenties as recently at 2008/9. On the other hand, the business mix
is now different, with more retail and cochlear implant sales, and the core wholesale
hearing aid market is more competitive. Our forecasts assume that Sonova achieves an
EBITA margin of 24.1% in FY2016/17 and 24.3% in FY2017/18, which would put
the company at the low end of its “mid twenties” target. Consensus estimates, by
contrast, are towing the company line, with the current implied Bloomberg consensus
EBITA margin for 2016/17 at around 25% (Bloomberg doesn’t collect EBITA, so this
is a hybrid estimate based on Bloomberg consensus EBIT and our estimate of the
amortisation of acquired intangibles).
Several drivers of margins
For a more detailed discussion of margin drivers, please see the Earnings Outlook
section of this note. As a brief summary here, we see the following as the key
potential drivers of Sonova’s margins in the next four years.

The Cochlear implant business. Sonova managed to reach breakeven in
FY2012/13, with EBITA of ~CHF1.8m on revenues of CHF147m. Over
the next four years, we expect it to lift the margins in its cochlear implant
business to 15%, providing CHF37m of incremental EBITA by FY2016/17.
On our FY2016/17 sales forecast of CHF2,269m, this represents 155bp of
margin expansion at the group level, or a decent chunk of the 260bp
expansion that we expect at the Group level.
Sonova does have the advantage of being able to leverage its hearing
instrument R&D platform, but is also somewhat smaller in scale than the
market leader cochlea, and is faced with a similar-sized competitor (Medel)
that appears to be using price aggressively. We therefore think a peak
EBITA margin in the mid twenties is a fair assumption

The retail operations. We see these as more of a potential driver at present.
It is hard to put figures on this business, as Sonova doesn’t disclose margins in
its retail activity. However, assuming that it has transfer prices similar to the
prices charged to other large chains, we think it would be fair to assume that
margins in retail are comparable to other large chains, ie something in the 1214% range at the operating level or mid teens on a EBITA basis. Sonova had
roughly CHF500m in retail sales in FY2012/13, so every 100bp of margin
expansion in retail adds just under 30bp to margins at the group level. While
unlikely to improve this year, as Sonova absorbs the costs of rebranding its
retail operations, we think there is some possibility thereafter of moderate
margin expansion in the retail chain – mainly as a result of efficiency gains
extracted by operating a more unified brand and implementing standard
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Sonova Holding AG
operating procedures across the bulk of the retail chain.

Wholesale margins. Here, we expect pressure. With 1) product cycles
shortening; 2) share gains getting incrementally harder to win, as onceweak competition such as GN, Siemens and, to a degree, Starkey get their
acts together; 3) geographic mix likely to provide a headwind; and 4)
pricing generally becoming more competitive, it is hard to see how margins
can expand meaningfully in this business. There are some positive drivers,
namely the natural operating leverage effect as well as Lyric exiting its
investment phase. However, with the bulk of manufacturing now done in
low-cost countries (Vietnam, mainly), we think manufacturing is about as
lean as it can get. R&D is a necessary expense that can’t be held back, and
the same is also true for selling expenses. We therefore think wholesale
margins will show only modest gains, partly because they are already very
good.

Currency. We cannot really say whether FX is going to be a help or a
hindrance, but it is a significant driver of margins. Sonova has considerable
CHF-denominated costs (HQ costs, other G&A costs, R&D and some
manufacturing), so is particularly geared to movements in the CHF,
especially against its main selling currencies of the USD and EUR. Indeed,
for 2013/14, a 5% move in the USD/CHF rate has a delta of
CHF38m/2% on sales and CHF11m/2.5% at the EBITA level. Put
another way a 5% move in the USD/CHF rate changes EBITA margins
by, around 12bp. The EUR/CHF effect is similar, but marginally less
severe.
Margin targets achievable, but in the price.
In conclusion, we think Sonova’s margin targets are readily achievable. However, for
reasons we discuss more fully in the Valuation section of this report, we think the
share price already factors in the upper end of the company’s “mid twenties” goal.
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Sonova Holding AG
Earnings outlook – steady growth
A summary of our earnings outlook for Sonova is given in the table below. Overall,
we expect solid mid single-digit revenue growth to be leveraged to low double-digit
pre-tax profit. At the bottom line, we expect a stable-to-slightly-rising tax rate
(mainly a geographic mix effect) to result in slightly lower post- versus pre-tax
earnings growth.
A summary is provided below, together with an explanation of the key assumptions
driving our forecasts.
More detailed financial tables are laid out at the back of this report.
Sonova profit and loss account (CHFm expect per share data)
CHFm
Revenue
Cost of sales
Gross Profit
R&D
Sales and marketing
General and admin
Other
EBITA
Adjusted EBITA
2011/12A
1,620
-514
1,106
2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E CAGR '13/14-'17/18
1,795
1,888
1,995
2,132
2,269
2,401
6.2%
-555
-574
-596
-633
-672
-708
1,240
1,314
1,398
1,499
1,597
1,693
6.5%
-116
-503
-169
-3
315
315
-114
-559
-181
-204
183
386
-119
-581
-191
0
423
423
-132
-606
-197
0
463
463
-145
-637
-209
0
507
507
-159
-672
-220
0
547
547
-170
-706
-233
0
584
584
8.4%
8.4%
Acquisition-related amortisation
Impairment
EBIT
-23
-5
288
-26
0
157
-29
0
394
-29
0
433
-30
0
477
-31
0
516
-32
0
552
8.8%
Financial income
Financial expenses
Associates
Profit before tax
7
-14
1
282
4
-13
2
150
3
-11
1
387
6
-11
1
430
7
-9
2
477
5
-2
3
522
7
-2
5
561
9.7%
Tax
Net profit
-35
246
-38
112
-49
338
-57
373
-66
412
-74
448
-83
478
9.1%
Minorities
Sonova net profit
Sonova adjusted net profit
0
247
254
-1
111
315
-3
335
335
-4
369
369
-4
408
408
-4
443
443
-5
473
473
9.1%
EPS
Diluted EPS
3.71
3.71
1.66
1.66
5.02
5.01
5.60
5.59
6.26
6.25
6.94
6.92
7.53
7.52
10.7%
10.7%
Adjusted EPS
3.79
4.72
5.02
5.60
6.26
6.94
7.53
10.7%
Note: Sonova’s fiscal year run April-March ie FY12/13 runs April 2012 to March 2013
Revenue expectations
We expect Sonova to generate revenues of CHF1,888m in FY2013/14E, increasing
to CHF2,401m by 2017/18E, a CAGR of 6% growth in the hearing aid business
and 11% growth in the cochlear implant franchise. Our key assumptions are as
follows.

6.9% CAGR in premium hearing aids. This is the category which we
expect to perform best over the next five years, driven by: 1) the Quest
platform in the short term; 2) Sonova’s new platform, which is due in late
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Sonova Holding AG
2014; and 3) the benefit of Lyric. In addition, this is the performance
category where we expect pricing pressure to be the least significant.
Therefore, our overall 6.9% estimate basically assumes slightly above
market volume growth (i.e. around c.6%), with flat to slightly positive
ASPs as the positive ASP effects of Lyric and new products offset wider
price pressure and adverse geographic mix caused by faster growth in
lower-priced markets. While we expect organic retail growth of 3-5% to
drag down the growth rate in this performance category, we also expect
acquisitions to lift the growth rate back toward 7% over the long term
(although, in practice, the acquired growth will likely prove lumpier).

6.1% CAGR in advanced hearing instruments. In this performance
category, we expect Sonova to continue to deliver at or above-market
growth in hearing aid volumes (ie c.6%). However, here we expect
continued modest declines in ASPs due to price pressure and the adverse
geographic mix effect to pull growth in hearing aids down to the 6% range.
While we expect organic retail growth to again be in the 3-4% range, we
also forecast a 2-3pp contribution from acquired retail to lift growth to
c6%.

4.6% CAGR in standard hearing instruments. Here, we expect a
CAGR of 4.6%, as, although we anticipate volume growth will remain
reasonable in the 2013E/14E-2017E/18E timeframe, we also expect price
pressure to be the most significant in this price category, taking c.6%
volume growth down to 5% value growth. Finally, on the retail side, we
expect no more than market growth (ie 2-3%) on an organic basis, but,
once again, we see retail acquisitions lifting the overall growth rate
somewhat.

Wireless communication system/miscellaneous. We expect these two
reporting lines to deliver 2013E/14-2017E/18E CAGRs of 6.2% and
4.7%, respectively. Wireless communication, at less than 4% of group
revenue, does not need significant discussion but consists of Roger
(Sonova’s school solution), TV studio equipment etc. Miscellaneous, at
14% of sales, is more significant (in fact, more significant than cochlear
implants), but consists of a variety of things such as batteries, warranties,
spare parts etc, making forecasting difficult.

Cochlear implants – 11.2% growth. We expect the cochlear implant
market to grow 10-15% in the next five years but anticipate that Sonova
will deliver growth at the low end of this forecast range, mainly due to
price competition from Med-El and an increasing presence in the market
from William Demant. Sonova’s cochlear implant business, as is the case
with Med-El, slightly falls between two stools. It is neither the big
incumbent (Cochlea), nor the disruptive newcomer (William Demant). We
do think Sonova has a competitive cochlea implant business, but, for this
reason, expect its growth to be at the lower end of the market – although
still at a very healthy double-digit rate.
Our overall revenue forecasts are summarised in the table below.
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Sonova Holding AG
Berenberg revenue expectations for Sonova
CHF3,000m
CHF2,500m
CHF2,000m
CHF1,500m
CHF1,000m
CHF500m
CHF00m
2008/09A 2009/10A 2010/11A 2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
Premium hearing instruments
Advanced hearing instruments
Standard hearing instruments
Wireless communication systems
Miscellaneous
Cochlear implants and accessories
The chart below illustrates the contribution to group revenue growth we expect
each reporting line to make. Premium hearing instruments account for a shade
under a quarter of the growth we expect (24%), advanced hearing instruments
23%, standard hearing instruments 19%, cochlear implants and accessories 20%,
with the remaining 14% coming from Miscellaneous (10%) and wireless (4%).
Berenberg 2012A/13A-2017E/2018E revenue bridge
CHF2,500m
CHF2,300m
CHF2,100m
CHF1,900m
CHF1,700m
CHF1,500m
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Sonova Holding AG
Margins – expect reasonable expansion
We do believe Sonova will make significant progress on improving margins, driven
mainly by the swing in margins in the cochlear implant business. This was barely at
breakeven in 2012/13A, but we anticipate EBITA margins of 24.3% by 2017/18E.
This, alone, counts for over half of the margin expansion factored into our
forecasts. Elsewhere, we expect efficiency gains and natural scale-based operating
leverage to be offset by continued price pressure and rising launch costs for new
products (both R&D pre-launch and sales and marketing costs post launch).
But we are more conservative than consensus
Our revenue estimates (detailed above) are not that dissimilar to Bloomberg
consensus. However, where we do differ slightly is on the margin front and, as the
table below illustrates, this is the main reason our EPS estimates are 4-6% below
consensus.
Berenberg versus Bloomberg consensus
CHFm (except per share data)
2013/14E
2014/15E
2015/16E
2016/17E
Berenberg
Revenues
EBITA
Margin %
EBIT
Net income
EPS (CHF)
1,888
423
22.4%
394
338
5.02
1,995
463
23.2%
433
373
5.60
2,132
507
23.8%
477
412
6.26
2,269
547
24.1%
516
448
6.94
Consensus
Revenues
EBITA
Margin %
EBIT
Net income
EPS (CHF)
1,935
437
22.6%
408
345
5.23
2,072
490
23.7%
461
390
5.90
2,219
541
24.4%
510
432
6.58
2,333
585
25.1%
554
468
7.34
Berenberg vs consensus
Revenues
EBITA
Margin %
EBIT
Net income
EPS (CHF)
-2.4%
-3.3%
-19 bps
-3.5%
-2.0%
-4.1%
-3.7%
-5.6%
-47 bps
-6.0%
-4.3%
-5.2%
-3.9%
-6.1%
-56 bps
-6.5%
-4.8%
-4.9%
-2.7%
-6.6%
-99 bps
-6.9%
-4.4%
-5.5%
The company has provided a medium term (ie 2017/2018) EBITA margin target in
the “mid twenties”, and we believe most analysts have simply based their estimates
on the mid point of the range implied by this guidance.
However, we are slightly more circumspect, and have EBITA margins rising from
21.5% in 2012A/2013A to 24.3% in 2017E/18E.
We do not precisely know the thinking behind consensus margins, but we have a
number of concerns that we think will restrain Sonova’s margins to the lower end
of its guidance range, as follows.

Pricing: We expect pricing to remain in the -2% to -3% range for the
foreseeable future, as we anticipate that: 1) ASP gains from new products
will become harder to achieve; 2) large, professional buyers will become an
increasing feature of the market; 3) manufacturers will increasingly use
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Sonova Holding AG
price to defend share; and 4) adverse geographical mix caused by faster
growth in lower-priced markets will continue to be a drag on margins. We
also expect pricing to become more competitive in the cochlear implant
market.
On the cochlear implant side, Med-El recently claimed to have sold 14,027
cochlear implants in the year to June 30 2013. This figure likely includes a
Chinese tender it didn’t have in 2012, so we estimate it sold around 1112,000 units in 2012 when it generated revenues of €176m. If we deduct
accessory sales, processor upgrades and middle ear implants, then we
estimate that Med-El made around €150m on cochlear implant sales in the
year to November 2012, which would imply an ASP of €13,000-13,600
($17,000-18,000) – at least 20% less than where most estimates put the
market ASP in 2012. We see this as a warning sign that pricing in cochlear
implants may be getting more competitive.

R&D efficiency/costs. As we discuss above, we expect returns on R&D
to gradually diminish over the next five years as technological innovation
runs into the law of diminishing returns (ie the easy steps are made first,
the harder, more costly steps then follow).

Short product cycles. As discussed in the industry section, there has been
a trend toward slightly shorter product cycles in the last 10 years. We don’t
expect this to reduce further to any great degree, but we do expect cycles
to remain short, potentially limiting margin expansion. Also, with at least
four manufacturers now seemingly back to a reasonable level of
performance (Sonova, GN, William Demant and Siemens) and Widex
under new management, we don’t see incremental share gains getting any
easier to capture in the coming years.

Retail. We expect retail to exert pressure on Sonova’s margins in both the
short and medium term. In the short term, the costs related to re-branding
stores under the Connect Hearing brand are, in our view, likely to weigh
on margins, especially in H1 2013E/14E. Longer-term, we think retail
margins will remain below hearing instrument margins, and continue to act
as a drag on overall margins.
Tax and interest – tax rate likely to creep up
Sonova’s interest expense calculations are fairly straightforward. Aside from
CHF242m of bank debt still outstanding as part of the acquisition financing of
Advanced Bionics, the company has little interest-bearing debt. We expect this debt
to be redeemed in full in FY2015/2016, with a commensurate drop in interest
expense from CHF13m in 2012A/13A to CHF2m in 2016E/17E. Our interest
income assumptions reflect the low interest rate environment persisting for another
two to three years.
Sonova currently has a relatively low tax rate. We expect it to be 12.8% in
2013E/14E – a reflection of the company’s Swiss domicile. However, in the
coming years, we think this tax rate will trend up toward the mid teens, mainly as
we expect Sonova to generate more profit in jurisdictions where it is more
challenging to repatriate profits – the US, in particular. That said, we still expect
Sonova’s tax rate to remain low by med tech standards.
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Sonova Holding AG
Cash flow and capital management
Sonova has a good record of cash generation, in our view, with FCF/Sales
averaging 17% over the last five years. There is relatively little of note in Sonova’s
operating cash flow from a non-cash perspective, with FCF/net income typically
somewhere between 70% and 100%.
At present, we estimate a 2013E/2014E FCF yield of 4.3%, and roughly the same
again the following year (a reflection of product cycles). Thereafter, we expect FCF
to grow at a 13% CAGR between 2013E/14E and 2017E/18E, slightly higher than
the 11% EPS CAGR we expect over the same timeframe.
Cash utilisation
Sonova has invested significantly in the past five years, but with a heavy skew to
acquisitions rather than internal investment. The company has returned cash to
shareholders through dividends and buybacks, but, arguably, its focus has been on
growth and not cash distributions.
Sonova’s acquisitive drive has resulted in a 51% of cash outlay used in transactions
in the last five years. The key focus of this spend has been on the Advanced
Bionics deal, which cost c$490m, and also the build-out of the retail business,
including the purchase of UK-based David Ormerod Hearing in 2012. Going
forward, we would expect the company to continue to build out its retail business,
although not to the extent seen in the past. With regards to acquisitions within the
hearing instrument space, Sonova’s market share means that any acquisitions are
likely to be opportunistic and bolt-on in nature.
Cash distribution to shareholders has accounted for 23% of outlays over the past
five years. This has been heavily skewed towards dividends, with some buybacks,
although this was mostly confined to 2008/09. Going forward, we would expect
dividends to be the primary method of cash distribution. Sonova has a stated
target dividend payment of c30% of net income after taxes in 2011/12, but this
was not reiterated for 2012/13, and Sonova now has a loose guidance to return
excess cash to shareholders but retain strategic flexibility.
We believe that Sonova’s cash requirements are sustainable, with capex at just 5%
of sales (2012/13) and generally somewhere between 20% and 30% of operating
cash flow. This has been fairly stable, and we see no reason for it to change.
We think the dividend policy is unlikely to be affected by any increase in cash
requirements elsewhere, as we forecast dividend cover of more than 2.5x in the
medium term.
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Sonova Holding AG
Use of cash (2008-2012)
Other
Buybacks CHF 68m
CHF87m
4%
4%
Capex
CHF 433m
22%
Dividends
CHF371m
19%
Acquistions
CHF1,013m
51%
Source: Berenberg, Sonova
Working capital requirement
Sonova has typically kept working capital as a percentage of sales to a relatively low
10% over the past 10 years. As it has generated a net margin, on average, of c17%
over the same period, and free cash has averaged 15% of sales, working capital
would not be a concern for us. Going forward, we would expect this to increase
somewhat. But Sonova’s track record reassures us that working capital will not
become an issue.
Sonova working capital
25%
20%
15%
10%
5%
0%
Working Capital as % sales
Net margin
FCF as % of sales
Source: Berenberg, Sonova
Debt sustainability
Sonova has tended to take a very conservative view towards its net debt position.
Over the past ten years, it has had an average net cash position of cCHF100m. We
think this looks like a relatively inefficient capital structure. On the other hand, it
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Sonova Holding AG
allows Sonova the scope to lever up and make significant acquisitions should an
opportunity present itself.
The company operates a defined contribution and also a defined benefit pension
plan, primarily in Switzerland. The current pension deficit stands at a small
CHF29m (2012-13). As such, the pension liability is not a concern for us.
Leverage ratios are, at this point, largely irrelevant for Sonova, with the company
running a net cash position. Based on the discipline shown in the past, we would
not anticipate the net debt position becoming an issue for investors.
Sonova net debt/EBITDA
0.4x
0.2x
0.0x
-0.2x
-0.4x
-0.6x
-0.8x
-1.0x
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Sonova Holding AG
Share price history
Sonova share price performance and commentary
200
Sonova - Share price history
Delayed profit warning after cochlear
implant products recalled due to "severe
pain". This leads to improper share sales
concerns which causes the share price to
collapse by over 20%
180
160
German Cartel Office opposes
Sonova's takeover of GN ReSound (12
April)
140
Broader equity market
sell off as credit-crunch
grips the market
120
CHF
Sonova receives FDA
approval to resume sales
of cochlear implants
(14/09/11)
Disappoinitng full-year
guidance leaves stock trading
flat
100
Strong double-digit growth
(+25%) leads to upgrade in
guidance, Sonova also moves
into the important cochlear
market buying Advanced
Bionics for c.CHF500m
80
60
40
20
0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
In March, Sonova CEO, CFO and
Chairman resign amid allegations of
improper share sales, although
Chairman Andy Rihs remains on the
board.
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Source: Berenberg estimates, Bloomberg, Sonova
Following the collapse of the acquisition of GN ReSound in 2007 Sonova, like the rest of the sector, was hit by the broader equity market sell-off even as it
posted strong double-digit earnings growth in 2007/08, slowing to 6.4% in 2008/09. A strong financial performance in 2009/10 helped the stock to
recover, while the purchase of Advanced Bionics in 2009 improved sentiment as investors warmed to Sonova’s entry into the high-growth Cochlear implant
market. Much like the previous year, 2010/11 was eventful for Sonova, but this time for all the wrong reasons. Due to two complaints of “severe pain”
from patients with Advanced Bionics’ HiRes 90k implant, Sonova was forced to recall the product again (it had already been recalled once by AB prior to its
acquisition by Sonova), leading to lost sales of as much as CHF90m. As a result, the company issued a profit warning in March 2011, which was followed by
controversy as it was revealed that the then Chairman and certain members of management had sold shareholdings prior to the warning. This, and the initial
profit warning, put severe pressure on the shares, and ultimately led to the resignation of the CEO, CFO and Chairman (although he remained on the
board). The stock only began to recover when Advanced Bionics was cleared by the FDA to resume sales, and when new management was brought in later
that year. Since then, the stock has been relatively flat, with a worse-than-expected full-year guidance issued for 2012/13 not helping matters.
76
Sonova Holding AG
Valuation and price target summary
The hearing aid stocks have historically been some of the most expensive in the
European medical technology universe, and, despite the pressures on the
industry, we think these multiples can be sustained for the winners in the space.
In Sonova’s case, we think sentiment will remain favourable in the near term as
investors anticipate (and Sonova delivers) growth in hearing instruments. We also
believe multiples will be sustained by the expectations for the margin expansion
that can be generated from the cochlear implant business and, in the longer term,
from the retail business.
As regards Sonova, we would summarise our thoughts on different valuation
approaches as follows.

Price/earnings: Sonova’s forward P/E multiple looks full, in our view,
largely as we think the market has already priced in the earnings growth
we and consensus expect in the next two to three years. We therefore
expect Sonova to grow into its multiple somewhat in the next 12-24
months, thereby limiting share price upside.

EV/EBITDA: We do not find EV/EBITDA a particularly useful
valuation methodology for Sonova, mainly as the company’s very low tax
rate skews EV/EBITDA comparisons between it and the other two
listed hearing aid manufacturers (GN Store Nord and William Demant).

Sum-of-the-parts. Sonova does not disclose profitability by business
line, so sum-of-the-parts analyses are impracticable. Besides, as the
businesses are so interlinked (even between retail and wholesale),
comparisons would be meaningless anyway. We therefore think sum-ofthe-parts has limited utility.

Dividend-based methods. Sonova is, for the foreseeable future, likely
to reinvest a substantial part of its cash flows into either debt pay-down
or acquisitions. This renders dividend-based approaches to valuation
almost useless. Besides, we do not believe income investors make up
anything but the minority of Sonova’s shareholder base.

Discounted cash flow. We base our valuation for Sonova on discounted
cash flow analysis, which yields a price target of CHF119. Despite the
limitations, we think DCF is the best way to value Sonova as it: 1) addresses
the longer-term margin expansion/cash flow growth of the company; these
are currently depressed due to investments in the retail operations and the
lack of profitability in the cochlea implant business; and 2) facilitates
comparisons between different listed hearing aid companies.
We therefore set a DCF-based target price of CH119 per share.
P/E – hearing aids are expensive, but have been for some time
Hearing aid stocks are not, by most metrics, cheap. Sonova has averaged a 12month forward PE of 18.4x over the last five years. However, this period
includes the somewhat depressed years around 2007/8. The forward PE over the
last three years has averaged 18.6x, and in the last 12 months has been just under
19x, as the following charts illustrate.
77
Sonova Holding AG
Sonova 12-month forward P/E ratio – last 12 months
21.0x
20.5x
20.0x
19.5x
19.0x
18.5x
18.0x
17.5x
17.0x
16.5x
16.0x
Sonova forward P/E
1 year average
Source: Bloomberg
Sonova 12-month forward P/E ratio – last three years
22.0x
21.0x
20.0x
19.0x
18.0x
17.0x
16.0x
15.0x
14.0x
13.0x
12.0x
3 year average
Sonova forward P/E
Source: Bloomberg
78
Sonova Holding AG
Sonova 12-month forward P/E ratio – last five years
24.0x
22.0x
20.0x
18.0x
16.0x
14.0x
12.0x
10.0x
8.0x
Sonova forward P/E
5 year average
Source: Bloomberg
Given that we expect just 10.7% earnings growth from 2013E/2014E to
2017E/2018E, we think the current multiple of 22.0x our 2013/14E EPS
estimate of CHF5.02 is likely to limit further upside.
If Sonova’s shares are to move higher from here, this will have to come from
earnings estimate upgrades, in our view, not from the multiple. As our estimates
are slightly below those of consensus (see Earnings Outlook section, above), we
do not expect such upgrades. We therefore see Sonova’s current multiple as likely
to limit further share price appreciation.
EV/EBITDA – looks equally expensive
We do not consider EV/EBITDA to be a particularly useful valuation
methodology due to Sonova’s very low tax rate. We present Sonova’s historical
EV/EBITDA trends here more for background than anything else. Suffice it to
say that, at a forward EV/EBITDA multiple of 13.1x, we don’t believe there is
much room for near-term multiple expansion.
Sonova 12-month forward EV/EBITDA – last three years
17.0x
16.0x
15.0x
14.0x
13.0x
12.0x
11.0x
10.0x
9.0x
Sonova EV/EBITDA
3 year average
Source: Bloomberg
79
Sonova Holding AG
Looks rich compared to the rest of med tech, too
The table below illustrates where Sonova sits on a relative basis, both versus the
two other hearing aid companies and the rest of our med tech coverage universe.
As can be seen, Sonova looks expensive on a relative basis.
Sonova peer group comparisons
Company
2013E
PE
2014E
GN Store Nord
Sonova
William Demant
Carl Zeiss
Celesio
Coloplast
Drägerwerk
FMC
Fresenius SE
Gerresheimer
Getinge
Grifols
Grifols B shares
Lifewatch
Nobel Biocare
Rhoen-Klinikum
Sartorius
Smith & Nephew
Sorin
Stada
Stratec
Straumann
Tecan
Sector weighted avg.
Hearing Aid weighted avg.
HA weighted avg. (ex-Sonova)
Sonova
Vs. Sector
Vs. Hearing Aid (ex-Sonova)
24.0x
22.0x
22.6x
19.7x
18.8x
24.4x
12.3x
17.4x
15.7x
16.5x
14.2x
23.8x
17.7x
31.9x
29.4x
23.6x
19.0x
15.7x
17.5x
13.3x
23.5x
21.8x
23.0x
18.5x
22.6x
23.2x
22.0x
19.0%
-5.2%
19.1x
19.7x
19.3x
18.8x
15.8x
21.5x
10.8x
16.8x
14.0x
14.2x
12.4x
19.4x
14.5x
17.0x
22.2x
38.5x
16.2x
14.0x
13.9x
11.0x
20.7x
19.0x
18.5x
16.7x
19.4x
19.2x
19.7x
17.8%
2.5%
2015E
EPS
EV/EBITDA
Growth
2013E
2014E
2015E '13-'17
16.7x
17.6x
16.7x
16.7x
13.8x
19.8x
9.4x
14.6x
12.4x
12.2x
10.7x
16.3x
12.1x
11.1x
15.2x
29.6x
14.0x
12.3x
11.4x
9.8x
18.0x
14.9x
14.3x
14.5x
17.1x
16.7x
17.6x
21.4%
5.5%
14.8x
14.7x
15.7x
9.4x
10.3x
15.3x
6.8x
10.8x
9.3x
7.3x
11.1x
13.3x
nm
11.8x
14.6x
11.6x
9.7x
9.3x
8.5x
9.0x
15.6x
16.5x
13.9x
11.2x
15.1x
15.3x
14.7x
31.8%
-4.0%
12.5x
13.1x
13.8x
8.7x
9.6x
14.1x
6.1x
10.6x
8.7x
6.6x
9.5x
11.3x
nm
8.6x
12.0x
29.9x
8.7x
8.3x
7.4x
7.9x
13.2x
13.6x
11.1x
10.7x
13.2x
13.3x
13.1x
22.6%
-1.6%
11.5x
11.8x
12.4x
7.9x
9.1x
13.1x
5.5x
9.5x
7.9x
6.0x
8.4x
10.1x
nm
6.2x
9.7x
23.0x
7.8x
7.4x
6.4x
7.4x
11.5x
11.1x
9.0x
9.5x
11.9x
12.1x
11.8x
23.5%
-2.5%
Discounted cash flow – our preferred methodology
Discounted cash flow analyses carry the obvious flaws of being enormously
susceptible to certain assumptions, particularly the equity risk premium and
terminal growth rates one chooses to use. However, in the case of the hearing aid
companies, we think DCF is the best valuation approach as we believe: 1) it
better captures the longer-term earnings growth for Sonova, which is somewhat
skewed by near-term factors; 2) it allows the capital requirements for acquired
growth implicit in our forecasts to be factored in; and 3) PE-based approaches in
general do not fairly represent the cash flow potential of Sonova. Our DCF is
therefore based on the following assumptions, aside from those represented in
our P&L and cash flow forecasts.
80
30.4%
10.7%
14.8%
8.9%
13.2%
9.3%
12.4%
12.6%
12.4%
13.3%
12.8%
17.0%
17.0%
42.1%
27.2%
-2.2%
15.4%
11.1%
18.5%
13.8%
16.4%
16.7%
18.6%
13.0%
16.3%
20.9%
10.7%
-2.3%
-10.2%
PEG
Ratio
0.8x
1.8x
1.3x
2.2x
1.4x
2.6x
1.0x
1.4x
1.3x
1.2x
1.1x
1.4x
1.0x
0.8x
1.1x
nm
1.2x
1.4x
0.9x
1.0x
1.4x
1.3x
1.2x
1.4x
1.4x
1.1x
1.8x
34.7%
66.9%
Sales
Growth
'13-'17
8.0%
6.2%
7.2%
6.6%
2.2%
5.8%
4.6%
7.6%
7.1%
5.4%
5.5%
7.8%
7.8%
8.2%
6.2%
nm
6.7%
5.0%
5.6%
6.6%
13.4%
9.2%
9.3%
6.5%
6.9%
7.5%
6.2%
-0.3%
-1.3%
Sonova Holding AG

8% EBITDA growth over the 10-year forecast period, although this
is somewhat front end loaded, with 10% growth in the first six years of
the forecast period and 5% growth in the last four.

30.2% terminal EBITDA margin. This is somewhat higher than the
25.8% we expect in 2013E/14E, but reflects our belief that Sonova is
likely to be one just one of a small number, perhaps two, max three,
companies with significant scale at the end of the forecast period.

8.4% cost of equity. This factors in a risk-free rate of 2.0%, a beta of
0.7x and a market risk premium of 8.75%.

3.9% net cost of debt. This is our assumed average debt cost over the
forecast period, taxed at the assumed tax rate over the corresponding
timeframe.

2.5% terminal growth rate. This reflects a mature market where
volume growth is offset by price pressure.
A summary of our discounted cash flow forecast and valuation is provided below.
Sonova discounted cash flow analysis
(CHF m)
2013/14E 2014/15E 2015/16E 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E
2
394
92
486
25.8%
3
433
113
546
27.4%
4
477
132
610
28.6%
5
516
154
670
29.5%
6
552
173
725
30.2%
7
585
195
780
30.8%
8
626
204
830
31.0%
9
671
195
865
30.7%
10
690
219
908
30.7%
11
711
229
940
30.2%
-139
-15
-20
313
-156
-61
-6
323
-166
-107
-41
294
-177
-46
-34
413
-187
0
-3
535
-197
0
-13
571
-203
0
-36
591
-213
0
-24
628
-224
0
-25
659
-236
0
-26
679
-12.8%
-40
3
276
-13.3%
-43
13
293
-13.8%
-40
23
277
-14.3%
-59
10
364
-14.8%
-79
0
456
-15.3%
-87
0
484
-15.8%
-93
0
498
-16.3%
-102
0
526
-16.8%
-110
0
549
-17.3%
-117
0
562
Discount factor
Discounted cash flow
100%
276
92%
271
85%
236
79%
287
73%
333
67%
326
62%
310
58%
303
53%
292
49%
276
Sum of NPV
Terminal Value
Enterprise value
Net debt
Equity Value
Minorities
S/O
Value per share (CHF)
2,633
4,951
7,584
-296
7,881
61
67
119
Operating profit
D&A
EBITDA
Margin
Capex & essential acquistions
Provision releases
Working capital
FCF
Tax rate
Taxes
Tax shield on provision releases
Post Tax FCF
10 year yield
beta
Market premium
Cost of equity
Net cost of debt
D/(D+E)
E/(D+E)
WACC
At our target price, Sonova would be trading at 21.3x our 2014E/2015E EPS
estimate. As we expect little more than 9.8% EPS growth, this might suggest that
Sonova is more than fully valued. However, if we roll the clock forward 12
months, the market will likely be looking at calendar 2015, or, in Sonova’s case,
FY 2015/16. At this point, assuming our target price is attained, Sonova will be at
81
2.0%
0.7x
8.75%
8.4%
3.9%
3.2%
96.8%
8.2%
Sonova Holding AG
a forward multiple of 19.1x. Although still fairly full, in our view, this is not
particularly high compared to the multiples that Sonova has enjoyed in the last
three years.
82
Sonova Holding AG
Financials
Revenue summary
Summary Sales (CHF m)
Total hearing instruments
- Premium hearing instruments
- Advanced hearing instruments
- Standard hearing instruments
- Wireless communication systems
- Miscellaneous
Cochlear implants & accessories
Total
Sales growth CER
- Miscellaneous
Total
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E CAGR '13/14-'17/18
1,524
1,648
1,712
1,795
1,908
2,022
2,133
5.6%
360
393
412
436
471
504
537
6.9%
376
435
452
470
502
538
573
6.1%
490
496
512
537
563
590
613
4.6%
65
64
67
72
77
82
86
6.2%
233
260
269
280
293
308
324
4.7%
96
147
176
200
224
247
269
11.2%
1,620
1,795
1,888
1,995
2,132
2,269
2,401
6.2%
606
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
9.4%
4.8%
5.5%
5.8%
6.3%
6.0%
5.4%
3.5%
4.8%
6.4%
7.0%
8.0%
7.0%
6.5%
10.4%
5.4%
5.4%
5.0%
7.0%
7.0%
6.5%
11.0%
3.6%
4.8%
5.8%
4.9%
4.9%
3.9%
-3.3%
-5.8%
7.0%
8.0%
7.0%
6.0%
5.0%
19.2%
9.6%
5.0%
5.0%
5.0%
5.0%
5.0%
53.5%
47.1%
21.4%
15.0%
12.0%
10.0%
9.0%
11.3%
7.3%
6.8%
6.7%
6.9%
6.4%
5.8%
Sales growth reported
- Miscellaneous
Total
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
-1.4%
8.2%
3.9%
4.8%
6.3%
6.0%
5.4%
-9.5%
9.2%
4.8%
6.0%
8.0%
7.0%
6.5%
-0.8%
15.7%
3.8%
4.0%
7.0%
7.0%
6.5%
1.9%
1.3%
3.2%
4.8%
4.9%
4.9%
3.9%
-13.3%
-1.5%
5.3%
7.0%
7.0%
6.0%
5.0%
9.4%
11.6%
3.4%
4.0%
5.0%
5.0%
5.0%
35.2%
53.1%
19.5%
13.9%
12.0%
10.0%
9.0%
0.2%
10.8%
5.2%
5.7%
6.9%
6.4%
5.8%
Sales split by product
- Miscellaneous
Total
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
94.1%
91.8%
90.7%
90.0%
89.5%
89.1%
88.8%
22.2%
21.9%
21.8%
21.9%
22.1%
22.2%
22.4%
23.2%
24.2%
23.9%
23.5%
23.6%
23.7%
23.8%
30.2%
27.6%
27.1%
26.9%
26.4%
26.0%
25.5%
4.0%
3.6%
3.6%
3.6%
3.6%
3.6%
3.6%
14.4%
14.5%
14.2%
14.0%
13.8%
13.6%
13.5%
5.9%
8.2%
9.3%
10.0%
10.5%
10.9%
11.2%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Sales split by geography
Switzerland
EMEA
USA
Americas
Asia-Pac
Total
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
2%
2%
1%
1%
1%
1%
1%
39%
38%
38%
38%
40%
40%
41%
36%
37%
37%
37%
36%
36%
35%
13%
12%
12%
12%
12%
12%
12%
10%
11%
11%
11%
11%
11%
11%
100%
100%
100%
100%
100%
100%
100%
Sales growth by geography (CER) 2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
Switzerland
-7%
-28%
-5%
3%
5%
5%
5%
EMEA
15%
7%
5%
7%
10%
9%
7%
USA
9%
7%
8%
6%
5%
5%
5%
Americas
4%
8%
7%
6%
5%
5%
5%
Asia-Pac
24%
18%
13%
10%
5%
5%
5%
Total
12%
7%
7%
7%
7%
6%
6%
83
Sonova Holding AG
P&L
CHFm
Revenue
Cost of sales
Gross Profit
R&D
Sales and marketing
General and admin
Other
EBITA
Adjusted EBITA
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E CAGR '13/14-'17/18
1,620
1,795
1,888
1,995
2,132
2,269
2,401
6.2%
-514
-555
-574
-596
-633
-672
-708
1,106
1,240
1,314
1,398
1,499
1,597
1,693
6.5%
-116
-503
-169
-3
315
315
-114
-559
-181
-204
183
386
-119
-581
-191
0
423
423
-132
-606
-197
0
463
463
-145
-637
-209
0
507
507
-159
-672
-220
0
547
547
-170
-706
-233
0
584
584
8.4%
8.4%
Acquisition-related amortisation
Impairment
EBIT
-23
-5
288
-26
0
157
-29
0
394
-29
0
433
-30
0
477
-31
0
516
-32
0
552
8.8%
Financial income
Financial expenses
Associates
Profit before tax
7
-14
1
282
4
-13
2
150
3
-11
1
387
6
-11
1
430
7
-9
2
477
5
-2
3
522
7
-2
5
561
9.7%
Tax
Net profit
-35
246
-38
112
-49
338
-57
373
-66
412
-74
448
-83
478
9.1%
Minorities
Sonova net profit
Sonova adjusted net profit
0
247
254
-1
111
315
-3
335
335
-4
369
369
-4
408
408
-4
443
443
-5
473
473
9.1%
EPS
Diluted EPS
3.71
3.71
1.66
1.66
5.02
5.01
5.60
5.59
6.26
6.25
6.94
6.92
7.53
7.52
10.7%
10.7%
Adjusted EPS
Adjusted Diluted EPS
3.79
3.78
4.72
4.71
5.02
5.01
5.60
5.59
6.26
6.25
6.94
6.92
7.53
7.52
10.7%
10.7%
Margin analysis
Cost of sales
Gross Profit
R&D
Sales and marketing
General and admin
EBITA
Adjusted EBITA
EBIT
Profit before tax
Tax
Minorities
Attributable Net profit
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
-31.7%
-30.9%
-30.4%
-29.9%
-29.7%
-29.6%
-29.5%
68.3%
69.1%
69.6%
70.1%
70.3%
70.4%
70.5%
7.2%
6.3%
6.3%
6.6%
6.8%
7.0%
7.1%
-31.1%
-31.1%
-30.8%
-30.4%
-29.9%
-29.6%
-29.4%
-10.4%
-10.1%
-10.1%
-9.9%
-9.8%
-9.7%
-9.7%
19.5%
10.2%
22.4%
23.2%
23.8%
24.1%
24.3%
19.5%
21.5%
22.4%
23.2%
23.8%
24.1%
24.3%
17.8%
8.7%
20.9%
21.7%
22.4%
22.7%
23.0%
17.4%
8.3%
20.5%
21.6%
22.4%
23.0%
23.4%
-12.6%
-25.2%
-12.8%
-13.3%
-13.8%
-14.3%
-14.8%
0.0%
-0.1%
-0.2%
-0.2%
-0.2%
-0.2%
-0.2%
15.2%
6.2%
17.7%
18.5%
19.1%
19.5%
19.7%
Growth analysis
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
Revenue
0.2%
10.8%
5.2%
5.7%
6.9%
6.4%
5.8%
Cost of sales
3.2%
8.0%
3.4%
3.9%
6.1%
6.1%
5.5%
Gross Profit
-1.1%
12.1%
5.9%
6.5%
7.2%
6.6%
6.0%
R&D
7.8%
-2.3%
4.7%
10.7%
10.1%
9.6%
7.3%
Sales and marketing
1.0%
11.0%
4.0%
4.3%
5.1%
5.4%
5.1%
General and admin
-8.9%
7.5%
5.2%
3.6%
5.8%
5.4%
5.8%
EBITA
-3.5%
-42.0%
131.2%
9.5%
9.6%
7.8%
6.7%
Adjusted EBITA
-3.5%
22.6%
9.4%
9.5%
9.6%
7.8%
6.7%
EBIT
6.2%
-45.5%
151.5%
10.0%
10.1%
8.1%
6.9%
Profit before tax
8.3%
-46.8%
158.6%
11.0%
11.0%
9.4%
7.4%
Attributable Net profit
6.8%
-55.1%
201.7%
10.4%
10.3%
8.8%
6.8%
Basic EPS
6.1%
-55.2%
201.7%
11.5%
11.9%
10.7%
8.6%
Basic Adjusted EPS
-6.2%
24.7%
6.4%
11.5%
11.9%
10.7%
8.6%
84
Sonova Holding AG
Balance Sheet
Balance Sheet (CHF m)
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
Cash and cash equivalents
Other current financial assets
Trade receivables
Current income tax receivables
Other receivables and prepaid expenses
Inventories
Total current assets
192
7
339
14
52
164
768
435
5
340
11
72
204
1,066
526
5
372
12
67
212
1,194
537
5
393
13
71
212
1,231
220
6
420
14
75
243
978
185
6
448
15
80
267
1,001
255
7
474
16
85
262
1,098
PP&E
Intangible assets
Investments in associates/JVs
Other non-current financial assets
Deferred tax assets
Total non-current assets
242
1,121
16
42
98
1,519
249
1,200
19
30
117
1,615
284
1,246
19
30
110
1,689
324
1,286
19
30
115
1,774
364
1,318
19
30
120
1,852
406
1,340
19
30
126
1,921
443
1,359
19
30
131
1,982
Total Assets
2,287
2,681
2,884
3,006
2,830
2,922
3,081
Short-term debt
Trade payables
Current income tax liabilities
Other current financial liabilities
Other short-term liabilities
Short-term provisions
Total current liabilities
0
70
73
16
177
92
428
7
75
57
0
206
106
451
0
76
61
0
215
109
461
0
80
65
0
225
112
481
0
84
69
0
235
114
503
0
90
74
0
245
117
526
0
95
78
0
256
120
550
Non-current financial liabilities
Long-term provisions
Other long-term liabilities
Deferred tax liabilities
Total non-current liabilities
242
79
34
29
384
242
257
50
46
594
230
242
50
47
569
230
180
50
49
510
0
73
50
51
174
0
27
50
53
130
0
27
50
55
133
Total Liabilities
811
1,046
1,030
991
677
656
682
Share Capital
Treasury shares
Retained earnings and other reserves
Equity, minority interests' share
Total Equity
3
3
1,468
2
1,476
3
9
1,594
28
1,635
3
6
1,812
32
1,853
3
-76
2,052
36
2,015
3
-207
2,317
40
2,153
3
-387
2,605
44
2,265
3
-566
2,913
49
2,399
Total Equity and Liabilities
2,287
2,681
2,884
3,006
2,830
2,922
3,081
85
Sonova Holding AG
Cash flow statement
Cash Flow Statement (CHF m)
Income before taxes
D&A and impairment
Loss/(gain) on sale of assets, net
Share of gain in associates/JVs
Increase in long-term provisions
Financial expenses, net
Unrealised exchange differences
Share-based payments
Other non-cash items
Cash flow excl. net working captial
2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E 2017/18E
282
150
387
430
477
522
561
78
82
92
113
132
154
173
0
0
0
0
0
0
0
-1
-2
0
0
0
0
0
1
197
-15
-61
-107
-46
0
7
9
0
0
0
0
0
-1
-8
0
0
0
0
0
20
16
17
18
19
20
21
1
-0
0
0
0
0
0
387
444
482
500
521
650
755
Increase in trade receivables
Decrease in other receivables/prepaid expenses
Decrease /(increase) in inventories
Increase/(decrease) in trade payables
(Decrease)/increase in other payables
Income taxes paid
Cash flow from operating activities
-30
1
3
5
-15
-47
305
8
-17
-31
2
32
-50
387
-33
5
-8
2
12
-37
422
-21
-4
-0
3
12
-57
434
-27
-5
-30
5
13
-66
411
-27
-5
-24
5
13
-74
538
-26
-5
5
5
14
-83
665
Purchase of tangible and intangible assets
Proceeds from asset sales
Cash consideration for acquisitions, net
Decrease/(increase) in other financial assets
Interest & realised gain from financial assets
Cash flow from investing activities
-81
2
-83
11
3
-148
-82
1
-56
11
2
-125
-104
0
-70
-0
0
-174
-120
0
-74
-0
0
-194
-128
0
-77
-0
0
-205
-136
0
-81
-0
0
-218
-144
0
-85
-0
0
-230
Decrease in borrowings
Proceeds from capital increases
(Purchase)/sale of treasury shares, net
Dividends paid
Changes in non-controlling interests
Interest paid and other financial expenses
Cash flow from financing activities
-41
5
-1
-80
-5
-7
-128
-1
54
-5
-80
15
-5
-22
-19
0
-20
-117
0
0
-156
0
0
-100
-129
0
0
-229
-230
0
-150
-143
0
0
-523
0
0
-200
-155
0
0
-355
0
0
-200
-166
0
0
-366
-2
27
2
243
0
91
0
11
0
-317
0
-35
0
70
165
192
192
435
435
526
526
537
537
220
220
185
185
255
FX
Cash flow for the year net
Cash and cash equivalents, start
Cash and cash equivalents, end
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Hearing Aid Industry analysis
Industry drivers – caution warranted
Our overall stance on the hearing industry is one of caution. We believe there is
likely to be sustained, albeit modest, volume growth, driven by favourable
demographics and improving penetration rates. However, we also believe greater
price pressure, increasing challenges in the retail channel, shortening product cycles
and resurgent competition from historically weak players are likely to present more
challenges in the coming years. These pressures are not unknown to either the
companies or their investors, and it is how each company responds to them that
will decide the winners and losers in the coming years, in our view. Despite the
challenging backdrop, we think William Demant will meet these challenges to a
greater degree than the share price currently reflects. Sonova, we believe, will fare
well, but we are also of the view that this outcome is largely reflected in the share
price. Hence we rate William Demant a Buy and Sonova a Hold.
Before looking at the specific dynamics of each company in turn, there are a
number of themes common to both that are worth discussing because they set the
framework on which individual companies can be assessed. These seven key
themes are as follows.
1. Demographics – an overplayed card
2. Penetration rates – slow and steady changes
3. Binaural fitting rates– two are better than one
4. Pricing – tough and getting tougher
5. Capital allocation – anything but wholesale
6. Short product cycles – R&D efficiency is key
7. 2.4 GHz – evolution, not revolution
Industry theme 1: Demographics – an overplayed card
The use of hearing devices dominates the management of age-related hearing loss,
so it is no surprise that increasingly aged Western populations are frequently cited
as a key driver of volumes in the hearing instrument industry. We would agree that
the demographic trends in most, if not all, Western markets are supportive of
continued volume growth. However, as a driver of overall market dynamics, and
especially of individual company performance, we think the demographic impact is
often overestimated.
The reason is simply one of timeframe. The age-structure of a population shifts
slowly, so that while over an extended period of time demographics can
meaningfully alter things, from one year to the next the impact can be much more
marginal. We present a more detailed analysis of the demographic factors driving
hearing instrument volumes in the hearing instrument industry section further on
in this note. However, we would pull out just one key table which we think
illustrates our point well. The table below shows the growth in the US population
forecast by the US Census Bureau. As can be seen, while the aggregate increase in
people in the key 65-84 year-old bracket between 2010 and 2025 is an impressive
sounding 63%, over the 15-year timeframe of this forecast that equates to a CAGR
of just 3.3%. Even in the fastest-growing age brackets of 70-74 and 75-79, the
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population is only forecast to expand at a CAGR of 3.8% and 3.6%, respectively.
US population changes 2010-2025
Age Group
Number of
people in
2010
(millions)
Number of
people in
2025
(millions)
Absolute
increase
(millions)
< 5 yrs
5 - 9 yrs
10 - 14 yrs
15 - 19 yrs
20 - 24 yrs
25 - 29 yrs
30 - 34 yrs
35 - 39 yrs
40 - 44 yrs
45 - 49 yrs
50 - 54 yrs
20.9
20.6
20.0
21.4
21.5
21.2
20.3
20.1
20.9
22.5
22.1
22.6
22.6
22.6
22.3
22.0
21.6
23.0
23.0
22.2
20.6
20.0
1.7
2.0
2.5
0.8
0.5
0.4
2.8
2.8
1.3
-1.9
-2.1
0.11
0.13
0.17
0.06
0.03
0.02
0.18
0.19
0.08
-0.13
-0.14
0.5%
0.6%
0.8%
0.3%
0.2%
0.1%
0.9%
0.9%
0.4%
-0.6%
-0.7%
55 - 59 yrs
60 - 64 yrs
65 - 69 yrs
70 - 74 yrs
75 - 79 yrs
80 - 84 yrs
19.4
16.7
12.2
9.2
7.3
5.7
20.2
21.0
19.6
16.1
12.4
7.6
0.7
4.3
7.4
7.0
5.2
1.9
0.05
0.29
0.50
0.47
0.34
0.13
0.2%
1.6%
3.2%
3.8%
3.6%
1.9%
85 - 89 yrs
90 - 94 yrs
95 - 99 yrs
> 100 yrs
3.7
1.6
0.5
0.1
4.3
2.0
0.7
0.2
0.6
0.5
0.3
0.1
0.04
0.03
0.02
0.01
1.0%
1.8%
3.3%
5.3%
307.9
346.7
38.8
2.58
0.8%
Total
Average
CAGR 2010increase p.a.
2025
(millions)
Source: US Census Bureau
Other markets also have supportive demographics
Aside from the US, the other key geographies for the hearing instrument industry
are the usual suspects – Germany, the UK, France, Switzerland and, by virtue of
very high penetration rates, the Nordic markets, Denmark in particular. Germany
and the UK certainly have favourable demographics that are very similar to the US
(Germany, in particular, has an even larger baby-boomer issue), but in all these
markets demographics are positive for the hearing instrument industry.
Demographics supportive, but little more
In conclusion, we think that demographics are supportive for the industry, but the
low single-digit volume growth demographic trends yield can easily be offset by
lower prices (more of which later) or, at the company level, very marginal share
loss.
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Industry theme 2: Penetration rates – slow and steady changes
The second major driver of hearing instrument volume growth cited by the
industry is penetration rates. Again, we present a more detailed discussion of
penetration rates in the industry section further on in this note but, as the chart
below illustrates, it is easy to make the argument that many hearing aid markets
remain substantially underpenetrated.
Penetration of hearing instruments into hearing loss populations
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Source: Company reports
We do not disagree that the number of potential users remains significant when
compared with the number of people currently using hearing aids. The bigger
question is what, if anything, is going to meaningfully change the current situation.
It does not take too much scratching below the surface to realise that the industry
faces an uphill struggle to improve penetration, in our view.
Public funding drives penetration up…
The chart above is perhaps somewhat misleading. A common theme uniting most
of those countries with higher penetration rates is the presence of a national
publicly-funded, or at least subsidised, system for the provision of hearing aids.
The UK has the National Health Service (NHS), the US has the Veterans
Administration (VA), and Denmark, Norway, the Netherlands, Germany and
Sweden all have widespread publicly funded programmes (either direct provision or
indirect reimbursement).
Low penetration itself is not reason enough to expect penetration to increase.
Either national programmes need to be introduced or, where they exist, expanded
before penetration increases. Such expansion seems extremely unlikely in the
current economic climate.
…and prices down
The quid pro quo of higher penetration driven by public funding is the effect on
price. The substantial volumes being bought by various national programmes, often
in highly competitive tenders, means that pricing is very low. The NHS, for
example, pays around £70 per hearing aid, although it does not buy the highest
performing devices. We estimate the prices paid by the VA in the US are not far
off the global average ASP of c$350, but, for the high-end devices it procures,
these are probably some of the lowest prices in the world, in our view. The
situation with Australian Hearing (a state-owned hearing-health company) is likely
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to be more akin to that of the VA than the NHS, but the message is the same: big
buyers have pricing power.
Economic balance needs to shift
The other aspect to hearing loss penetration relates to two interconnected factors,
in our view: penetration rates at various degrees of hearing loss; and the total
economic cost to the patient of acquiring then using a hearing aid – or, more
specifically, the perceived costs of doing so.
Penetration already high for those that care
The following chart illustrates the level to which the US hearing loss population is
penetrated, stratified by the degree of hearing loss suffered. Although it is US data,
we believe it to be representative of most developed markets.
Figure 1: Hearing aid penetration by degree of hearing loss
70%
60%
50%
40%
30%
20%
10%
52%
8%
76%
0%
Mild
Moderate
User
Severe/Profound
Non-user
Source: Sonova company reports
The key message from this chart is not that the penetration rate in the mild hearing
loss population is 8%, but that in the severe/profound hearing loss segment the
penetration rate is already high at 76%.
Total economic costs are the issue
We could have written this report 10 years ago and the chart above would not have
looked much different. So why have penetration rates not changed meaningfully in
the last 10 years in developed markets, despite the significant improvements in
hearing aid technology made by the industry over that timeframe? Simply put, we
believe it is because the total perceived economic costs of acquiring a hearing aid –
namely the perceived cash costs, time, hassle and discomfort associated with
wearing a hearing aid – are not, in the eye of the potential user, outweighed by the
benefit a hearing aid can bring. Until the industry can meaningful tip this equation,
we do not think penetration rates will change significantly. The industry has not
tipped the balance in the last 10 years, and we do not see how it will in the next 10.
Education is needed, but economics challenging
In our view, if the industry is to tip this balance, one of two things needs to
happen. Either the perceived benefits need to be improved significantly, or the
perceived costs need to be lowered.
The industry has strived to improve the user experience for hearing aids and has
had considerable success, in our view. However, the industry is always going to be
faced with the challenge presented by the fact that hearing aids do nothing to
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improve auditory function, and there is only ever going to be so much they can do
with a semi-functional auditory apparatus.
As for the perceived costs, the financial side is coming down as manufacturers pack
more and more functionality into their hearing aids for the same price point, or
drop the price points of what was once the premium technology. However,
addressing the non-financial economic costs of hearing aid usage is a matter of
education, in our view. Manufacturers and retailers need to educate patients on the
benefits of hearing aids and dispel some of the myths around their discomfort and
lack of benefit. The problem with this approach is how to do it economically.
Patient education is typically a long-term, low-return investment, and without the
margin to play with at the moment, few manufacturers appear willing to make
these investments at the scale needed to tip the balance, particularly as every dollar
spent is equally likely to benefit the competition as it is the company spending it.
Expect current trends to continue
The chart below illustrates the fall and rise in hearing aid penetration witnessed in
the US over the last 30 or so years. As can be seen, penetration rates in the last 8
years have risen by a mere 250bp. On a static population this would have yielded a
volume CAGR of just 1.3%.
Hearing aid penetrations in the US 1984 to 2012
30%
25%
23.8%
22.9%
22.6%
21.3%
20.4%
1994
1997
22.2%
23.5%
24.6%
26.0%
20%
15%
10%
5%
0%
1984
1989
1991
2000
2004
Source: MarkeTrak VIII
We therefore see penetration rates in developed markets as a relatively minor
contributor to volume growth.
Emerging markets offer better penetration rate prospects
Putting developed markets to one side, the penetration arguments hold much more
sway for the industry in developing markets. Here, hearing aid use, even in the
severe/profound population, remains low; with rising affluence, we are confident
penetration rates will increase.
However, a number of these markets are characterised by local companies selling
relatively low-quality products, albeit at extremely attractive prices – we have seen a
basic digital hearing aid on sale for less than $10! The issue, then, is how fast users
in these markets will move up the price/quality spectrum. Hard data is very
difficult to come by for these markets (based on our discussions with component
suppliers we suspect penetration rates are higher than the major global
manufacturers would care to admit), but it makes intuitive sense to think that as
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these economies develop, consumption of higher-priced Western hearing aids will
increase.
However, as the chart below illustrates, emerging markets currently contribute a
relatively small percentage of global volume growth – we estimate well under 20%.
Therefore, coming from a relatively low base, we think rising penetration in
emerging markets is likely to contribute little more than 100-150bp of top-line
growth to the aggregate sales of the big six manufacturers in the short to medium
term. They may contribute more to overall unit growth, but a decent percentage of
this incremental growth is, in our view, likely to fall to very low-priced products
outside the scope of the major manufacturers.
Global hearing aid market – unit distribution by geography
South America,
0.75m, 7%
North America,
3.1m, 29%
Oceania, 0.4m, 4%
Asia, 1.8m, 17%
Eastern Europe,
0.75m, 7%
Africa, 0.2m, 2%
Western Europe,
3.7m, 34%
Source: Company data
Industry theme 3: Binaural rates– two are better than one
The final factor affecting the volume growth outlook for the industry is binaural
fitting rates – that is, fitting one hearing aid per ear. This is often cited as factor that
will drive volume growth in the coming years, and we do not disagree. The benefits
of binaural fitting run further than just being able to hear on both sides. Factors
such as loudness summation (a neural effect that allows the brain to sum up inputs
from both ears, meaning lower amplification is needed), sound localisation,
elimination of head shadow, masking-level difference (a phenomenon that allows
the ears to distinguish between two simultaneous sounds with different phasing
and thus improve speech-in-noise intelligibility) all come into play.
However, much like the demographics angle, it is a widely appreciated and well
understood dynamic and one where we think current market expectations are
unlikely to be exceeded. Overall, we think the shift from monaural to binaural
fitting is likely to be only a moderate driver of volumes.
Binaural rates high in some markets
One issue we have with the question of binaural fitting rates as a driver of overall
market growth it that, in certain markets, Denmark and the US in particular,
penetration is already very high. The following chart illustrates the current situation
in the US and, as can clearly be seen, binaural fitting rates are already very high. We
doubt very much if further increases in binaural fitting rates will contribute
meaningfully to volume growth in the US.
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Binaural fitting rates in the US
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1984
1989
1991
1994
All purchasers
1997
2000
Those with bilateral hearing loss
Source: MarkeTrak VIII
Situation variable in other markets
While binaural fitting rates are already high in the US, the situation in other markets
around the world is highly variable. Australia has binaural rates of around 80%.
Binaural fitting rates across Europe average around 50% for all users and nearer
65% for those requiring binaural aids. However, this hides the fact that in some
countries, such as Spain and the UK, binaural fitting rates are quite low (we
estimate less than 25%) while in other markets, notably Denmark, binaural fitting
rates are very high. Japan, for some reason, has binaural fitting rates as low as 2030%.
Given the high binaural fitting rates seen in some markets, there is every reason to
believe that rates can be driven up in other markets too. We therefore see this as a
reasonable contributor to global volume growth in coming years. What takes the
edge off matters, however, is the issue of price/cost. Purchasing two hearing aids
frequently costs twice as much as buying one, although some retailers offer
discounts for purchasing two at once. For markets such as the UK, where
resources are constrained and waiting lists occasionally lengthy, we do not expect a
dramatic increase in binaural rates. However, in other markets there is more hope.
But again, if we use the US an example, increasing binaural fitting rates can take a
long time. We therefore expect an increase in binaural fittings to add another
percentage point or so to industry growth rates but no more.
All adds up to steady 4-5% volume growth
The three key drivers of favourable demographics, increased penetration and
higher binaural fitting rates all, in our view, point to steady 4-5% global volume
growth for the industry. There is, however, risk to the upside if the hearing aid
industry can meaningfully shift the current trends in penetration rates in the mildto-moderate hearing loss population or significantly increase binaural penetration
rates. Thus, as the chart below shows, we expect global hearing aid volume growth
to be slightly faster in the coming seven to eight years than it has been in the
preceding seven years.
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Global hearing aid unit volume growth
16m
2012-2020 CAGR
4.5%
14m
2006-2012 CAGR
4.4%
12m
10m
8m
6m
4m
2m
0m
2006A
2007A
2008A
2009A
2010A
2011A
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2012A
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
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Industry theme 4: Pricing – tough and getting tougher
Unfortunately there is little truly reliable data on pricing trends in the wholesale
hearing instrument market, leaving analysts and investors to piece together the
various anecdotal comments made by manufacturers in order to develop a sense of
the wider market dynamics. In the early part of the 2000s pricing was generally
favourable because the mix effect of the switch from analogue to digital devices
drove reasonable ASP increases. By 2003/4 this effect had begun to moderate and
pricing remained stable in the +1-2% range for several years. Then in 2008 pricing
turned negative as the financial crisis coincided with an increase in competition in
the hearing aid markets as unit growth slowed to 2-3% and manufacturers used
price more aggressively to drive the levels of growth investors had come to expect.
Pricing, as the chart below shows, has yet to return to positive levels, and we
estimate the global average wholesale ASP across all manufacturers is around $370
per unit.
Global average wholesale hearing aid ASP trends
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
H1 2013
In addition to the financial crisis, the following factors have also been implicated in
the decline of wholesale selling prices for hearing aids.

Greater purchasing power of large buying groups. The larger retail
chains, both the independent ones such as Amplifon and Audika and the
wholesaler-owned ones, have steadily been getting larger in recent years. As
they grew in size and scale, their purchasing power increased. As the larger
retailers continue to expand, the wholesalers continue to acquire and
independents continue to consolidate; we do not see this pressure easing off.

Greater competition among wholesalers for share. Share is the name of
the game in hearing aids and for several years it was easy for some
manufacturers to take share. GN ReSound was, for a period in the middle of
the last decade, an easy target, and Siemens has progressively lost share for
most of the last 10 years. However, more recently, GN has got its act
together, launching the Verso range to much acclaim and generally getting its
marketing right. There have even been signs lately that Siemens is becoming
more competitive. With the industry back to being at least a four-horse race
(rather than two), pricing has commensurately come under pressure.

Technology convergence. As technology has advanced, in our view, the
technology gap between manufacturers has narrowed. Consequently, we
believe pricing dynamics at the premium end of the market have shifted
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somewhat. Whereas new products once drove ASP increases, we now think
they confer little more than price stability. Evidence comes from the new
Alta range from Oticon (William Demant) which, despite being launched at a
0-5% price premium, after discounts the company does not expect to see any
ASP uplift. Nothing in the current raft of new product platforms gives us any
cause to believe that this dynamic is likely to change radically in the near
term, and certainly not before we hit the next launch cycle, which is likely to
be in late 2014 and 2015.

Changes to subsidy schemes. A number of countries have altered their
subsidy schemes in the last two to three years, most notably Switzerland,
Denmark, the Netherlands and Norway (although the latter has merely
changed to consignment stocking rather than changed reimbursement per
se). This has had a knock-on effect on both volumes and pricing in these
markets. Although the impact of these changes will, more or less, annualise
out by the end of 2013, this knock-on effect has happened in these markets,
so we think it would be reasonable to expect similar dynamics in at least a
small number of other markets in the coming years. However, in the very
short term, we expect a hiatus in price pressure from such changes.

Geographic mix shift. This is mainly a reflection of the faster unit growth
in lower-priced emerging markets. At a more company-specific level,
however, a greater share of some of the lower priced tenders, such as those
invited in the UK by the NHS, can drag overall pricing down. We do not
expect this dynamic to ameliorate any time soon.
Pricing down ~3% and we expect it to stay that way
During the second quarter of 2013 we believe pricing was, on average, down by
about 3% across the industry. While negative, this is no great disaster, and the fact
that it is not an awful lot worse, given the aforementioned dynamics, does give us
some confidence that the reasonably consolidated nature of the wholesale hearing
aid market is lending itself toward a degree of price stability.
We would not go so far as to say that the hearing aid industry is an effective
oligopoly, but we are of the view that the fact that approximately 65% of global
volume is controlled by just three companies does take the edge off what could
otherwise be aggressive price competition.
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Industry theme 5: Capital allocation – anything but wholesale
Both William Demant and Sonova are highly cash-generative businesses (GN is
less so, but mainly because it has had lower margins in recent years), and we think
the decisions on where to invest that cash are somewhat indicative of the state of
the wholesale hearing aid market, or least its capital requirements.
No manufacturers left to buy
Aside from the acquisition of Otix Global by William Demant for DKK806m
(c$145m) in 2010, recent acquisition activity has focused on pretty much anything
but hearing aid manufacturers. In the main, this is because there are no noteworthy
brands left to buy. The two smaller players, Widex and Starkey, are both privately
owned and unlikely to be for sale, in our view. It is no secret that Siemens’ hearing
aid business has been for sale in the past, but our understanding is that while there
were willing bidders, none met Siemens’ price expectations. GN was once for sale
– indeed Sonova tried to acquire its ReSound subsidiary for DKK15.5bn (c$2.6bn)
in 2006, but was blocked by the anti-trust authorities in Germany.
So acquisition capital has flowed elsewhere
Sonova and William Demant have maintained a healthy level of R&D and SG&A
investment over the last five years, but both have simultaneously sustained
reasonable levels of free cash flow. However, that FCF is finding its way into pretty
much anything but the wholesale hearing aid business. Both companies continue to
acquire retail outlets, adding anything from 1-5% to the underlying organic growth
in any given year on average. Both companies have also acquired cochlear implant
businesses in the last four years – Sonova was first, with its acquisition of
Advanced Bionics in January 2010 for $489m, and William Demant recently
followed suit with the acquisition of the much smaller Neurelec in April 2013 for
€58m. In addition, William Demant has acquired a number of diagnostics brands in
recent years and, of course, Sonova acquired InSound Medical in 2010 for $75m
(plus earn-outs) to gain access to Lyric (an externally invisible hearing aid).
Acquisitions have accounted for half Sonova’s cash outflows in last five years
Indeed, in the last five years Sonova has invested just over CHF1bn (CHF1,013m,
to be precise) in acquisitions. This is equivalent to 78% of the FCF the company
has generated in that time. By contrast, it has returned the equivalent of just 28%
of the cumulative FCF to shareholders in dividends (the differential being made up
by incurring debt).
Sonova sources of cash over – last five years
Operating
cash flow
CHF1,746m
83%
Debt,
CHF214m
10%
Capital
increases,
CHF134m
6%
Sonova uses of cash over – last five years
Other
Buybacks CHF 68m
CHF87m
4%
4%
Dividends
CHF371m
19%
Other
CHF16m
1%
William Demant’s capital deployment has been more balanced
William Demant, on the other hand, has had a slightly more balanced allocation of
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Capex
CHF 433m
22%
Acquistions
CHF1,013m
51%
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capital between capex and acquisitions, but has still spent the equivalent of nearly
40% of it cumulative operating cash flow on the latter. Both companies have
returned a similar percentage of their operating cash flows to shareholders as either
buybacks (William Demant) or a mixture of buybacks and dividends (Sonova).
William Demant sources of cash - last 5 years
Debt
DKK 350m,
6%
Operating
cash flow
DKK 5,256m,
87%
William Demant uses of cash - last 5 years
Other
DKK 1,010m,
17%
Buybacks
DKK 1,226m,
21%
Other
DKK 409m,
7%
Capex
DKK 1,400m,
23%
Aqusitions
DKK 2,316m,
39%
The picture at GN Store Nord is slightly more confusing
Although this report focuses on Sonova and William Demant, we include a brief
discussion of GN Store Nord’s cash flow as we think it puts the other companies
in context. However, comparisons are somewhat difficult. Firstly, GN capitalises
significantly more R&D than either William Demant or Sonova, and although it
also amortises capitalised R&D, in order to make fairer comparisons we have
normalised operating cash flow for this effect. At present, GN’s capitalised R&D
broadly equals the amortisation that is expensed through the P&L, although it
hasn’t always been as balanced. Secondly, GN received a DKK3bn payment in
2012 related to a long-standing legal dispute with a Polish telecoms operator
(TPSA) which was included in the reported operating cash flow figures. Again, we
have normalised operating cash flow for this effect, as well as adjusted both the
buyback (to zero) and debt pay-down figures – again for ease of comparison with
Sonova and William Demant. As the charts below show, GN has allocated far less
capital to acquisitions, instead allocating the majority of what operating cash flow it
has generated into debt pay-down and capex.
GN sources of cash - last five years (ex TPSA
cash)
Disposals
DKK 267m,
11%
GN uses of cash - last five years (ex TPSA cash)
Acquisitions
DKK 185m,
8%
Others,
DKK 195m,
8%
Debt
paydown,
DKK 1,308m,
53%
Operating
cash flow
DKK 2,001m,
81%
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Other
DKK 199m,
11%
Capex
DKK 742m,
40%
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GN sources of cash -last five years (inc. TPSA
cash)
Capex
DKK 742m,
15%
Operating
cash flow,
41%
Others
DKK 195m,
4%
GN uses of cash - last five years (inc. TPSA cash)
Net TPSA
proceeds (est.)
DKK 2,464m,
50%
Dividends
Buybacks,
DKK 2,492m,
51%
Debt
paydown,
DKK 1,308m,
26%
Acquisitions
Other
DKK 185m,
DKK 199m,
4%
11%
Disposals,
DKK 267m,
5%
In fairness to all three companies, there are limited opportunities to deploy capital
in the hearing aid business outside of normal operations as the market is now
consolidated. The point we are making is that both William Demant and Sonova
are choosing to allocate capital to areas allied to the wholesale manufacturer of
hearing aids, which has two implications from an investment perspective. Firstly, it
suggests that capital is not a significant competitive advantage in the hearing aid
manufacturing industry; if it were, we believe companies would deploy more.
Secondly, the effectiveness of this capital deployment into allied areas is a key
differentiating feature between hearing instrument manufacturers.
Conclusion: William Demant stands out
This analysis is all very well, but the bigger question is what does it mean for the
companies and their share prices going forward? We draw the following
conclusions.

Both Sonova and William Demant generate moderate levels of free cash
flow (FCF yields in 2012 were around the 4% mark).

GN Store Nord’s free cash flow, once normalised for capitalised R&D and
the TPSA proceeds, is relatively poor (just over 2% yield in 2012).

Both Sonova and William Demant have deployed a significant percentage
of their operating cash flows into either capex or acquisitions.

GN has not generated enough cash to be a meaningful acquirer of assets,
mainly due to historically having lower margins than its competitors.

Thus far, William Demant has the better track record of M&A.
The latter point we discuss in more detail in the individual company sections later
on in this report. Suffice it to say, at this point, that this view, and it is admittedly
our subjective opinion, is largely based on: 1) the success, or lack thereof, of the
Advanced Bionics acquisition, which has accounted for roughly half of Sonova’s
acquisition spend in the last five years; and 2) the relative success of the retail
purchases the three companies have made. GN shied away from pursuing an
aggressive retail strategy, while Sonova’s is requiring a somewhat costly rebrand to
achieve the performance levels the company’s management desires.
Thus, on the question of the effectiveness of capital deployment, on the evidence
of the last five years, we think William Demant has performed the best. We would
caveat this statement with the observation that GN has not really been in a position
to deploy capital, so it is perhaps unfair to judge it on this metric. For Sonova, it is
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also worth noting that a reasonable percentage of the acquisition spend in the last
five years was the work of the previous management team. However, that said, the
respective companies’ track records are what they are, and we stick to our view that
William Demant is more likely to be the more prudent spender of its shareholders’
money in the coming years.
Industry theme 6: Short product cycles – R&D efficiency is key
The last industry theme worthy of mention that is applicable across all three listed
hearing aid companies is the question of length of product cycles and, more
importantly, the costs of bringing each new wave of products to market. In
summary, we think product cycles have seen a gradual shortening over the last 10
years, from two to three years to nearer two, but development costs continue to
rise as each incremental advance becomes more challenging to deliver, and,
consequently, R&D returns come under pressure.
For instance, if we take Sonova, the Palio platform was launched in FY2004/5. It
was then another two to three years before this was superseded by the Core
platform, and another two to three years before the Spice platform was launched.
However, this was followed 18 months later in mid FY11/12 by Spice+, and a year
later, in mid FY12/13, by the launch of the Quest platform – although, as Quest
uses the same chipset as Spice, one could argue that it was not a truly novel
platform. At present, the next platform is due towards the end of CY 2014 in mid
FY14/15, which will be two years after Quest.
So for Sonova at least, the interval between platform launches has dropped from
two to three years in the middle of the last decade to around two years today. The
situation for other manufacturers is generally similar.
However, R&D spending has not declined in absolute terms in any meaningful way
for any of the three listed manufacturers.
Two-year life cycle for new products
Hearing aid companies often put up slides showing the percentage of sales
generated from products launched in the last one and two years as supporting
evidence for their innovation power, with the figures usually around 60% for
recently-launched products and 80% for those products launched in the last two
years. However, we have a slightly different take on this dynamic – what it
essentially means, in our view, is that after two years a product is as good as
obsolete.
The shortening of product cycles is one of the reasons we believe returns have
declined in recent years (price is probably the other key factor), as borne out in the
chart below (we have included GN for completeness, but this is more of a recovery
story, so its ROIC dynamics are somewhat different).
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Post tax return on invested capital*
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
2002
2003
2004
2005
2006
William Demant
2007
Sonova
2008
2009
2010
2011
2012
GN Store Nord
Source: Company Reports, Berenberg calculations
*Note: ROIC calculations exclude significant one-off items
R&D returns need to increase
If the hearing industry is to improve its ROIC trends, we think returns on R&D
need to improve. As technology advances, progress has become more incremental
(witness the modest step forward Sonova made with its Quest platform versus
Spice), but we don’t think development costs have moderated. Our issue is that it is
hard to see how this can happen. Leveraging R&D across several brands is perhaps
one way of improving the return on every R&D dollar spent, as it is leveraging
R&D into allied product areas such as cochlear implants. So it is no surprise that
both William Demant and Sonova have bought into the cochlear implant market in
the last three years. Other routes to improving R&D efficiency are more plain
vanilla.
R&D spending patterns variable
The following three charts illustrate the trends in R&D spending for GN, William
Demant and Sonova over the last 10 years. GN’s is somewhat difficult to interpret,
as sales suffered significantly in the 2005-2009 timeframe, although R&D was
maintained; for William Demant and Sonova the charts are skewed by the growth
in their retail business.
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Sonova R&D trends
CHF160m
12%
CHF140m
10%
CHF120m
8%
CHF100m
CHF80m
6%
CHF60m
4%
CHF40m
2%
CHF20m
CHF0m
0%
R&D
% sales
William Demant R&D trends
DKK700m
12%
DKK600m
10%
DKK500m
8%
DKK400m
6%
DKK300m
4%
DKK200m
2%
DKK100m
DKK0m
0%
2002
2003
2004
2005
2006 2007
R&D
2008 2009
% sales
2010
2011
2012
GN Store Nord R&D trends
DKK700m
12.0%
DKK600m
10.0%
DKK500m
8.0%
DKK400m
6.0%
DKK300m
4.0%
DKK200m
2.0%
DKK100m
DKK0m
0.0%
2002
2003
2004
2005
2006
2007
R&D (cash)
102
2008
% sales
2009
2010
2011
2012
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The above charts detail cash R&D costs, not those expensed in the P&L. This is a
better way to compare the companies, in our view, due to differences in R&D
capitalisation. GN capitalises the most, Sonova some and William Demant none –
although both GN and Sonova also amortise development costs and provide a
clear breakdown in their financial reports. We are not being critical of anyone’s
accounting policies, merely drawing attention to the fact that cash R&D costs are a
better measure for making comparisons than expensed R&D, especially over
extended periods. For GN, expensed versus incurred R&D costs are currently
broadly similar, although it hasn’t always been so. Sonova is currently the other way
round, with incurred development costs now higher than expensed costs, whereas
before 2010 the two figures were similar.
We think the above charts illustrate a number of differences between the
companies as regards their R&D philosophies.

Firstly, William Demant is by far the most consistent investor in R&D,
with R&D spend increasing every year. It has also generated a
reasonable return as it has gained share in hearing aids over the last 10
years.

Secondly, GN’s R&D spend has been somewhat more volatile. We
suspect the volatility in GN’s R&D spending is a reflection of the
transition the company has been through. However, as a company that
targeted margin expansion, we wonder how much R&D, as an
essentially elective cost, was used as a source of profit growth and/or
source of cash flow – both of which have, in our view, been in short
supply at GN in recent years.

Thirdly, Sonova has historically spent the lowest percentage of sales in
R&D at 6-8% versus its peers, at 8-10%. In part, we think this is a
reflection of Sonova’s relatively larger retail presence, but it is also
reflective of a more efficient R&D set-up, as, despite spending less as a
percentage of sales, Sonova’s products remain highly competitive, and
it has steadily gained share in the last 10 years.
Conclusion – two safe pairs of hands and one wild card
The conclusion we draw from these analyses is that both William Demant and
Sonova are truly R&D-driven businesses, and generally maintain R&D spending,
even if this results in short-term pressure on margins and cash flows. Both
companies also appear to get reasonable value for money from their R&D efforts,
as reflected in steady share gains over the last decade.
On the other hand while we believe GN understands the importance of R&D, it
has perhaps adopted a more episodic approach, with a spurt in spending in the
2006-2008 timeframe. We think this was a catch-up effect from a period of relative
underspend in 2002-2006 when R&D/sales were <6%, followed by a return to
what is perhaps a more sustainable level of spending.
What does this mean from an investment perspective? Our view is that we would
expect Sonova and William Demant to continue to deliver a steady stream of
products to the market, whereas GN runs the risk of delivering new product more
episodically, with commensurate volatility in its market share.
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Industry theme 7: 2.4 GHz – evolution, not revolution
2.4GHz is a widely-used frequency band for cordless phones, video games consoles
and other everyday items, and is the frequency at which Bluetooth® operates. We
think its use in hearing aids is an evolutionary step, as it has the potential to
connect more easily with these devices than other bands. However, we don’t see it
as revolutionary. GN ReSound developed the first 2.4GHz hearing aid in 2010 and
has built on this since, the latest incarnation being the Resound Verso with 2.4GHz
binaural connectivity that was launched in late 2012. Many believe other firms will
need to offer 2.4GHz technology, and see this area as a potential growth driver. We
believe it is an attractive offering and certainly is another step forward for the
industry. However, we are not convinced that it will be as great a long-term driver
for the industry as many think. Our rationale is as follows.
1) Convenience versus battery life. We are concerned that the balance of
convenience (no need for an intermediate streaming device) does not fully
offset the increased power consumption of 2.4 GHz-based hearing
instruments. Think of your own smartphone. If you had to sacrifice either
the battery’s ability to last through the day or the phone’s Bluetooth®
connectivity, which would it be? Battery life is especially relevant in hearing
aids as they can be fiddly to change, and for those with reduced dexterity
this can be an issue. Although relatively inexpensive individually, hearing
aid batteries do cost a dollar or so each, and the costs can be relevant for
those on low incomes. That said, as battery technology improves, this issue
will become less significant.
2) Made for iPhone yet to be proven. We are yet to be convinced that
there is widespread demand for direct connectivity between hearing aids
and smartphones. With the average first-time user of a hearing aid being 70
years’ old, we think this advantage will be offset by the higher power
consumption. We can’t help but think that the Made for iPhone
programme (an open platform that allows any hearing aid manufacturer to
make iPhone compatible hearing aids) is much more about selling
smartphones to hearing aid users than it is about selling hearing aids to
iPhone users.
Frequency bands are about trade-offs – different manufacturers, different
philosophies.
Currently, most devices use frequency bands below 15MHz, although Starkey has
opted for a 900 MHz platform. These frequency bands are well below the 2.4GHz
at which Bluetooth® operates. Thus, they require an intermediary device to
connect with external Bluetooth devices such as televisions and telephones,
commonly referred to as a streamer. The hearing aids themselves communicate
wirelessly with the streamer (and with each other) by a phenomenon known as
near-field magnetic induction (NFMI).
NFMI is a well-established technology and is attractive for those focused on sound
quality. Communication between two hearing aids, and thus the binaural
functionality (crucial for sound quality and directionality), is best at lower frequency
bands. This is because lower frequency bands have less body absorption, making it
easy for information to travel from one device to another. 2.4 GHz
electromagnetic waves are almost entirely absorbed by the first few millimetres of
body tissue they encounter. The various spectra used by the different
manufacturers are shown below.
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Higher frequency band means more body absorption
6
ReSound
Loss dB/cm
5
4
3
Oticon, Siemens,
Sonova, Widex
2
1
Starkey
900 MHz 2.4 GHz
Frequency
<15 MHz
The drawback with NFMI is that, because it is used on lower frequency bands, it
requires an intermediary device to connect with devices using other frequencies,
such as 2.4 GHz Bluetooth® devices. These are often worn around the neck (neck
loops), and are often viewed as cumbersome and not particularly discreet. In
addition, there can be lip synching problems when sound is transmitted via an
intermediary device, and there is a range limit of 3-5 feet from the streaming
device. NFMI thus offers great sound quality, but perhaps at the expense of true
connectivity.
Features and uses across frequency spectrum
Radio Frequency
<15 MHz
200 MHz
433 MHz
800-900 MHz
2.4 GHz
Features
Short-range magnetic
Mainly FM systems
Control & sensors
Audio streaming & control
Audio streaming & network
Manufacturers
William Demant, Siemens, Sonova, Widex
William Demant, Sonova
Interton
Starkey
GN ReSound, Sonova (Roger platform)
2.4GHz is a much newer technology in hearing aids, despite being used in multiple
other industries for some time (GN was the first company to make a 2.4GHz
hearing aid in 2010, with its Alera device). 2.4GHz is the frequency at which
Bluetooth® operates, making direct links between hearing aids and other devices
possible, and therefore obviating the need for a streamer. As the signal does not go
through an intermediary device, there is less of an issue with lip synching, although
we think this is a somewhat overblown concern as it is irrelevant when listening to
music or using the telephone, and most modern televisions allow the
picture/sound phasing to be altered. However, it is a small advantage nonetheless.
Thus, the 2.4GHz band clearly opens the door for better integration between
hearing aids and televisions, smart phones and stereos; and whatever one thinks of
the technology, it is something new and differentiated. From this, manufacturers
that offer it (at the moment just GN) should be able to gain at least some edge in a
very competitive environment as smartphones, in particular, proliferate.
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Where NFMI is strong, 2.4GHz technology is, arguably, weak
As the 2.4 GHz frequency band is a much higher frequency than that used for
NFMI, body absorption is much greater. This has made binaural connectivity hard
to achieve (2.4GHz signals move at the speed of light and bounce off walls, so this
isn’t much of a challenge indoors, but hearing aids need to work outside as well).
The antenna is larger, potentially making the hearing aids larger, less cosmetically
appealing and therefore less commercial – although, in practice, GN’s Verso is
competitive from a size standpoint, in our view. As we stated above, 2.4 GHz
causes quite a drain on battery performance, which increases cost and
inconvenience for users. However, more importantly, there is a trade off between
the power required for 2.4 GHz and the power available for sound processing if
battery life is to be preserved.
Thus the choice between NFMI and 2.4 GHz is effectively a three-way trade off
between battery life, processing power and connectivity. In our view, the first two
criteria are the most important for the majority of users.
GN has solved some 2.4GHz issues and is showing some success
GN ReSound, as the pioneer of 2.4GHz hearing aids, has ironed out some of the
flaws in its new Verso range. It has binaural functionality; hearing aids can
communicate with each other using ReSound’s proprietary 2.4 GHz technology.
Using two small radios in each hearing aid, GN claim the waves “bend” so they
don’t have to pass through the body where they would be absorbed. GN also
claims to have developed novel approaches to the power consumption required for
sound processing, freeing up power/battery life for 2.4 GHz connectivity.
Our discussions with audiologists suggest that battery life is, however, reasonable,
and, in terms of size, the Verso is competitive. Although provided by GN, the
chart below demonstrates that order pull-through from trials of Verso was better
than that seen with the first-generation device (Alera), especially for those trialling
more users. This would corroborate GN’s claims that some of the shortcomings of
Alera have been overcome with Verso, in our view.
Alera versus Verso US comp: percentage of trials that reached order level
after 23 weeks
80%
70%
60%
50%
40%
30%
20%
10%
0%
Alera
Source: Berenberg, GN ReSound
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Smartphone compatibility nice to have, but 2.4GHz isn’t necessary
In June 2012, GN ReSound announced that it had partnered with Apple to create
“Made for iPhone” hearing aids. The hearing aids will have direct connectivity to
Apple devices, and be based on 2.4 GHz technology. While this demonstrates
some potential for 2.4GHz technology, we think manufacturers will be able to
develop smartphone-compatible hearing aids without 2.4GHz technology. Given
the level of excess power usage 2.4GHz creates, an alternative would clearly offer
incremental benefit.
Thus, while superior smartphone compatibility is nice to have, we do not believe it
will be disruptive to the market in the long term. Ultimately, if it works well both
from a technological and commercial perspective, we would expect William
Demant, Sonova, and other manufacturers to follow GN with 2.4 GHz products.
2.4GHz attractive, but not revolutionary
We view 2.4GHz hearing aids as attractive, as evidenced by Cochlear in-licensing
ReSound’s technology (2011). However, we believe they are evolutionary, not
revolutionary, and thus do not see them as being a significant long-term growth
driver for the industry. In the short term, we agree that they are likely to be a useful
differentiator for manufacturers, but we think the incremental value-add is
moderate, and thus 2.4GHz technology is not going to be game-changing.
While iPhone and Android compatibility should enhance a company’s offering,
realistically we think most manufacturers will be able to achieve this with existing
technology. We don’t believe 2.4GHz offers benefits which are substantial by
comparison to more traditional hearing aids, so the technology is unlikely to be
market-disrupting.
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The hearing healthcare industry
The history of assisted hearing dates back to the sixteenth century. It has evolved
through bulky table-top devices and hearing trumpets to larger analogue amplifiers
and, finally, to the small fully-digital hearing aids, cochlear implants and boneanchored devices that we have today. There are now 10-11m hearing aid units sold
per annum, with a total wholesale value of c$4.2bn. In addition, cochlear implants
($1bn), bone-anchored hearing aids ($125m) and OTC amplifiers ($50m) take the
total market for hearing devices to around $5.2bn, as shown below.
Global hearing devices – a $5.4bn market
Cochlear
implants
$1,000m
Hearing aids
$4,200m
Bone anchored
hearing aids
$125m
OTC
amplifiers,
$50m
Once the typical dispenser mark-up is added to the wholesale price, the end-user
hearing instrument market is worth a total of around $15bn.
From the telephone to the modern hearing aid
The invention of the telephone by Alexander Graham Bell in 1876 paved the way
for the development of hearing aids as we know them. The telephone simply took
a sound, turned it into an electrical signal, and transmitted this to a speaker which
subsequently turned it back into sound. This is the same principle as that on which
all modern hearing aids still work. Key events in the history of how hearing aids
went from Bell’s telephone to the devices we see today are as follows.
1898
The first electric hearing aid, a table-top device named the Akoulallion,
was invented by Miller Reese Hutchinson in 1898 and manufactured by
the Akouphone Company.
1904
Oticon, founded by Hans Demant after he went to London to buy a
hearing aid for his wife, begins distributing hearing aids.
1910
Siemens enters the market, although its early products are unrecognisable
as hearing aids by today’s standards. William Demant takes over the
running of Oticon after the death of his father Hans.
1920s
Vacuum tubes are invented allowing the construction of smaller, more
portable devices.
1940s
The invention of the transistor allows yet more miniaturisation.
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1960s
Bell Telephone Laboratories digitises sound signals in the 1960s, but at the
time this was only possible on mainframe computers and thus totally
impracticable for use as a hearing aid.
1970s
The arrival of microprocessors opens the door to the creation of digital
processors. Moreover, Edgar Villchur, an American who learnt his
electronics skills in the US army during WWII, then develops amplitude
compression, the process whereby sound is split into frequency bands and
then each amplified or reduced in turn to moderate loud sounds and
amplify quieter ones. The technology forms the basis for the modern
digital signal processing which is present in hearing aids today.
1987
The Nicolet corporation produces the first digital hearing aid, the
Phoenix, although it never really got past the experimental stage. Bell
Laboratories also developed a hybrid digital-analog hearing aid around this
time, before selling out to Resound Corporation, now the hearing
instrument division of GN Store Nord.
1995
The first all-digital hearing aid is created by The Oticon Company, but
only really as a research tool.
1996
Widex launches the first commercial digital hearing aid, the Senso.
2007
The first generation of wireless hearing aids are introduced, the first truly
commercially successful version being the Oticon Epoch from William
Demant.
Hearing loss backgrounder
Hearing loss basically falls into one of three main categories – congenital, acquired
or age-related, although it can also be classified according to whether it is a failure
of the sound to reach the inner ear – so called conductive hearing loss – or a failure
of the ear itself to turn sounds into impulses the brain can interpret – sensorineural
hearing loss. Hearing loss can also, but rarely, be brain related – central hearing loss
which is usually associated with disease of the brainstem.
Physiology and anatomy of the ear
The organ that is the ear has three main components, the outer, middle and inner
ear.
The outer ear consists of the pinna that is responsible for directing sound waves
towards the second component of the outer ear, the ear canal, or external auditory
canal to give it its full name. At the far end of the ear canal lies the middle ear,
separated from the outer ear by the ear drum, or tympanic membrane.
The tympanic membrane is connected to three small bones that go to make up the
middle ear – the malleus, the incus and stapes, known to the laymen as the
hammer, anvil and stirrup. These three bones convert the vibrations of the
tympanic membrane caused by incoming sound waves into vibrations in the
cochlea – the snail shell like structure that makes up that part of the inner ear
concerned with hearing.
The cochlea itself is essentially a membranous structure made up of three chambers
called scalae (the scala tympana, the scala media and the scala vestibule), whose
three dimensional shape is conferred upon it by the bony structure within which it
sits. Within the cochlear lie millions of microscopic structures known as Organs of
Corti. The Organs of Corti have tiny hairs known as cilia arranged into four rows
that protrude into the fluid-filled scala media. Vibrations in the fluid of the scala
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media, known as endolymph, agitate these cilia which, in turn, produce action
potentials in the hair cells that are then transmitted via the auditory nerve to the
brain, where they are perceived as sound.
Although not addressed by the hearing instrument industry, the ear also has a
second function of balance and proprioception (knowing which way is up).
Situated above and behind the cochlea are three semi-circular, fluid-filled chambers
known as the superior, posterior and lateral semi-circular canals. These structures
are all arranged at 90° to each other (think X, Y and Z axes on a graph). Movement
of the head creates differential movement of the fluid in these chambers, which is
detected by hair cells, thus allowing the brain to evaluate which way up it is and
how fast it has moved in one particular plane. The fluid in the semi-circular canals
can continue to move even after the head has stopped moving, particularly if it has
been rotating for some length of time – giving rise to the sensation of dizziness and
the associated lack of balance of which we are all familiar. Alcohol also dampens
the ability of the hair cells in the semi-circular canals to respond to movements in
the fluid, and hence dampens the brain’s ability to properly assess balance – hence
the lack of balance associated with excess alcohol intake.
Anatomy of the human ear
Outer Ear
Middle Ear
Inner Ear
Semi-circular canals
Auditory
nerve
Tympanic Membrane
Pinna
Cochlea
Ear Canal
Maleus,
Incus &
Stapes
Eustachian Tube
Types of hearing loss
Hearing loss is estimated to affect 600m people globally, with this number forecast
to exceed 700m by 2015. Hearing loss is typically one of two types; conductive –
where sound is not transmitted through the structures of the ear properly – or
sensorineural – where the sound reaches the ear appropriately but, for a variety of
potential reasons related to the sensory apparatus of the ear or its neural
connections, is not converted into nervous signals that the brain can interpret. It is
possible to have a condition with elements of both conductive and sensorineural
hearing loss, known as mixed hearing loss.
Causes of hearing loss
The vast majority (well over of 85%) of hearing loss patients suffer from agerelated hearing loss, a type of sensorineural hearing loss scientifically named
presbycusis (from the Greek for old man or elder – presbys – and akousis –
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hearing), which is thus unsurprisingly the main focus of the hearing instrument
industry.
However, there are other causes of hearing loss, namely:
•
Genetic – Most genetic causes of hearing loss are congenital (although
not all congenital hearing loss is genetic), and can be divided into
syndromic, where the deafness is part of a wider condition (there are
over 100 known syndromes of which Alport’s syndrome is the best
known), and non-syndromic, where deafness is the only observable
pathology. Syndromic deafness is less common than non-sydromic
deafness, accounting for around 20-30% of cases of genetic hearing
loss. Although not all genetic in origin, 1.6 babies per 1,000 are born
deaf.
•
Traumatic – obvious really, but due to the deep location of the ear
within the skull, when direct blunt or penetrating trauma is the cause of
injury hearing loss is typically a secondary concern. However, very loud
noises listened to for long periods can damage the hair cells in the ear,
resulting in a form of sensorineural hearing loss. A single exposure to a
an extremely loud noise, for example an explosion, can also result in a
sudden loss of hearing known as acoustic trauma. Explosions also
cause direct trauma to the ear, mainly by rupturing the tympanic
membrane.
•
Toxicity – certain pharmaceuticals, most notably the antibiotic
gentamicin and the oncology drug cisplastin, are well known causes of
irreversible hearing loss. In addition, a number of chemicals are known
to be ototoxic, including several metals (lead and mercury), solvents
(toluene, styrene, white spirit), gases (carbon monoxide and hydrogen
sulphide) and agrochemicals (especially the herbicide paraquat and the
organophosphate insecticides).
•
Disease – a variety of diseases can result in damage to the structures of
the ear, resulting in varying degrees of hearing impairment right up to
profound deafness. In utero infection with German measles is perhaps
the most famous condition, but teratogenic drugs, Mondini dysplasia,
meningitis, mumps, HIV/AIDS, neonatal chlamydiasis, fetal alcohol
syndrome, congenital syphilis, various other infections and various
neurological tumours can all cause deafness.
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Age-related hearing loss – the key driver for the industry
Age-related hearing loss is the main focus of the hearing healthcare industry as it
accounts for the vast majority of mild to moderate hearing loss patients, although
as a progressive condition many will progress to moderate to profound hearing
loss. In addition, the demographic trends in key North American and Western
European markets, the vast majority of which have increasingly aged populations,
make age-related hearing loss all the more important for manufacturers. However,
it would be a mistake to think of hearing loss as only a condition of the old and the
unlucky – for example, there are over 6m people in the US in the 18-44 year-old
age group with hearing loss, equivalent to 2% of the total population. There are
also around 1.5m school-age children with some degree of hearing loss.
However, age-related hearing loss is far and away the main cause of acquired
hearing loss, and is the main focus of the hearing instrument industry. As the chart
below shows, the prevalence of age-related hearing loss begins to rise sharply from
middle age onwards. (Note that the data in this chart are based on self-reported
hearings loss; the actual prevalence of hearing loss is likely higher, but if a person
does not perceive that they have a hearing issue then they are unlikely to become a
hearing aid user – so the numbers of those who perceive they have hearing loss are
a more relevant metric than the number who actually have a degree of hearing
loss.)
Prevalence of hearing loss (self reported) by age in US
40%
35%
30%
25%
20%
15%
10%
5%
0%
<18
18-34
35-44
45-54
55-64
65-74
75-84
Age Group
Source: MarkeTrak, US Census Bureau
In view of the above chart, demographics are thus a key factor often cited as a
driver of growth for the hearing aid industry. The charts shown below are clearly
supportive of this argument, and illustrate that growth in the over 60s is expected
to be significant in the coming years – the blue bars on the right illustrate the
expected population growth by age group between 2010 and 2015.
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US population by age group and expected growth
641%
> 100 years
384%
95 to 99 years
268%
90 to 94 years
85 to 89 years
174%
2010 Population
80 to 84 years
125%
2050E Population
75 to 79 years
109%
90%
70 to 74 years
65%
65 to 69 years
60 to 64 years
31%
55 to 59 years
18%
50 to 54 years
2%
45 to 49 years
5%
40 to 44 years
16%
2010 - 2050E Population
growth
24%
35 to 39 years
25%
30 to 34 years
25 to 29 years
18%
20 to 24 years
15%
15 to 19 years
15%
10 to 14 years
24%
5 to 9 years
20%
< 5 years
19%
30
25
20
15
Numbers in millions
10
5
0
200%
400%
600%
800%
2010 - 2050E Population growth
Source: US Census Bureau
But data are somewhat misleading
They say there are lies, damned lies, and statistics, and we think this may be a case
in point. While the above presentation of the US population projections would lead
the reader to expect demographics to be a significant positive driver of hearing aid
volumes, if the data are presented differently, as shown below, they can be made to
tell another, altogether less overwhelming story. Using the same dataset as above
from the US Census Bureau, the table illustrates the CAGR by age group between
2010 and 2025. As can be seen, the case, while still one of supportive
demographics, is more marginal than the headlines on baby boomers might suggest
and points to little more than low-to-mid single-digit population growth in the key
demographics.
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US population CAGR 2010-2025 by age group
Age Group
Number of people Number of people Absolute increase
in 2010 (millions) in 2025 (millions)
(millions)
Average increase
p.a. (millions)
CAGR 2010-2025
< 5 yrs
5 - 9 yrs
10 - 14 yrs
15 - 19 yrs
20 - 24 yrs
25 - 29 yrs
30 - 34 yrs
35 - 39 yrs
40 - 44 yrs
45 - 49 yrs
50 - 54 yrs
20.9
20.6
20.0
21.4
21.5
21.2
20.3
20.1
20.9
22.5
22.1
22.6
22.6
22.6
22.3
22.0
21.6
23.0
23.0
22.2
20.6
20.0
1.7
2.0
2.5
0.8
0.5
0.4
2.8
2.8
1.3
-1.9
-2.1
0.11
0.13
0.17
0.06
0.03
0.02
0.18
0.19
0.08
-0.13
-0.14
0.5%
0.6%
0.8%
0.3%
0.2%
0.1%
0.9%
0.9%
0.4%
-0.6%
-0.7%
55 - 59 yrs
60 - 64 yrs
65 - 69 yrs
70 - 74 yrs
75 - 79 yrs
80 - 84 yrs
19.4
16.7
12.2
9.2
7.3
5.7
20.2
21.0
19.6
16.1
12.4
7.6
0.7
4.3
7.4
7.0
5.2
1.9
0.05
0.29
0.50
0.47
0.34
0.13
0.2%
1.6%
3.2%
3.8%
3.6%
1.9%
85 - 89 yrs
90 - 94 yrs
95 - 99 yrs
> 100 yrs
3.7
1.6
0.5
0.1
4.3
2.0
0.7
0.2
0.6
0.5
0.3
0.1
0.04
0.03
0.02
0.01
1.0%
1.8%
3.3%
5.3%
307.9
346.7
38.8
2.58
0.8%
Total
Source: MarkeTrak, US Census Bureau
As the table illustrates, within the key 55-85 year old range, even for the group
expected to see the fastest growth in population (70-74 year olds), the CAGR is
only 3.8%, in line with the trends seen over the last few years in hearing aid
volumes. Taken in aggregate, the expected CAGR in 55-85 year old people in the
US is just 2.2%.
These data are corroborated by the projections for the US hearing loss population
by the Better Hearing Institute, a not-for-profit advocacy group founded in 1973
that has been tracking the US hearing aid market through its MarkeTrak surveys
undertaken every three to four years since 1984. The chart and table below show
that, from a base of 33m in 2010, it expects the number of hearing loss sufferers to
rise to 53m by 2050. At first glance, this is a significant increase. However, on
closer inspection, it gives a CAGR over that timeframe of just 1.2%.
US hearing loss population – historic and projected
60m
50m
40m
30m
20m
10m
0m
1989 1994 2000 2004 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: MarkeTrak
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Projected growth in US hearing loss population
Year
n=
CAGR vs. 2010
2010
2015
2020
2025
2030
2035
2040
2045
2050
33.4m
35.8m
38.4m
41.0m
43.7m
46.4m
48.8m
50.9m
52.9m
1.4%
1.4%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
Source: MarkeTrak
Demographics are thus likely to be supportive, but are not the whole story, in our
view.
Types of hearing instruments
The hearing instrument industry produces a baffling variety of different
technologies to address hearing loss, which can be somewhat overwhelming to the
uninitiated. However, as with most jargon-heavy industries, the names conceal
what is actually quite simple to understand. In essence, there are four main types of
hearing instruments:
1. Cochlear implants. These are devices used to manage severe hearing loss.
Cochlear implants have three parts. Firstly, there is an external receiver,
which also contains the sound processor and battery and looks very similar
to a standard super power behind-the-ear hearing aid. This part of the
system is connected to the external part of a coil array that sits on the skin
immediately above the internal part of the coil array, with the skin
separating the two. Sound, in digitised form, is transmitted by magnetic
induction from the external part of the coil array to the internal part
through the skin. This enables the skin to be preserved and obviates the
need for internal batteries. The internal coil then transmits electrical signals
along an electrode array positioned within the cochlea. This directly
stimulates the nerves in the ear to evoke action potentials that are
perceived by the user as sound. Cochlear implants are fitted by surgeons in
a delicate, but not overly complicated, procedure. Patients typically wait six
weeks post implantation before the device is switched on. The sound is
often described as tinny or mechanical at first, but with fine tuning by the
audiologist and regular speech therapy sessions, patients quickly adapt –
particularly if their hearing loss has only been recent.
2. Middle ear implants. The external apparatus for a middle ear implant is
similar to that of a cochlear implant. The main difference is that, rather
than stimulating the cochlear directly via an electrode, the stimulating
device sits in the middle ear and directly stimulates either the bones of the
middle ear or the membranous window of the cochlea to set up vibrations,
and hence hearing, in the cochlea itself. Middle ear implants are a relatively
new innovation, pioneered by the Austrian company MED-EL.
3. Bone-anchored hearing aids (BAHAs). BAHAs are external devices
anchored to the patient’s bone that convert incoming sound waves into
vibrations of the bone to which they are attached. Technically speaking,
BAHA is a brand of the Australian company Cochlea. William Demant
uses the term ‘bone-anchored hearing system’, but the term BAHA has
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entered common parlance for the whole class. The vibrations BAHAs
create are perceived by the patient as sounds. These devices are useful for
mixed conductive and sensorineural hearing loss. The quality of sound is
surprisingly good. A lot of what we “hear” when speaking ourselves is in
fact bone conduction, hence people are often surprised at how they sound
when they hear recordings of their own speech.
4. Auditory brain stem implants (ABIs). Working on a similar principle to
cochlea implants, auditory brain stem implants are used when a patient has
no functional cochleae or auditory nerves (the commonest cause of which
is a condition called type II neurofibromatosis, which results in tumours of
both ears, removal of which often results in total destruction of the
auditory nerves). Instead of stimulating the cochlea, the electrode
stimulates the next level up in the nervous system, namely the cochlea
nucleus in the brain stem. Australian company Cochlear currently
manufactures the only FDA-approved ABI. ABI surgery is complex, and
results are mixed as it is extremely difficult to place the electrode in exactly
the right place. However, the only alternative is to live with total hearing
loss. These are relatively niche products, and not commercially of great
significance.
5. Hearing aids – the hearing aid as we know it. These are simply
amplifiers, albeit fairly sophisticated ones, that utilise the patient’s residual
hearing by taking external sounds, processing and amplifying them, and
then playing them to the user via a speaker located in the ear canal. In the
next section, we break down the hearing aid landscape, to include its
dynamics and trends.
The hearing aid landscape
Hearing aids are frequently classified by manufacturers according to their type,
their underlying technology platform, their style, their performance level or any
combination of these parameters. This creates a complex array of products. To
further complicate matters, some manufacturers offer two or even three different
brands, each with their own range of types, performance levels, technology
platforms and form factors. The end result is a baffling collection of products
across the market, a situation that exists for one reason only, the desire of the
manufacturers not only to generate the most revenue/profit per unit sold, but to
also maximise units sold.
Broadly speaking, the commonest method for classifying hearing aids is according
to where they are positioned.
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Types of hearing aids
Style
Refered to as:-
Hearing loss:-
Key features
BTE
Mild to severe
What most would envisage a hearing aid to look like
Sits behind the ear
Sound trasmitted to ear via tube
Preferred choice in more complex cases
RITE/RIC
Mild to severe
Similar to a BTE hearing aid
Receiver sits within the ear or ear canal
Reduces overall size of BTE component
Preferred choice in most countries
Best size/performance ratio
ITE
Mild to severe
Entire device sits within the ear canal but is still visible
Can be more discreet than BTE
Shell is custom made
Relatively niche market for the cosmetically focused
- In-the-canal
ITC
Mild to moderate
Sub-divsion of ITE
Sits within ear canal, but still visible
- Completely-in-canal
CIC
Mild to moderate
Sub-divsion of ITE
Smallest type of hearing aid
Device sits withing ear canal
- Invisible-in-canal
IIC
Mild to moderate
Yet smaller versions of ITE hearing aids
Rests within second bend of ear canal
Power
Severe to profound
Behind-the-ear
Receiver-in-the-ear/
Receiver-in-the-canal
In-the-ear
Power
BTE hearing aids with high levels of amplification
Larger than standard BTE due to battery
Of the hearing aid types, the most popular form currently is the receiver-in-canal.
In-the-ear models were once more popular for their purported cosmetic
advantages, but they were often fairly visible. The development of receiver-in-theear (RITE) and receiver-in-canal (RIC) aids, which are essentially two variants of
the same thing – the difference being how deeply in the ear or ear canal the
receiver sits – meant that the componentry that needed to be positioned behind the
ear could be significantly reduced in size and the receiver/speaker component
hidden within the ear canal. The small tube/wire connecting the two can be almost
imperceptible, and from both the front and side it can be very difficult to tell
someone is wearing one.
Breakdown of hearing aid market by type
Receiver-in-ear
40%
Power
25%
In-the-ear
15%
Behind-the-ear
20%
Source: Sonova company reports
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Product landscape bewildering
The six major product companies generate a staggering array of products that, to
the outside observer, is often confusing. The reason this situation exists is that all
manufacturers are simply trying to make sure there is a product at every price point
in every variant for every potential customer.
However, it can help to break the products down as per the terms often used by
manufacturers to describe their portfolios.

Brands. A number of manufacturers carry two or more separate brands,
such as Sonova with Phonak and Unitron and William Demant with
Oticon, Bernafon and Sonic. Part of this is, in our view, a legacy from the
acquisitive way these businesses were built up. What you are more often
than not buying is a brand and its associated share. If you then change the
brand, you effectively destroy most of what you bought. The major
manufacturers argue that the dual brand strategy helps with market
segmentation, but we would argue that market segmentation is a
consequence of the different brands, not the reason it exists.

The platform. In recent years, manufacturers have sought to use a
common technology platform across the various performance levels of the
portfolio as a way of improving R&D efficiency and to simplify the
portfolio somewhat. Examples include Sonova’s Quest and William
Demant’s Inium. A new platform can involve a totally new chip, or, in the
case of Quest, just a software/algorithm upgrade.

Performance categories. Hearing instrument manufacturers typically
delineate the portfolio into three performance levels, all at varying price
points, although some have up to five performance categories. Often, the
hearing aids across the performance categories are physically the same, the
difference simply being the number of features that are enabled.

Form factors: This is just a reference to the different types of hearing aids
– behind-the-ear, in-the-ear, receiver-in-canal, etc.
A breakdown of the hearing aid product landscape is shown below.
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Hearing aid product landscape
Quantum , Moxi , Moxi Kiss , Max
(in flex range)
Oticon Medical (Boneanchored systems)
Diagnostics
Personal communication
systems
Cochlear implants
Siemens Life
Flip, Bliss, Endura, Charm
Bliss 100, Flip,
Groove, Ion,
Velocity/Pearl 24
Eclipse/Insio/Nitro/Intuis
iMini
Ace/Pure/Aquaris/Motion
Widex Starkey
Group
Group
Menu/Real
Passion 110
Group
Vea/ Sparx 1,2,3
Tour
Joyton
Chronos/Vérité/ Acriva 7,9
Alera 4/5, Verso/Up 7
Series 3 / Ignite
Wi Series /
Clear 220, Super
Clear 330, Mind 330,
ROCO, A Series, RISA
Source: Company reports, Berenberg research
119
Nitro
Verso/Alera/Up 9
Soundlens X Series
Clear 440, Super
U Series
Electronics,
communications and
diagnostics
Consumer electronics
Specialty hearing products
(music, TV, film)
Diagnostics
GN
Chronos 5
Vérité 5
Xtreme
Alta
Widex Starkey
Bernafon
Nera
ITE
Sonic
Ino
Siemens
Intiga, Chili, Sensei
Pep
BTE
Quantum/ Moxi/
Moxi Kiss Pro
Cochlear Implants and
accessories (Advanced
Bionics)
Wireless communication
systems
Sonova
Quantum E,
Moxi E, Moxi
Kiss E
Bolero, Virto
Other businesses
Rion
Phonak
Dalia
Inizia 1
Neo
Win
Group
High-end
William Demant
Shine
Oticon
Unitron
Mid-range
Audéo, Naída
Milo
Rion
GN
Siemens
William Demant
Sonova
Low-end
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Global market for hearing aids
The global wholesale market for hearing aids is currently worth around $4.2bn,
with other hearing devices adding a further $1.3bn or so. The market breaks down
as follows:
Breakdown of wholesale global hearing device market – 2012
Cochlear
implants
$1,000m
Hearing aids
$4,200m
Bone anchored
hearing aids
$125m
OTC
amplifiers,
$50m
Overall end user market far larger
If we take the $4bn wholesale market for hearing instruments, this figure obscures
the fact that the end-user market is far larger – probably in the region of $15bn per
annum given the 3-4x mark-up of the wholesale price a typical dispenser makes.
Thus, as the following chart – which illustrates who gets what in the value chain in
terms of revenues – shows, the retail component of the market is significant.
Breakdown of the hearing aid value chain
Component
manafacturers
5-8%
Retail
60-70%
Wholesale
20-30%
Source: Berenberg Research
Market now significantly consolidated
If we go back 20 years, the six major manufacturers in operation today accounted
for just under half the market. Since then, steady consolidation and market share
gains means that these six companies now claim to have nearly the entire market.
We are somewhat sceptical of this claim, mainly as we think local players have a
slightly larger share in some Asia-Pacific markets than the large manufacturers
would care to admit. However, the shares shown in the table below are relevant for
most major markets, in our view.
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Hearing aid market share by value 1994
Hearing aid market share by value 2012
Others,
5%
Sonova, 6%
Siemens,
14%
Widex, 8%
William
Demant,
7%
Others,
51%
GN
ReSound,
4%
Starkey,
12%
Widex, 6%
Starkey, 11%
GN ReSound,
13%
Siemens
17%
William
Demant,
22%
William Demant and Sonova the main consolidators
As the chart below illustrates, the main consolidators in the industry have been
William Demant and Sonova, although GN isn’t far behind and Siemens has also
been fairly active. The two privately-owned players, Starkey and Widex, have been
far less active on the M&A front, although this is not so unusual given their
ownership structure.
Consolidation of the hearing health market
Today
1994
Oticon
Phonak
Danavox
Siemens
Starkey
Widex
Bernafon
Gfeller/Ascom
Maico
Bosch
Unitron
InSound Medical
Argosy
Adavanced Bionics
ReSound
Sonar Beltone
Interton
Philips
Otix
3M
Rexton
Vivatone
William
Demant
Lori Medical
Sonova
GN
Resound
Siemens
A&M Audioservices
Microtech
Neurelec
Viennatone
Starkey
Vivatone
Widex
Coselgi
Source: Company reports, Berenberg research
Unit growth has been fairly steady
Since 2006, the global hearing aid market in unit terms has expanded from just
over eight million units to 10.7m in 2012 (implying an average ex-wholesaler price
of ~$375). Although unit growth took a slight dip in the financial turmoil of 2008,
at just under 3%, this volume returned fairly quickly thereafter, bouncing back to
5% growth in 2009. Overall, between 2006 and 2012, hearing aid unit sales
increased at a compound annual growth rate of 4.4%. We expect a slightly slower
rate of growth in the future, mainly due to an expectation of slower incremental
technological progress. Share gain is the name of the game.
If we look at the volume and value shares over the last five years, there are some
slight differences in how the market has evolved. The main winners have been
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Sonova and William Demant. Both companies have sought to drive their
businesses by rolling out new high-end products and have captured more of both
the available volume and value. The main loser has been Siemens, although slightly
less from a volume than value perspective, as it has more aggressively pursued
high-volume, low-priced business than either William Demant or Sonova. GN was,
at one point, haemorrhaging share, but has since reversed this trend. Finally,
Widex’s and Starkey’s share in both volume and value terms has remained
somewhat steady, albeit with a slight bias toward decline.
Hearing instrument market shares by volume
30%
25%
William Demant
Sonova
20%
Siemens
15%
ReSound
Starkey
10%
Widex
5%
Others
0%
2008
2009
2010
2011
2012
Hearing instrument market shares by value
30%
William Demant
25%
Sonova
20%
Siemens
15%
GN ReSound
10%
Starkey
Widex
5%
Others
0%
2008
2009
2010
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Global hearing aid unit sales 2006-2020E
16m
2012-2020 CAGR
3.8%
14m
2006-2012 CAGR
4.4%
12m
10m
8m
6m
4m
2m
0m
2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013E
2014E
2015E
2016E
2017E
Geographic volume split contains few surprises
If we take the estimated 10.7m hearing aid units sold in 2012 and break the market
down geographically, it is much as one would expect. North America is just under a
third of global volume, with 3.1m units sold in 2012. Western Europe accounts for
another third, 34% to be exact, and 3.7m units. The remaining third is divided up
across Eastern Europe, Asia, South America, Oceana and Africa/RoW. We suspect
that unit sales in Asia may be significantly higher than shown in the chart below,
which is based on data from the major manufacturers. Our discussions with
component suppliers suggest that the market in Asia is larger than the “Big 6”
manufacturers would care to admit. However, the chart does give a fair indication
of where the addressable value lies for the major global manufacturers.
Geographic breakdown of global hearing device market by units (2012)
South America,
0.75m, 7%
North America,
3.1m, 29%
Oceana, 0.4m, 4%
Asia, 1.8m, 17%
Eastern Europe,
0.75m, 7%
Africa, 0.2m, 2%
Western Europe,
3.7m, 34%
Big markets matter
If we look at the contribution individual markets make to global volumes, then,
unsurprisingly, the US is the main market, accounting for just over a quarter of
global units. However, it is also noteworthy that the top five markets account for
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2020E
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over half the global market by volume and the top ten account for over two-thirds
of the global volume.
Key hearing aid markets
Country
USA
UK
Germany
France
Japan
China
India
Australia
Brazil
Canada
Share of total world market (units)
26%
11%
9%
4%
4%
4%
4%
3%
3%
3%
RoW
31%
Cumulative Share
Top 1
26%
Top 2
37%
Top 3
46%
Top 4
50%
Top 5
54%
Top 6
57%
Top 7
61%
Top 8
64%
Top 9
67%
Top 10
70%
All
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Market segmentation
There are several different ways of breaking down the hearing aid market aside
from by hearing aid type and by geography, as shown above. The two most
informative ways to look at the market are by the distribution of hearing aid
price/performance level and by dispenser type.
Market segmentation by performance level
Hearing aids are frequently classified by manufacturers into one of four
performance levels – high, medium, low and very low, although the latter two
categories are often given less marketing-unfriendly names like “economy”, “basic”
or “value”. The products themselves are often physically identical across all
performance levels, and therefore have the same cost of goods, the difference
being in the number of software features that are operable. The two charts below
illustrate what we calculate the volume breakdown of the 10-11m hearing aid units
sold per annum by performance category and how this translates into the relative
contribution each performance category makes to the $4bn wholesale hearing aid
market.
Breakdown of hearing aid market by performance category – volume
Medium
30-40%
Low /
Very low
45-60%
High
10-15%
Breakdown of hearing aid market by performance category – value
Medium
45-50%
High
30-35%
Low /
Very low
15-25%
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Market segmentation by dispenser type
Hearing aids are provided to the end user by a variety of different channels. The
key channels, and the volume of the global market by volume each one accounts
for, are as follows.

Independent distributors – 38%. These are independent audiologist
practices working either from a retail location or on a mobile basis often
described as “out of the back of a car”.

Large purchasing groups – 8%. These groups purchase hearing aids on
behalf of their smaller members, usually independent practices.

Large independent retail chains – 24%. These are simply chains of
retail dispensers and include Audika, Amplifon, Kind and Audionova,
among others.

Public entities – 22%. These include the Dept. of Veteran’s Affairs in the
US, the National Health Service in the UK and Australian Hearing (a
statutorily-created body that supplies hearing aids to veterans and children
affected by rubella). The NHS is a sizeable buyer, acquiring around 1m
units per year, so in volume terms accounts for nearly 10% of the market.
However, it pays only c£70 per unit, meaning that it is less than 3% of the
market by value.

Manufacturer-owned retail – 9%. These are retail chains owned directly
by the manufacturers, such as David Ormerod Hearing Centres, Connect
Hearing and AuditionSante (all Sonova), Beltone (a franchise network run
by GN), and Hidden Hearing, Avada, American Hearing Aid Associates
and ListenUP (all William Demant). These often distribute hearing aids
made by rival manufacturers, which seems odd on the face of it. However,
if you take into account the 3-4x mark-up a retailer typically makes, and the
margins on these sales, there is more to lose by not making a sale than
there is to gain by forcing customers to choose from just one brand. That
said, manufacturer-owned retailers clearly favour their own brands.
Breakdown of hearing aid market by dispenser type
Manufacturer
controlled
retail
9%
Public entities
22%
Large
indpendent
retail chains,
24%
Independents
38%
Large
purchasing
groups, 8%
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Drivers of hearing aid volume growth
The key drivers of unit growth in the hearing instrument market break down as
follows.

Demographics: The number of people who could benefit from a hearing
aid.

Penetration: The uptake of hearing aids by those that could potentially
benefit. Emerging market growth also falls into this category.

Binaural penetration rates: Hearing loss, especially age-related hearing
loss, frequently occurs in both ears. The advantages of having two, rather
than just one hearing aid are significant.

Replacement cycles: Having steadily increased from 3.1 to 4.5 years
between 1991 and 2004, the average age of a hearing aid then dropped
back to 4.1 years by 2008. Speeding up replacement cycles is potentially a
key driver to unit sales.
Of these factors, penetration rates and binaural penetration rates are by the far the
two most important drivers of unit growth. As we discussed above, the
demographics of key markets are supportive of moderate growth, but only a low
single-digit level per annum.
There is little up-to-date hard data on replacement cycles, although we suspect that
they may have continued to shorten since 2008.
Penetration and binaural rates are worthy of brief discussion, however.
Binaural penetration – approaching a plateau in mature markets
The data shown below is from the US and illustrates that for purchasers of hearing
aids with bilateral hearing loss, the group most in need of two units, penetration
rates were already very high in 2008, and if we extrapolated the data forward we
would get to a binaural penetration rate approaching 95% by the year 2012. For the
hearing loss population as a whole, binaural penetration is nearer 65%.
Binaural penetration rates in the US
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1984
1989
1991
All purchasers
1994
1997
2000
Those with bilateral hearing loss
Source: MarkeTrak
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Other markets more variable
Binaural penetration rates in other markets are variable. Some countries such as
Denmark and Australia have very high binaural penetration rates (Australia is
around 80%), Europe as a whole sits around the 65% mark while for various
reasons Japan has binaural penetration rates of just 30%.
Raising penetration therefore key to volume growth
Having dealt with demographics, binaural fitting rates and product longevity, the
only unit growth driver left is that of penetration. As we showed above, prevalence
of hearing loss increases with age, but the penetration rates of hearing aids lags
behind somewhat. If we look at it by age group, the penetration of hearing aids
into the hearing loss population increases with age – largely a result of increased
severity of hearing loss with age. However, even in 75-84 year olds, penetration
rates in the US remain below 50%, as shown below.
Penetration of hearing aids into US hearing loss population by age group
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
<18
18-34
34-44
45-54
Owners
55-64
65-74
75-84
>85
Non-owners
Source: MarkeTrak
Penetration rates vary dramatically by market
As the chart below shows, there is considerable variation in penetration rates
between different countries. Unsurprisingly, penetration rates in developed
economies substantially exceed those of emerging economies, but there is also
considerable variation from one developed economy to another, and the same is
true for emerging economies.
While there are some country-specific factors at play in very penetrated markets
(Denmark is the home market for three of the six largest hearing aid companies in
the world, while the UK provides hearing aids free to the user via the NHS), there
are some clear outliers as far as developed economies go – we would highlight Italy
and Japan, in particular, as two potentially large markets where penetration rates are
especially low.
Potential users one thing, actual users quite another
This analysis suggests that there is a large, untapped pool of potential hearing aid
users in both mature and emerging markets. While we would not disagree that
there is a large untapped pool of potential users, the question is how many potential
users are likely to become actual users, and whether the proportions will change
over time.
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Penetration of hearing aids into overall hearing loss population
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
If we take the US, for reasons that are not entirely clear, penetration rates fell from
1984 to 1997, at which point the industry and its advocacy groups launched a
concerted awareness campaign, and penetration rates have increased steady ever
since by an average of around 40 basis points per annum. Given the relatively low
level of penetration of just over 20% in 1997, 40bp of higher penetration per
annum translated into around 2pp of volume growth per annum (ie 0.004/0.2 =
0.02).
It all adds up…
If we take the 1.5-2.0 percentage points of unit growth per annum that has come
from increased penetration, then add on the 1-2% percentage points of growth that
demographics provides, together with the marginal contribution from higher
binaural use, we obtain the overall c4% unit growth seen in the US over the last
decade.
…and should continue in the same vein
Based on current demographic trends, the new technologies emerging from the
major players and current level of awareness, we are of the view that the trend in
hearing aid unit volume growth seen in the last 10 years in a mature market of ~4%
is sustainable for the next 10 years.
Why penetration rates are so low
One obvious question is why, with over 48m Americans suffering from hearing
loss and an average product life of four years, are unit sales so low? The answer is
straightforward, in our view, and is one which we think applies not just to the US
but to most other markets.
At relatively mild levels of hearing loss, which is where the majority of age-related
hearing loss sufferers sit, the total perceived economic costs of acquiring and using
a hearing aid are simply not outweighed by the perceived benefits it brings. By
economic cost we do not just mean the price paid, but the total financial, physical
and emotional investment made by the user to acquire and then use the hearing aid.
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This is borne out by the breakdown of hearing loss by severity and the rates of
hearing aid use by hearing loss severity, as shown below.
Hearing instrument penetration – mild hearing loss
User, 10%
Mild hearing
loss
65%
Moderate
hearing loss
30%
Non-User,
90%
Profound
hearing loss
5%
Hearing instrument penetration – moderate hearing loss
Profound hearing
loss
5%
User, 50%
Moderate hearing
loss
30%
Mild hearing loss
65%
Non-User,
50%
Hearing instrument penetration – profound hearing loss
Mild hearing loss
65%
Profound hearing
loss
5%
Moderate hearing
loss
30%
User, 70%
Non-User,
30%
The other point we would make looking at these charts is that, for profound
hearing loss, the penetration rates are high, but, as the chart shows, some 30% of
profound hearing loss sufferers are not users of any kind of hearing instrument. In
our view, based on our discussions with audiologists, the reason for this is that
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once a person’s hearing loss reaches a certain level, the benefit that hearing
instruments confers – even in the Power section of the market – begins to wane,
further skewing the economic cost/benefit ratio away from benefit and toward
cost. Essentially, the costs and hassle remain the same, but the benefit begins to
diminish.
To conclude, we think that unless there is a meaningful reduction in the total
economic cost of using a hearing aid, or a substantial leap in the benefit that
hearing aids bring, then it seems unlikely that the cost/benefit ratio is likely to shift
to any significant degree. Marketing and awareness campaigns by the industry can
undoubtedly help, as they did in the US from 1997 onwards, but we think that,
faced with only incremental shifts in the cost/benefit ratio of hearing aid use, such
campaigns are likely to only provide a marginal advantage. Thus we conclude that
unless there is a meaningful leap forward in technology, or costs, be they financial
or otherwise, drop noticeably, then the penetration rates for hearing aids are only
likely to see slow increases.
4% volume growth looks sustainable, but don’t expect an acceleration
Taking into account current technology, demographics, penetration rates, binaural
use rates and produce longevity, the conclusion we come to is that volume growth
of 3-5% per annum looks sustainable; and while it is certainly possible that volume
growth accelerates to a higher level, we don’t think this is probable.
Pricing visibility is low
There is a little reliable pricing data available for the hearing aid industry, and most
of it is based on periodic anecdotal comments by the manufacturers. New product
mix also has a far larger bearing, or at least once did, on average selling prices than
it does like-for-like pricing. The last 10 years have really been a tale of two halves.
The first 5-6 years, between 2003 and about 2008/9, were characterised by flat to
slightly positive price growth, averaging 1-2% per annum, in our view. Over the
last 4-5 years, however, pricing has become much more challenging, driven by the
following four factors.
1) Unfavourable price dynamic 1 – Competition. For various postulated
reasons, pricing has become a more frequently and more aggressively
deployed competitive weapon of late. In our view, this stems from two
main factors: a) for Sonova and William Demant, share gains have become
harder to come by as other manufacturers, most notably Siemens and GN
Resound, have rolled out improved product offerings and become more
effective at marketing; and b) technological gains have become more
incremental, shifting the dynamic from competing for price and volume
with mix to simply competing for volume with price (as was the case in
orthopaedic reconstruction).
2) Unfavourable price dynamic 2 – Reimbursement changes. Changes to
reimbursement structures in certain markets, most notably Norway,
Switzerland, the Netherlands and Denmark have put downward pressure
on pricing. While the changes in Norway (a move to consignment
ordering) are likely to have a temporary effect, changes in other markets
are likely to have a more permanent effect – reimbursement in Denmark
was effectively halved and in the Netherlands a shift from a voucher-based
system (worth around €500) to a system of a 25% co-pay on a get-whatyou-are-given basis has improved matters for the patient but driven a drop
in overall ASPs.
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3) Unfavourable price dynamic 3 – Channel mix. The last few years have
seen a larger percentage of overall market volumes being sold via
Government systems and large retailers. The buying power these groups
command has put downward pressure on wholesale pricing.
4) Unfavourable price dynamic 4 – Geographic mix. Faster growth in
lower-priced emerging markets as compared to higher-priced developed
markets has also exerted downward pressure on overall ASPs.
New products aren’t yielding price hikes any longer
Another somewhat worrying development is the fact that new products are now
only largely defending ASPs, rather than driving them up overall. For example,
William Demant’s flagship product line, the Oticon Alta, was launched at a list
price 0-5% higher than the previous flagship line, Agil. However, factor in the
likely discounts coming off the list price and it is doubtful that William Demant is
seeing any benefit on ASPs at all (the company all but confirmed this to be the case
at the capital markets day in June).
And the share gain feast is ending too
For most of the last five to seven years, two manufacturers, namely William
Demant and Sonova, have steadily taken share from the remainder of the industry,
principally from GN Resound and Siemens. However, with GN having
restructured its operations and launched the highly competitive Verso range, it is
now firmly back in the game, in our view. Even perpetual industry whipping boy
Siemens seems to have regained some traction with its new MICON range. With
competition more intense and investors hungry for growth, we think
manufacturers are becoming increasingly willing to swap volume for price.
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The cochlear and bone-anchored hearing aid markets
The cochlear implant and bone-anchored hearing aid markets are attracting a lot of
interest among the larger players in the industry, as, although small, they are
growing fast and potentially come with attractive margins – especially in the case of
cochlear implants.
The cochlear implant market
Until 20 years ago, there were limited, if any, options for those with profound
hearing loss or total deafness. However, the advent of the cochlear implant
changed this, allowing innovative manufacturers to penetrate a largely virgin
market. Since then, the cochlear implant market has grown at a c10% CAGR, and
for 2012 was worth just short of $1bn. There are roughly 45,000 units sold per
annum, with market leader Cochlear having sold 26,674 units in the year to 30 June
2013. There is also a reasonable market in accessories and processor upgrades,
worth around 15% of the total market in our view.
In addition to high unit growth, cochlear implants have the potential to generate
relatively high margins (25-28% versus hearing instrument margins closer to 2025%). These margins are high for two reasons, in our view: 1) greater technological
innovation; 2) the market is very concentrated, giving producers price-setting
power. As it is an innovative space, there is scope for premium pricing; however,
the market is also very concentrated, with the top two players on our estimates
holding c85% market share. As a result of these two factors, prices for cochlear
implants are as high $25,000 apiece, although they take into account discounts, etc,
and ASPs are typically in the $18,000-20,000 range. Thus, while in volume terms
cochlear implants account for just 0.35% of hearing instruments sold globally, they
account for 19% or $1,000m of the $5.25bn market.
The market is expected to grow at a 10-15% CAGR in the medium term, driven by
increased penetration in the 65+ age group (currently just 30% of patients),
increased binaural fitting rates and expansion into emerging markets. Processor
upgrades also contribute to market growth, especially for those cochlear implant
companies with significant hearing aid businesses (Sonova and William Demant)
who can leverage their R&D on the hearing side into the cochlea implant business.
Key players in the cochlear implant market
The cochlear implant market is dominated by the listed Australian company
Cochlear, with the remainder of the market basically split between AB (owned by
Sonova) and private company Med-El. William Demant recently entered this
market with the acquisition of the French company Neurelec.
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Cochlear company market shares
William Demant
(Neurelec) 2%
Others, 1%
Med-El, 20%
Sonova (AB), 15%
Cochlear, 62%
Source: Company reports.
The main players in the cochlear implant market are as follows.
Cochlear Limited – This is a c$3bn listed Australian company which was founded
in 1983 in Sydney and has come to dominate the cochlear implant market. The
company has annual sales of A$753m ($685m), A$636m ($580m) of which is in
cochlear implants. We estimate that this gives the company a 62% share of the
market, and, although it remains the dominant player, it is under increasing
pressure from competitors, particularly Advanced Bionics (now part of the Sonova
group).
Advanced Bionics (now Sonova) – The company was founded in 1993 by Al
Mann and was bought by Boston Scientific in 2004 for $740m. Ultimately, the
companies ended up in a court battle which resulted in the original deal being
unwound and Advanced Bionics being left with the auditory and drug pump
development business. Sonova then bought it for $496m in 2009. AB is currently
the No.3 player in cochlear implants with a 16% market share and 2012 sales of
CHF147m.
Med-El – This a private company founded in 1989 in Austria. Little financial
information is available, but we believe it is the second-largest player in the
Cochlear market with a c20% market share.
William Demant – Through its 2013 acquisition of Neurelec, the company now
competes in the cochlear market, although its penetration is very limited, with just
2% market share. This does, however, belie a relatively high market share in its
home market of France. Bought by William Demant earlier this year for c$75m, the
company was established as a spin-off from MXM in 2006 and was the first to
produce a fully digital cochlear implant system in 1992. It had around $24m in sales
in 2012, and, as such, is a minor player in the cochlear implant market.
Geographic breakdown of cochlear implant market
The cochlear implant market is concentrated in North America and Western
Europe, as the chart below illustrates, with Asia-Pacific and RoW accounting for
far less of the global market than is the case for traditional hearing aids. Price is the
main factor: a cochlear implant, at c$25,000, is roughly 200x more expensive than a
low-end hearing aid, and that’s even before the surgical costs of implantation are
taken into account. However, this does not mean that Asia-Pacific is not a decent
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growth opportunity. China, for example, is a rapidly expanding market, often
inviting offers for large volume tenders.
Geographic breakdown of cochlear implant market
RoW, 10%
North America,
40%
Asia-Pac , 15%
Europe, 35%
Source: Company reports.
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The bone-anchored hearing aid market
The BAHA market is worth c$125m globally, and has grown quickly (c16%
CAGR) since 2007. Despite this growth, it remains a relatively underpenetrated
market – just 100,000 people globally having a BAHA at present.
The success of the BAHA is due, in part, to its ability to deliver superior sound in
noisy situations and the fact that it is not placed in the ear canal, which improves
comfort and reduces potential for ear infections. While substantially more
expensive than standard hearing aids, at $4-7k per unit for a BAHA versus $100$1,200 (at the wholesale level) for a hearing aid, they are much cheaper than
cochlear implants, and also much less expensive to insert. However, the relative
cost is somewhat unimportant as BAHAs, cochlear implants and regular hearing
aids don’t compete for the same customers.
We expect the market for BAHAs to continue to grow at a 10-15% CAGR over
the medium term, driven by increased penetration, wider reimbursement and
industry acceptance of the procedure by surgeons. Much like the cochlear implant
market, this segment is heavily dominated by two players, Cochlear and William
Demant, who have c95% share between them. The remaining 5% is split between a
number of smaller suppliers, the largest probably being Med-el, and the others two
US companies, Sophono and Sonitus.
Sophono’s products differ from traditional BAHAs in that they either function
without an implant (the device is held in place with a headband) or with an implant
but without an external abutment, the device being held in place by magnetic
coupling.
Sonitus markets a removable non-surgical device that is attached to the teeth and
works through the same principle of bone conduction.
Bone anchored hearing aid market share
William Demant,
25%
Cochlear, 70%
Others, 5%
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Bone-anchored hearing aid market growth
$140m
$120m
16% CAGR
$100m
$80m
$60m
$40m
$20m
$0m
2007
2008
2009
2010
2011
2012
2013E
Other hearing technologies
There are three other technologies used to help those with hearing difficulties
1) Personal amplifiers. These are really just very simple versions of hearing
aids that utilise either an ear-worn device or a separate receiver that is used
with headphones. These typically retail for less than $75 and tend to be
quite basic. They are only really useful in static situations, such as watching
TV. The market size is hard to estimate and largely irrelevant for the
hearing aid manufacturers.
2) Middle ear implants. These are similar to cochlear implants in that they
are surgically implanted but, instead of stimulating the cochlea directly via
an electrode, they stimulate it by creating vibrations in the middle ear.
These are only really sold by Med-el. Sonova did have a middle ear implant
programme (it referred to it as Direct Acoustic Cochlear Stimulation, or
DACS), but this never got out of the R&D stage. Cochlea does have a
program in this space but it draws little attention to it. These are a
relatively new innovation, the insertion surgery is complex, reimbursement
is patchy and the market remains nascent.
3) Auditory brain stem implants (ABIs). Like cochlear implants, only the
electrode is placed directly into the brain. This constitutes a salvage
procedure for those with no cochleae. These are not commercially
relevant.
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Diagnostic audiology
The diagnostic instruments market in audiology is small relative to the treatment
market. All of the major hearing aid players bar William Demant and GN Store
Nord have chosen to stay out of it. We do not view the market as attractive enough
to lure other major players despite its steady, low-risk growth. It simply doesn’t
appear to be lucrative enough.
The main areas and corresponding devices in diagnostic audiology are as follows.

Middle ear: Impedance audiometers are used to assess tympanic
membrane and middle-ear function. A probe with a soft tip is placed in the
ear canal and forms an airtight seal. The probe plays a tone, usually at 226
Hz, and varies the pressure in the ear canal. By measuring acoustic
transmission at various pressures, the device can yield information about
the stiffness of the middle ear that can help a physician to localise
pathology in the ear.

Inner ear: Otoacoustic emission (OAE) measurement tests cochlea
function. The cochlea was found to be capable of producing sound in
1978 (although this phenomenon was predicted as far back as 1948), either
spontaneously without external stimulation (spontaneous OAE) or in
response to a stimulus, so-called evoked OAE. OAEs are thought to be
part of the amplification/sound processing function of the cochlea, and
are generally thought to come from the outer hair cells. OAE testing
involves listening to a clicking sound or a combination of two tones for a
few minutes. The device simply listens back for evoked OAEs. The test is
quick, painless, easy to administer and used in many national screening
programmes to test the hearing of new-born babies.

Auditory brainstem: ABR (auditory brainstem response) is a neurological
test. It measures the response of the auditory brainstem to sound, so-called
auditory evoked potentials. This test assesses brain function with regard to
sound.

Motor function: VNG (Video nystagmography) is used to test whether
balance disorders are caused by the inner ear. Infrared technology is used
to trace eye movement in four tests. The caloric test is the audiology part
of the four tests. It involves measuring eye movement when warm and
cold water is circulated through a small, soft tube in the ear canal. It is
possible that the cause of the balance disorder is in the ear if this test
affects eye movement.

Hearing aid analysers and test boxes: These box-set machines do what
they say on the tin. They are used to programme hearing aids when being
fitted. This includes adjusting basic settings as well as more complex
processes, such as binaural capability. There is a move towards wireless
systems as hearing aids themselves move to wireless. This enhances
convenience and efficiency.
Market landscape and outlook
The diagnostics market is highly concentrated. William Demant is the number one
player, with a 36% share. GN Otometrics (part of GN Store Nord) is the secondlargest player, with a 21% share, and the listed US company Natus is the other large
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player, with 11%. Natus specialises in new-born screening, and we suspect that its
market share in this segment is significantly higher.
These three companies have consolidated the sector, recently increasing their share
from 60% in 2009 to the current level of around 70%. We believe that scale is
important, and smaller players are getting squeezed out. We expect to see this
consolidation continue, but probably at a slower pace.
The market has grown steadily over the past decade. The only periods of volatility
have been recessions, which have bounce-backs in the subsequent years typical of
capital goods-type businesses. We think the market is low risk, offering steady but
low 2-4% growth over the medium term. We believe this growth is attractive
enough to lure the other hearing instrument manufacturers into the diagnostics
market. But we also think the entrenched position of the top three firms would
likely make entry costly and difficult unless one on the incumbents was looking to
sell out. Of the big three, only Natus is a possibility in our view as we doubt GN or
William Demant would be willing to exit the diagnostics business. To us, the
opportunity simply wouldn’t be large enough to justify the costly entry.
A decade of steady diagnostics growth
6.0%
Diagnostics market share
CAGR 2.8% (2003 - 2012 )
5.0%
4.0%
William
Demant
36%
3.0%
2.0%
1.0%
Other
Manufacturers
30%
Total value
$260m (DKK1.5bn)
0.0%
-1.0%
Rion 2%
-2.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Diagnostic market growth
GN
Otometrics
21%
Source: Berenberg estimates, William Demant
The main companies in audiological diagnostics are as follows.
1) William Demant – The company operates right across the spectrum
under six different brands; Grason Stadler, Interacoustics, Maico
Diagnostics, MedRx, Micromedical Technologies and Amplivox. It is the
No.1 player in the market. It and GN Store Nord are the only of the big 6
hearing aid companies involved in diagnostics. Diagnostics accounts for
10% of William Demant’s group sales.
2) GN Otometrics – This is part of GN Store Nord (8% of sales), and sits
with the GN Resound side of the business. It is comprised of various
acquisitions that began in 1990. It is the largest global supplier of
computerised audiology and hearing-instrument fitting equipment, despite
being the second-largest player in the market. It operates under four brand
names; Madsen, Aurical, Hortmann and ICS.
3) Natus – This is a listed US company with a market capitalisation of
c$400m. It specialises in screening for neonates and infants in the areas of
hearing and jaundice, although it does also market diagnostic hearing
products and a range of other diagnostic equipment.
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William Demant company profile
Denmark-based William Demant is one of the oldest hearing aid manufacturers in
the world, having been founded in 1904. The company has a c22% share in the
hearing aid market which makes it the number two player behind Sonova. As well
as traditional hearing products, the company also markets a range of diagnostic
instruments, bone-anchored hearing aids, and, following the 2013 acquisition of
Neurelec, cochlear implants, making it the most diversified of the hearing health
companies. It also markets a range of personal communication devices.
Corporate structure
Group corporate structure
William Demant Holding
Hearing Devices
Personal Communicatinons
Bernafon
Oticon
Oticon Medical
Sonic
Amplivox
Grason-Stadler
Interacoustics
Maico Diagnostics
MedRx
Micromedical
Phonic Ear
Sennheiser
Shared functions
Operational activities
Distribution activities
The Group is split into three units, Hearing Devices, Diagnostic Devices and
Personal Communications.

Hearing Devices. This accounts for c87% of revenue and is split across
four brands: 1) Oticon, the original hearing aid business upon which the
company was founded, and which is the premium offering; 2) Bernafon,
which was acquired in 1995 and offers mid-level value driven products; 3)
Sonic, a brand that came with the acquisition of Otix in 2010 and is
primarily aimed at the US. 4) Oticon Medical is the implant business
within William Demant and was launched in 2009. It manufactures
cochlear and bone-anchored implants, and was strengthened by the
purchase of Neurelec earlier this year (a French cochlear implant
company).

Diagnostic Instruments. This accounts for 10% of revenue and is split
across several brands, most of which were acquired. William Demant
offers the full range of instruments in the audio diagnostic space, with
certain brands, such as Amplivox, specialising in audiometers, and others,
like MedRx, specialising in otoacoustic emissions measuring and
interacoustics operating across the full product spectrum. The company
has a 36% market share in the instruments segment of the diagnostic
market.
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
Personal Communications. This is the smallest division of the Group,
accounting for just 3% of revenues. It is a relatively new division, with
Phonic Ear having been acquired in 1997 and the JV with Sennheiser
having only been formalised in 2003. This space is particularly
competitive, with GN Store Nord and Plantronics particularly strong
participants.
William Demant geographic sales split
William Demant product sales split
Other Countries,
4%
Asia, 8%
Oceania,
10%
Europe,
39%
Diagnostic
Instruments,
10%
Personal
Communications,
3%
Hearing
Devices,
87%
North
America,
39%
Corporate history
Life started at the beginning of the 20th century
William Demant was founded as Oticon, a hearing aid sales agency, in 1904 by
Hans Demant, whose wife suffered from hearing loss. Following Hans’s death in
1910, his son William took over the business and expanded sales across Europe
over the next 40 years, and also established a manufacturing facility during WWII
as supply of instruments from the US became scarce. In 1964, William handed the
reins to four managers he had brought in over the previous two decades. In 1957,
he donated his family’s shares in the company to the Oticon Foundation, a charity
aimed specifically at helping those with hearing impairments. Today, the Oticon
Foundation is the largest shareholder in William Demant, owning around 55% of
the company with a target range of 55-60%
Became a full-scale manufacturer in the 1970s
The company went on to expand and build out its manufacturing and research
facilities in the 1970s, with factories set up in Denmark and Scotland, as well as a
research centre in Eriksholm, Denmark.
The ‘90s saw significant M&A activity as well as the IPO
The 1990s saw a flurry of acquisitions as William Demant looked to build out its
offering in the audiology space. First came Bernafon, a Swiss hearing aid
manufacturer acquired in January 1995. This acquisition was carried out prior to
the William Demant listing on the Copenhagen Stock Exchange in May that year.
After this, the company acquired Phonic Ear just two years later, in 1997 – a
Personal Communications business with a heavy focus on FM and wireless
technology. The last deal done in the 1990s was the purchase of headset
manufacturer, DanaCom, in 1999, which helped to diversify the business from
hearing aids and round out the communications offering.
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M&A activity has continued in the 21st century
The company began the 21st century much like it ended the 20th – by acquiring
another company, Interacoustics, this time in the diagnostics space. Although
many of these acquisitions were bolt-on in size, they helped diversify the business
away from a pure hearing aid manufacturer model. In 2003, William Demant
entered into a joint venture with German electronic maker Sennheiser. The JV was
named Sennheiser Communications A/S and manufactures headsets for phones,
as well as computers. The company also continued to build out its diagnostic
offering by acquiring audiometer manufacturers Amplivox in 2008 and Grason
Stadler in 2009.
Even while building out its diagnostics division, William Demant did not take its
eye off the traditional hearing aid business, entering the bone-anchored hearing
implant market in 2007 with the creation of Oticon Medical. Its first product, the
Ponto implant, was launched in 2009. Oticon Medical has since entered the
cochlear implant market with the group’s purchase of French company Neurelec.
The $74m deal done earlier this year now gives William Demant a much broader
reach in the specialist bone-anchored and cochlear implant markets (they now sell
in over 30 countries).
William Demant also a significant retailer
Along with Sonova and GN, William Demant has been one of the more proactive
hearing aid companies when it comes to forward integrating into the retail space,
and we estimate it now operates over 1,200 retail outlets in a number of different
markets.
In revenue terms, William Demant does not disclose the contribution retail makes
to Group revenues, but based on the number of stores we believe it operates, we
estimate retail sales account for 20-25% of Group revenue.
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Operational footprint
William Demant operates multiple subsidiaries across the globe, but with most
administrative functions concentrated in Denmark. The group’s headquarters are
located in Smørum, Denmark (not far from Copenhagen), with the other key
location being Eriksholm, Denmark some 50 miles away where the group’s main
research centre is located.
William Demant global footprint
Oticon Medical
Askim, Sweden
Micromedical
Illinois, USA
MAICO
Diagnostics
Berlin, Germany
Interacoustics
Assens, Denmark
Amplivox
Oxford, UK
Grason-Stadler,
Minneapolis, USA
Sonic
New Jersey,
USA
MedRx
Florida, USA
Neurelec,
France
Sennheiser
Solrod Strand,
Denmark
Group HQ,Oticon &
Phonic Ear
Kongebakken, Denmark
Production Centre,
Poland
R&D Centre
Eriksholm, Denmark
Source: Berenberg, Company data
Corporate Governance
The executive management is supervised by the Board of Directors which includes
four shareholder-elected directors and, like many other Scandinavian companies, a
number of staff-elected directors (three in this case). Although there are four
shareholder-elected directors, Chairman Lars Norby Johansen is not considered
independent, having been on the Board for more than 12 years. Thus, the Board
technically has a majority of non-independent directors.
The company adheres to the recommendations of the Danish Stock Exchange in
relation to Corporate Governance and disclosures except where it believes it has a
legitimate reason not to do so. Key exceptions include not having a majority of
independent Board members on the audit committee – the entire Board sits on
this committee which includes staff-elected members, and not having a
remuneration committee, which the company believes is unnecessary due to a lack
of a long-term incentive scheme or variable pay. With new recommendations
proposed by the Danish Committee on Corporate Governance in January 2013,
the company has committed to consider the new recommendations under the
“comply or explain” principle, which is currently applies.
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Supervisory Board
Lars Norby Johansen
Peter Foss
Niels B. Christiansen
Thomas Hofman-Bang
Ole Lundsgaard
Jorgen Moller Nielson
Karin Ubbesen
Chairman of the Board, Former CEO of G4S
Board member, Chairman of the Board of FOSS A/S
Board member, CEO & President of Danfoss A/S
Board member, Former President & CEO NKT holding A/S
Board member, Staff elected member
William Demant’s executive management structure is somewhat unusual in that the
Executive Board, if you can call it that, consists of just one person, the CEO Niels
Jacobsen. Other key management personnel, such as Oticon president Søren
Nielsen and Diagnostics president Arne Boye Nielsen, are simply employees, albeit
very senior ones.
Executive remuneration
Unusually for a listed entity, William Demant does not offer its executive
management any form of variable compensation, it simply pays what it considers a
competitive fixed salary. As such, it does not have a remuneration committee;
instead, the Board assesses the remuneration paid to the directors and to
executives once a year. Although William Demant’s Board has a slightly odd
balance of independent and non-independent members (three independent, three
non-independent and one (the Chairman) who is independent but is technically
classified as non-independent by virtue of his length of tenure), in practice the
Board is highly accountable, as four of its members are answerable annually to the
shareholders and the remaining three to company workers who have no incentive
to see remuneration levels out of kilter with the industry in general. Despite the
structure, this seems to work, with CEO Niels Jacobsen paid DKK12m in 2012,
equivalent to a little over $2m, which is not excessive by hearing aid or med tech
industry standards, in our view.
Articles of Association
We find nothing of concern to us in the Articles, although we do note that there
are several statements which are relevant for investors, given the nature of William
Demant’s shareholder concentration. An EGM is dependent on 5% of
shareholders acting together, which is much lower than is usual. Further, there is
no requirement on the size of shareholding to submit an issue to the Board to be
brought up at the AGM.
Changes to the articles of association or the act of a resolution in relation to the
company’s dissolution, division or merger with another company require 51% of
the share capital to vote and a two-thirds majority of those voting for the motion
to pass. In practical terms, this ensures that Oticon Foundation is the controlling
entity.
Corporate Social Responsibility
William Demant has taken a holistic approach to CSR by not only complying with
the obligations imposed on it by Danish law but also adopting a 14 principle policy
towards all its activities, being an active member of the UN Global Compact
Initiative and formulating a business ethics policy for dealing with customers and a
code of conduct for suppliers.
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The company’s activities are guided by its 14 Group Principles relating to four
focus areas: corporate governance, people and society, environmental protection
and business ethics. The principles, in essence, outline the group’s attitude towards
these focus areas which can be summed up as a policy of transparency and
accountability from a governance perspective, adherence to the Universal
Declaration of Human Rights, minimising the impact of the company on the
environment and operating in an ethical fashion.
Shareholder structure
The shareholder structure of William Demant is skewed by the Oticon Foundation
in that it owns c55% of outstanding shares. These shares were donated to it by the
late William Demant and his wife in 1957.
Oticon Foundation structure
Donations
Oticon Foundation
William Demant Invest A/S
William Demant
Holdings A/S
Ossur hf
Jeudan A/S
~ 55-60%
~ 41%
~ 42%
Unisense
FertiliTech A/S
~ 32%
Borkum Riffgrund
1
~ 19%
The Oticon Foundation distributes funds to causes related to hearing disabilities
with income earned via its various holdings, as outlined in the table below. The
foundation’s main purpose is to safeguard and develop the commercial activities of
William Demant Holdings. William Demant Invest A/S, which the foundation
owns in its entirety, invests in businesses which resemble, but are not within,
William Demant Holding’s strategic sphere. The foundation has concluded a
commercial arms-length agreement with management that William Demant
Holding will handle the administration of investments made by William Demant
Investments.
The Articles of the Oticon Foundation stipulate that it must maintain control of
William Demant.
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Share ownership
William Demant
3%
Employees 2%
Danish
Institutions 7%
Foreign
Institutions 26%
Oticon
Foundation
54%
Free float,
41%
Danish Private 3%
Other & nonregistered 5%
The 41% free float has a fairly segmented institutional holding. According to
Bloomberg data, Capital Research (World) has the largest share, at 3%, and the top
10 shareholders hold just c15%. The remaining c30% of outstanding shares are
held by unregistered shareholders and/or are small holdings.
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Liquidity
Given the relatively limited free float, William Demant’s liquidity is not as bad as
one might expect. Over the last 10 years, it has averaged DKK40m per day
(around $7m per day at current rates), and in the last 12 months this figure has
been nearer to DKK48m ($9m) per day.
William Demant average daily liquidity 2003-2013
DKK120m
Value traded (Line)
DKK100m
DKK80m
DKK60m
DKK40m
DKK20m
DKK0m
May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13
Source: Bloomberg. Figures are 10-day rolling averages
William Demant average daily liquidity for the last 12 months
DKK90m
DKK80m
Value traded (Line)
DKK70m
DKK60m
DKK50m
DKK40m
DKK30m
DKK20m
DKK10m
DKK0m
Aug 12
Nov 12
Feb 13
Source: Bloomberg. Figures are 10 day rolling averages
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Aug 13
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Management profiles
By contrast with some of the other companies in the sector, the management team
at William Demant has been very stable. The current CEO, Niels Jacobsen, has
been at the company for over 20 years.
Niels Jacobsen, President & CEO
Joined William Demant: 1992
Previous roles at the company: Executive Vice President
Mr. Jacobsen joined William Demant in 1992 as an Executive Vice President,
before being appointed CEO and President in 1998. Prior to joining William
Demant, he held positions including President of Orion A/S and Vice President of
Corporate Affairs for both Atlas Danmark A/S and Thrige-Titan A/S. Mr.
Jacobsen is a member of several Boards, including being Chairman of LEGO A/S
and Deputy Chairman of A.P. Moller-Maersk. He holds an M.Sc. in Economics
from Aarhus University.
Søren Nielsen, President Oticon
Previous roles at the company: Various positions in Oticon
Mr. Nielsen joined the company in 1995, initially working for Bernafon in Bern.
After two years, he moved to Oticon, where he worked in the R&D unit. In 2008,
he was appointed President of Oticon. Mr. Nielson holds an M.Sc. in Industrial
Management and Product Development from the Technical University of
Denmark.
Arne Boye Nielsen, President Diagnostic Instruments & Personal
Communication
Previous roles at the company: Various positions in Oticon
Mr. Nielsen has spent his entire career with William Demant, having joined in
1990. He worked as a management assistant to the current CEO, Niels Jacobsen,
and as interim general manager of Oticon Australia before taking up his current
role in 1996. Mr. Nielsen holds an M.Sc. in Business Administration from
Copenhagen Business School.
Lars Nørby Johansen, Chairman
Other Board chairmanships: Codan A/S, Dansk Væst Kapital, Falck A/S,
University of Southern Denmark, DONG Energy (deputy chairman), The
Rockwool Foundation (deputy chairman).
Other board memberships: Arp-Hansen Hotel Group A/S, Index Award A/S.
Mr. Nørby Johansen has vast experience in the corporate world, having been
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instrumental in developing G4S into the company it is today. He was appointed
Managing Director in 1988 when Falck was acquired by Baltica, a Danish
insurance company. He then became CEO of the new entity in 1995 and, by 2000,
G4S (as the company would become known) was the second-largest security
provider in the world. Mr. Nørby Johansen stepped down as CEO in 2005 after
transforming the company over nearly two decades. He sits on multiple Boards
now, including DONG Energy, IC Companys and The GEO Group.
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Sonova company profile
Switzerland-based Sonova is the market leader in the hearing aid industry with
around a 24% share of the wholesale market as well as significant retail operations.
It also holds the No.3 position in the cochlear implant market following the
acquisition of ABI in 2010.
Corporate structure
Corporate structure
Sonova Group
Hearing Instruments
Retail
Implants
Sonova is headquartered in Stäfa, Switzerland, and is split into two main segments,
hearing aids (92% of 2012 sales) and cochlear implants (the remaining 8% of 2012
sales). The hearing aid business consists of three core brands, Connect Hearing (its
retail operation), Unitron and Phonak. Connect Hearing is the retail side of
Sonova, which offers professional services and consultations direct to end-user
customers. Phonak and Unitron are both hearing aid manufacturers and are
recognised global brands.
The implants business consists of Advanced Bionics, which Sonova bought in late
2009 for $489m. Although cochlear implants make up just a small percentage of
sales currently, they are experiencing very fast growth.
While there are distinct businesses and brands within the Sonova Group, they are
all led, ultimately, by CEO Dr. Lukas Braunschweiler who, along with the rest of
his executive team, sets the direction for the group as a whole.
2012 sales by geography
Asia/Pacific
11%
2012 sales by product area
Switzerland
2%
Miscellaneous
14%
USA
37%
EMEA
(ex Switzerland)
38%
Cochlear
Implants
8%
Premium
Hearing
Instruments
22%
Personal
Communications
4%
Standard
Hearing
Instruments
28%
Americas
(ex. USA)
12%
Advanced
Hearing
Instruments
24%
Company history
Sonova was founded in 1947 as ‘AG für Elektroakustik’ in Zurich by a group of
French/Belgian investors who introduced the first portable hearing aid in 1950.
The company was then acquired in 1965 by Ernst Rihs, who helped shape the
company into its current format today and who was joined shortly after by his two
sons, Andy and Hans-Ueli Rihs, as well as Beda Diethelm. In 1978, Phonak, as the
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company was by then known, released the first ever behind-the-ear hearing aid that
delivered the same performance as a portable hearing aid. Following the death of
Ernst Rihs in 1980, his two sons took over his shares and along with Beda
Diethelm continued to grow and reshape the business, moving its corporate
headquarters to Stafa in Switzerland in 1987.
Phonak then moved into wireless communication. This proved to be a wise
investment, with the creation of Phonak Communications in Murten Switzerland in
1992. Shortly after this, in 1994, the company was floated on the Swiss Stock
Exchange. During the 1990s, Phonak continued to innovate and release marketleading products, including Claro in 1999, the first fully-digital Phonak hearing
system with an design integrated FM receiver.
An important development occurred in 2003 when the company made its first
move into China with the construction of a production plant, followed by a plant
in Vietnam in 2007. It now has a large presence in Asia, with the region
representing nearly 70% of its suppliers by volume in 2012. In 2007, the company
was renamed Sonova Holding AG, although company branding remained the same
at individual level, with the Phonak brand continuing. In the same year, Sonova
attempted to consolidate its position in the hearing aid market through the
acquisition of GN ReSound from GN Store Nord for DKK15.5bn ($2.87bn).
However, the German competition authorities prevented the deal from completing,
based on the potential for the market to become an oligopoly. Not long afterwards,
in 2009, Sonova did manage to acquire Advanced Bionics for c$500m in order to
enter the emerging cochlear implant market (AB had 18% market share at the time
of purchase).
Operational footprint
Sonova’s operational footprint is spread across the globe by need. Asia has become
an important hub for the company, which has operations in China and Vietnam.
Outside of this, the company has most of its important administrational functions
located in the developed world, with the group’s headquarters located in Stäfa,
Switzerland since 1987.
Sonova global footprint
Operation Centre
Stafa, Switzerland
Phonak Lyric Center
Newark, USA
Unitron HQ
Ontario, Canada
Phonak Communications HQ
Murten, Switzerland
AB HQ &
Operation Centre
Los Angeles, USA
Sonova HQ
Stafa, Swtizerland
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Operation Centre
Suzhou, China
Operation Centre
Ho Chi Minh City, Vietnam
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Articles
There are some unusual aspects to the articles governing Sonova’s shareholding
structure. An interesting provision is that no shareholder may combine, with their
own and represented shares, more than 10% of the total shares as shown in the
Commercial Register, although shareholdings owned by legal entities associated in
terms of capital or votes by single management or in a similar way in nature are
treated as one entity. This does not, however, apply to founder members as the rule
came in post their shareholding, and the Board of Directors may approve other
exceptions with good reason. While this is not ideal from a corporate governance
perspective, as it allows founding members greater privilege than other
shareholders, in practice we don’t think it is likely to be an issue of great relevance
to shareholders.
Other than this, we see little of note from an external investor’s perspective.
Corporate governance
The controversy in 2011 brought corporate governance into focus at Sonova and
the new management team has clearly targeted this as a priority area. The company
follows the Swiss Code of Obligations, the SIX Swiss Exchange Directive on
Information Relating to Corporate Governance and the standards defined in the
Swiss Code of Best Practice for Corporate Governance. As evidence of an active
approach to corporate governance, the company introduced a revised Code of
Conduct and several new policies in 2012, including an anti-bribery policy. It also
restructured executive pay in order to ensure best practice.
The Supervisory Board is responsible for the supervision of the executive
management team.
Members of the Supervisory Board
Robert F. Spoerry
Andy Rihs
Anssi Vanjoki
Beat Hess
Jinlong Wang
John J. Zei
Michael Jacobi
Ronald van der Vis
Chairman, former CEO of Mettler-Toledo
Member, company co-founder, former CEO and Chairman of the board of Sonova
Member, Individual Multicontributor of RKBS Oy
Vice-Chairman, Former member of Group Executive Committee at Royal Dutch Shell
Member, Senior VP of Starbucks Corporation and President of Asia-Pacific
Member, former CEO of Knowles Electronics
Member, former executive committee member of Ciba-Geigy Group
Member, former CEO of Esprit Holdings
Board members are elected by the shareholders for a maximum term of three years,
with staggered elections, and 70 is the maximum age. At present, seven of the eight
Board members can be considered independent. We note that Mr. Andy Rihs was
given an exemption from the upper age limit, having turned 70 last year. He will
now remain on the Board until the AGM in 2015.
Executive remuneration
Sonova overhauled its remuneration system in 2011 and 2012 in order to bring it
up to international best practice. Key components of this overhaul included the
introduction of the Sonova Share Ownership Guidelines, which require
management to hold a minimum amount of equity, and for the Board of Directors
a change in mix from share options and restricted share units to simple restricted
shares.
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Executive remuneration consists of three main components.
1. Fixed-base salary.
2. Variable cash compensation – This is paid as a lump sum at the end of
the fiscal year, and only when relevant performance goals are met. The
weight allocated to fixed and variable cash pay is dependent on the
employee’s position, with the target level being 10-43% for middle and
upper management.
For 2012, the executive team had variable compensation that accounted
for 45-50% of base salary, except for the CEO whose weighting was closer
to 63%. Individual targets as well as group-wide metrics such as sales,
EBITA and EPS targets are used. If performance exceeds a certain target,
the related variable compensation can go above 100%, but is capped at
200%.
3. Long-term incentive – The Executive Equity Award Plan (EEAP ) is the
long-term component of executive pay, with awards historically made in
the form of options, restricted stock units and restricted shares. For fiscal
year 2012/13, senior management were given 50% of the grant value in
options and 50% in restricted share units (RSU’s), except for the CEO
who received a 62.5%/37.5% option/RSU split. The options/RSU’s vest
in four equal annual instalments starting on 1 June the year after grant. The
options are granted with a strike price equivalent to the share price at the
time of granting, and expire after seven years. The RSUs are simply
converted to equity on vesting.
In order to best align management and shareholders, the Board introduced
minimum share ownership requirements for management and non-executive Board
members. Each member of the Board of Directors must hold at least 2,000 Sonova
shares; the CEO must hold 8,000; the Group Vice Presidents (GVPs) 3,000; and
the Vice Presidents (VPs) of the Management Board 1,500 shares each. These
holdings must be achieved within three years. As of March 2013, the CEO held
7,000 shares, 6,014 RSUs and 46,244 options.
Lastly, Sonova does not provide severance pay in the event of termination or
change of control. It instead allows unvested equity awards to vest pro-rata.
Corporate Social Responsibility (CSR)
Sonova has taken a very proactive approach to CSR and has established a complete
group-wide organisation which is governed by the CSR Steering Committee made
up of five members of the Board of Management and chaired by the CEO. The
organization is integrated internally by a CSR Network which is split along country
and business function lines. In addition to this organisation, Sonova has a range of
initiatives and procedures in specific focus areas identified by the Global Reporting
Initiative. For example, it has Group Supplier Principles which all suppliers must
pass before any business can be conducted. These principles are there to ensure
that suppliers act in a sustainable, employee-friendly and ethical manner. Sonova
has received a number of CSR certifications including Level C Global Reporting
Initiative Certification.
Sonova also has its own Hear the World Foundation, which was set up in 2006.
The aim of the foundation is to promote equal opportunities and enhance quality
of life for people with hearing loss globally. The foundation commits financial
resources and provides hearing aids in order to achieve its aim.
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Shareholder structure
The shareholder structure at Sonova is reasonably concentrated, with the top six
shareholders accounting for c39% of the company. The free float is currently
c78%.
Founders Andy Rihs, Hans-Ueli Rihs and Beda Diethelm collectively hold c22% of
the share capital. Andy Rihs has sold down his stake this year to fund other
business ventures by placing c1m shares, reducing his holding to 6% from about
8%. We have no reason to believe either of the other two founders intend to sell
down their stake, and we note that Mr. Rihs’s sales in 2013 have been orderly and
well flagged.
Sonova shareholding structure
Not registered
5%
Registered
shareholders with
interests below 3%
29%
Chase Nominees
Ltd
17%
MFS Investment
10%
Beda Diethelm
10%
Harding Loevner
LP, 3%
AKO Capital, 3%
Andy Rihs
BlackRock Inc, 3%
6%
Mellon Bank
Nortrust
Hans-Ueli Rihs
Nominee Nominees Ltd
6%
4%
4%
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Liquidity
Sonova is a reasonably liquid stock with an average daily traded volume of
CHF17m over the last 10 years and CHF16m over the last 12 months, as shown
below. It has, however, enjoyed periods of sustained liquidity, most notably in the
2006-late 2007 and 2011 timeframe.
Sonova trading volume by value 2003-2013
CHF80m
CHF70m
Value traded (Line)
CHF60m
CHF50m
CHF40m
CHF30m
CHF20m
CHF10m
CHF0m
May 03
May 04
May 05
May 06
May 07
May 08
May 09
May 10
May 11
May 12
May 13
Source: Bloomberg
Sonova trading volume by value last 12 months
CHF30m
Value traded (Line)
CHF25m
CHF20m
CHF15m
CHF10m
CHF5m
CHF0m
Aug 12
Nov 12
Feb 13
Source: Bloomberg
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Management profiles
The management team at Sonova changed significantly in 2011. The
company issued a profit warning on 16 March 2011, but ahead of this the
responsible persons at Sonova did not issue an internal blackout period for
trading. Consequently, share sales took place that should not have done.
The then CEO and CFO, Valentin Chapero and Oliver Walker, both
resigned and the then Chairman of the Board Andy Rihs resigned his
Chairmanship, although he remained on the Board. There were other
subsequent changes of the executive team.
However, since the events of early 2011, the executive management team has
been stable. The current team is as follows.
Lukas Braunschweiler – CEO
Joined Sonova Group: November 2011
Current role since: CEO
Previous roles: CEO at Ruag, CEO Dionex, Mettler Toledo
Dr. Braunschweiler joined the Sonova Group as CEO in November 2011 and
brings a wealth of technology- and healthcare-specific expertise. He held various
senior positions at the precision instruments manufacturer Mettler Toledo between
1995 and 2002. He then moved to become President and CEO of the Dionex
Corporation (2002-2007), since then acquired by Thermo Fisher Scientific for
c$2bn. Having enjoyed success at Dionex (taking the share price from c$20 to
c$70), he moved into the aerospace and defence technology industry as CEO of
Swiss company Ruag, where he remained for two years prior to joining Sonova. Dr.
Braunschweiler has a masters degree in analytical chemistry (1982) and was
awarded a PhD in physical chemistry (1985) from the Swiss Federal Institute of
Technology (ETH) in Zurich, Switzerland.
Hartwig Grevener – CFO
Joined Sonova Group: August 2012
Current role since: CFO
Previous role: CFO at Jet Aviation, Gate Gourment
Mr. Grevener’s background is in the industrial and engineering industries where he
worked for companies including BMW, Kearney management consultants and
Hapag Lloyd. Mr. Grevener then moved to the airline space, where from 2001 to
2006 he was CFO for the European operations of Gate Gourmet, one of the
leading global airline catering firms. From there, he moved to Jet Aviation, a
business group of General Dynamics, where he became CFO. Mr. Grevener holds
a diploma in Business Administration and Mechanical Engineering from the
University of Berlin (1991), as well as a PhD in Business Administration from the
University of St. Gallen (1994).
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Hansjürg Emch – GVP Medical
Joined Sonova Group: March 2011
Current role since: Group Vice President, Medical
Previous role: President of the Global Spine division of Synthes
Mr. Emch joined Sonova Group as Group Vice President, Medical in March 2011.
Before joining, he spent 15 years working in the healthcare industry, most notably
at Synthes (now owned by Johnson & Johnson). He ultimately became President of
the Global Spine division. He has a Master’s of Science and Engineering from the
Swiss Federal Institute of Technology (ETH) in Zurich, and completed the
Programme for Management Development at Harvard Business School.
Hans Mehl – GVP Operations
Joined Sonova Group: April 2007
Current role since: Group Vice President of operations
Previous role: Co-Division Head at Siemens Building technologies
Mr. Mehl was appointed Group Vice President, Operations in April 2007. Prior to
joining, Mr. Mehl spent much of his career at Siemens, where he worked across
many different divisions and geographies including in the Netherlands, Singapore,
USA and Switzerland. Between 2000 and 2003, he was CFO of Global Health
Services at Siemens Medical Group in Philadelphia, USA. During this period,
Siemens Medical Group integrated Shared Medical Systems, a $1bn+ revenue
acquisition. In his last position, he was Co-Division Head of Fire and Security at
Siemens Building Technologies in Zug, Switzerland. He has also been a member of
the executive management of Siemens Audiology Group. Mr. Mehl completed his
education in business administration in Germany.
Robert F. Spoerry – Chairman, non-executive member
Joined Sonova Group: 2003
Current role since: Chairman of the Board
Previous role: Non-excutive board member
Robert F. Spoerry was appointed Chairman of the Board in March 30, 2012 having
been a non-executive member of the Board since 2003. He has a wealth of
experience in the medical technology space having been the CEO of MettlerToledo International Inc., a leading global manufacturer and marketer of precision
instruments where he is currently Chairman of the Board. Mr. Spoerry joined
Mettler-Toledo in 1983 and was Chief Executive Officer from 1993 to 2007,
during which time he led the buyout of Mettler-Toledo from Ciba-Geigy (now part
of Novartis) in 1996, and the company’s subsequent Initial Public Offering on the
New York Stock Exchange in 1997. Mr. Spoerry graduated in Mechanical
Engineering at the Swiss Federal Institute of Technology in Zurich, Switzerland,
and holds an MBA from the University of Chicago.
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Andy Rihs - Co-founder, non-executive member
Joined Sonova Group: 1966, acquired shares from his father in 1980
Current role: Board member
Previous role: Various including CEO and Chairman
Andy Rihs has been member of the Board of Directors of Sonova Holding AG
since 1992 and is one of the company’s founders, together with his business
partner Beda Diethelm and his brother Hans-Ueli Rihs. In 1966, Mr. Rihs joined
Beda Diethelm, who had come to Phonak (now Sonova) a year earlier as technical
manager, and concentrated on the company’s marketing and commercial
operations. He first established a sales organisation for Switzerland and later
gradually built up a global distribution network, helping grow Sonova into a multibillion dollar business. Mr. Rihs managed the Sonova Group as CEO until April
2000, and again as interim CEO from April to September 2002. He also owns
several companies which are mainly active in the real estate and cycling business.
Mr. Rihs completed his education and business training primarily in Switzerland
and France.
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Please note that the use of this research report is subject to the conditions and restrictions set forth in the
“General investment-related disclosures” and the “Legal disclaimer” at the end of this document.
For analyst certification and remarks regarding foreign investors and country-specific disclosures, please
refer to the respective paragraph at the end of this document.
Disclosures in respect of section 34b of the German Securities Trading Act
(Wertpapierhandelsgesetz – WpHG)
Company
Sonova Holding AG
(1)
(2)
(3)
(4)
(5)
Disclosures
no disclosures
no disclosures
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead
Manager or Co-Lead Manager over the previous 12 months of a public offering of this company.
The Bank acts as Designated Sponsor for this company.
Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company
for investment banking services or received compensation or a promise to pay from this company for
investment banking services.
The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company.
The Bank holds a trading position in shares of this company.
Historical price target and rating changes for Sonova Holding AG in the last 12 months
Date
08 October 13
Price target - CHF
119.00
Rating
Hold
Initiation of coverage
08 October 13
Historical price target and rating changes for William Demant Holding A/S in the last 12 months
Date
08 October 13
Price target - DKK
605.00
Rating
Buy
Initiation of coverage
08 October 13
Berenberg distribution of ratings and in proportion to investment banking services
Buy
Sell
Hold
41.59 %
18.71 %
39.70 %
55.17 %
10.34 %
34.48 %
Valuation basis/rating key
The recommendations for companies analysed by Berenberg’s Equity Research department are made on an
absolute basis for which the following three-step rating key is applicable:
Buy: Sustainable upside potential of more than 15% to the current share price within 12 months;
Sell:
Sustainable downside potential of more than 15% to the current share price within 12 months;
Hold: Upside/downside potential regarding the current share price limited; no immediate catalyst visible.
NB: During periods of high market, sector, or stock volatility, or in special situations, the recommendation system
criteria may be breached temporarily.
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Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority),
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General investment-related disclosures
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all information contained in this financial analysis. The information on which the financial analysis is based has been
obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the
relevant specialised press as well as the company which is the subject of this financial analysis.
Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is
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Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this
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Legal disclaimer
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On no account should the document be regarded as a substitute for the recipient procuring information for
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Private customers, into whose possession this document comes, should discuss possible investment decisions with
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Analyst certification
I, Tom Jones, hereby certify that all of the views expressed in this report accurately reflect my personal views about
any and all of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the
specific recommendations or views expressed in this research report, nor is it tied to any specific investment
banking transaction performed by the Bank or its affiliates.
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Third-party research disclosures
Company
Disclosures
Sonova Holding AG
no disclosures
no disclosures
(1)
(2)
(3)
(4)
(5)
Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject
company by the end of the prior month.*
Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public
offering for the subject company.*
Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report.
Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months,
or expects to receive such compensation in the next 3 months.*
There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the
analyst knows or has reason to know at the time of publication of this research report.
* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of
section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.
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© May 2013 Joh. Berenberg, Gossler & Co. KG
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Benjamin Stillfried
+41 (0) 44 283 2029
+41 (0) 44 283 2024
+41 (0) 44 283 2038
+41 (0) 44 283 2026
+41 (0) 44 283 2033
EVENTS
Natalie Meech
Charlotte Kilby
Charlotte Reeves
Sarah Weyman
Hannah Whitehead
+44 (0) 20 3207 7831
+44 (0) 20 3207 7832
+44 (0) 20 3465 2671
+44 (0) 20 3207 7801
+44 (0) 20 3207 7922
US Sales
BERENBERG CAPITAL MARKETS LLC
Member FINRA & SIPC
Andrew Holder
+1 (617) 292 8222
Colin Andrade
+1 (617) 292 8230
Cathal Carroll
+1 (646) 445 7206
Burr Clark
+1 (617) 292 8282
Sales
SOVEREIGN WEALTH FUNDS
Max von Doetinchem
E-mail: firstname.lastname@berenberg-us.com
Julie Doherty
Kelleigh Faldi
Emily Mouret
Kieran O'Sullivan
+1 (617) 292 8228
+1 (617) 292 8288
+1 (646) 445 7204
+1 (617) 292 8292
162
Jonathan Paterson
Jonathan Saxon
+1 (646) 445 7212
+1 (646) 445 7202

Hearing aids

Transcription

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