GN Store Nord A/S Annual Report 2014 INNOVATORS IN SOUND Co. reg. no. 24257843 M CONTENTS 2 / MANAGEMent’s rePORT / CONTENTS Contents Our investment case 2 MANAGEMENT'S REPORT Through relentless execution GROUP DEVELOPMENT 2014 2014 in figures 3 of our Strategy: INNOVATION Foreword by the chairman 4 & GROWTH, we create State of GN Store Nord 6 Consolidated financial highlights 9 shareholder value based on Group performance 2014 10 our core competency within Financial outlook 12 sound processing 18 BUSINESS DEVELOPMENT GN RESOUND GN ReSound 18 GN Netcom 26 • Leader in customer-driven innovations based on dif- Corporate social responsibility 35 ferentiated wireless 2.4 GHz technology Risk management 36 • Focused business model – dedicated wholesale 38 manufacturer refraining from vertical integration • Attractive market growth driven by sustainable SHAREHOLDER INFORMATION & GOVERNANCE megatrends in a consolidated industry with attrac- Shareholder information 38 tive profit margins Corporate governance 40 Board of directors 44 • Profitability in line with the best manufacturers in Executive management 46 the industry 47 GN NETCOM ADDITIONAL FINANCIAL INFORMATION • The world’s largest supplier of Unified Communica- Quarterly financial highlights 48 tions headsets driven by customer-focused com- Quarterly reporting by segment 49 mercialization of a state-of-the-art product portfolio Q4 segment disclosures 50 Foreign exchange impact 51 • Double digit mid- to long-term market growth GN ReSound income statement excl. SMART costs 52 driven by sustainable market trends • The core business operates in a consolidated indus- 53 try with high barriers to entry FINANCIAL STATEMENTS • Attractive operating margin and return on invested Financial statements consolidated 2014 53 capital Financial statements parent company 2014 98 Statement by the executive management and the board of directors 109 Independent auditors' report 110 GN STORE NORD ANNUAL REPORT 2014 2014 in figures 3 / MANAGEMent’s rePORT / 2014 IN FIGURES 2014 in figures 7,340 9% 18.5% Total revenue (DKK million) Organic growth EBITA margin (excl. non-recurring M&A costs) Group performance page 10 5,075 22 900 Employees worldwide Market capitalization Total funds distributed to shareholders (DKK billion) – dividends and Safe Harbor buybacks (DKK million) 1500 842 472 -30 1284 State of GN Store Nord page 6 Shareholder information page 38 Group performance page 10 1200 900 600 300 Revenue split by region R evenue split EBITA 0 on business units GN GN Other GN Store (excl. non-recurringReSound Netcom M&A costs) Nord 14% DKK million 20% 40% 1,600 1,500 53% 521 (61) 1,400 1,357 1,200 1,200 1,000 897 900 25% 800 EMEA Hearing 600 600 Instruments NA 400 Diagnostic 300 200 RoW Equipment 0 0 8% CC&O GN GN Other GN 40% ReSound Netcom Store Nord Mobile GN ReSound page 18 and GN Netcom page 26 GN STORE NORD ANNUAL REPORT 2014 FOREWord by the CHAIRMAN 4 / MANAGEMent’s rePORT / FOREWORD BY THE CHAIRMAN Foreword by the chairman In 2014, we revolutionized the perception of hearing aids and became the largest provider of Unified Communications headsets In my foreword in the Annual Report 2013, I was pleased We also said that we would continue with a relentless focus to articulate our three-year strategy plan for 2014 – 2016: on productivity increases. The results are already visible as INNOVATION & GROWTH. We could finally take focus away the gross margin increased nicely in both GN ReSound and from restructuring and basic operational matters and move GN Netcom in 2014. We have systematized our approach organizational energy to what must become our core com- to productivity improvement and have a strong pipeline of petencies – innovation and commercialization. Since 2008, areas where we want to increase productivity in the years we have created significant growth through unique innova- to come. tions in the space within sound and wireless connectivity. With the Strategy 2014 - 2016, we aim at doing what we are Finally, we said that we would continue our relentless focus good at even better. on innovation, and our R&D teams are indeed delivering remarkable results - as planned. With a smaller R&D budget The first year of our strategy plan is now behind us, and than our key competitors, we are bringing significant inno- we have executed strongly on every single parameter. We vations to the market in both of our businesses. We brought said that we wanted to transfer the organizational capacity the world’s first Made for iPhone hearing aid, ReSound released from the restructuring programs to commercializa- LiNX, to the market in early 2014; we broadened the Smart tion. In 2014, we have taken a significant step in our com- Hearing concept to new segments and form factors in the mercialization efforts and completed specific programs to same year, and we are now all set with the next genera- evaluate sales and marketing investments. In GN ReSound, tion, ReSound LiNX2™. In the same way that ReSound LiNX we have engaged in significant public relations and was the revolutionized connectivity in hearing aids, ReSound LiNX2 only hearing aid manufacturer participating in consumer will, in a complete line-up of form factors, revolutionize the events such as the CES, IFA and joint marketing events at sound experience by adding an unprecedented level of spa- Apple stores. These efforts help to revolutionize the percep- tial awareness to the user as a complement to our unique tion of hearing aids. ReSound LiNX™ achieved significant Surround Sound by Resound™. This gives an entirely new media exposure and created an encouraging user demand dimension to GN ReSound’s superior replication of natural that we have never seen before. hearing. In GN Netcom, our commercialization efforts were espe- In GN Netcom, we have brought new breakthrough head- cially focused on North America where we have opened up sets to the market late last year with the introduction of a significant potential long-term opportunity by upgrading the noise cancellation Jabra Evolve™ series and the heart our sales capacity. North America is the largest headset rate monitoring earbuds, Jabra Sport Pulse™ Wireless. Both market in the world, and we are still in the early phase of products are the first of their kind and position us strongly trying to win our fair share of that market. We also invested in the two fast-growing segments that are our top priorities, in our own online sales channel, making it possible to buy UC and the Sports Audio segment. Jabra headsets directly from GN Netcom online. Both initia- tives are new long-term investments and have initially given To position the company for long-term sustainable growth, us reasons to be optimistic. Our continuous market share we also upgraded our Intellectual Property Rights (IPR) gains in the important Unified Communications (UC) seg- function by upgrading the capacity and by consolidat- ment led us to win the position as the number one supplier ing the two functions in GN ReSound and GN Netcom into in this fast growing market – we are now the world’s largest one GN function. As a technology leader and a leader in provider of UC headsets. innovation, it is a business imperative to have capabilities to GN STORE NORD ANNUAL REPORT 2014 5 / MANAGEMent’s rePORT / FOREWORD BY THE CHAIRMAN protect our innovations in the most professional way. Com- We are strongly positioned to continue to deliver on our petencies within IPR became extraordinary relevant during announced financial targets. In GN ReSound, we will grow 2014 as Oticon filed for a preliminary injunction against GN more than 3 percentage points above the market growth, ReSound. The filing was based on an antenna patent, which and in GN Netcom we will continue to grow with double- we strongly believe is invalid. As expected, the court in Den- digit rates. While investing in growth – and despite head- mark did not issue a preliminary injunction. wind from foreign exchange rates – we will maintain the EBITA margin in line with top-tier competition in 2015, and On August 1, 2014, we appointed Anders Hedegaard as CEO we see the potential for margin expansion in 2016. of GN ReSound and member of GN's executive manage- ment team. I am very pleased with how Anders Hedegaard Our results are the product of the hard and dedicated work and Lars Viksmoen - in close collaboration - have ensured a of our employees throughout the world. On behalf of the particularly seamless transition. Anders Hedegaard's broad board of directors, I want to congratulate and thank all managerial experience and key competencies within sales employees for their contributions and success in efficiently and marketing will be valuable assets for GN going forward. changing the focus and priorities of GN. We are bringing GN forward toward a new level of performance, and in do- During 2014, we also got a rare chance to evaluate an M&A ing so, we are improving the quality of life for our custom- opportunity that had the potential to transform the com- ers around the globe. pany. The opportunity was relevant for GN following the completion of our successful turnaround, which meant that Per Wold-Olsen we – out of strength – had the potential to acquire a large Chairman asset. As we were the only strategic buyer of the asset, the acquisition had the potential to be highly accretive for our shareholders. After a long and thorough due diligence, we demonstrated strong discipline and left the opportunity behind us as we saw the price being unattractive for our shareholders. We have such a strong momentum in our cur- rent businesses that we can continue to create significant value for our shareholders on our own and at less risk.