AMPLIFON SPA

Branch of Industry
Amplifon, listed on the STAR segment of the Italian Stock Exchange,
is the global leader in hearing solutions and services for retail expertise, customization and consumer care.

Competitive Arena
Amplifon engages in the distribution and customization of fitting of hearing aids for the solution of
problems related to the loss of hearing and the supply of related services. Amplifit engages in the diagnosis
of hearing problems and in the application of hearing-aids with the collaboration of university centers in
Europe and the Unites States.

The global retail hearing aids market is expected to grow by around 4% in the next 3-5 years, largely driven
by demographics. Other long-term socio-economic factors such as baby boomers turning 65+ and the
ever increasing noise pollution are increasing the number of people that could benefit from hearing
solutions, mainly in North America and Europe which represent by far the largest markets worldwide.

The business model is based on listening and understanding customers needs in order to customize the
solution to their lifestyle, to the sounds they hear every day and to their aesthetic preferences. Theres a
strong interaction with the customers, finalized to use the most advanced technologies and develop new
groundbreaking tools and protocols in order to find the best hearing solution. The network of hearing care
professionals blends solid technical know-how with behavioral - communication skills and innovative
technologies to offer an elite experience

Structure
Amplifon has the following structure, certified by the CONSOB:

Anna Maria Formiggini: 54,843%

Ampliter: 54,843%
FMR: 4,918%
FMR: 3,246%
Fidelity Institutional Asset Management: 1,074%
FIAM: 0,598%
Tamburi Investment Partners: 4,025%
Own Shares: 3,477%
Other Shareholders: 33,900%
Size and Governance
Through a network of 9,500 points of sale, of which approximately 4,000 direct shops, 3,700 service centers and
1,900 affiliates, Amplifon is active in 22 countries across 5 continents, under three regions (EMEA, AMERICAS
and APAC), each of which is responsible for implementing the Companys strategic guidelines, coordinating
local activities and sharing best practices. Management teams in each country are accountable for
developing the Companys business as well as implementing sales and marketing strategies, adapting them
to local market needs and legislation, ensuring customer satisfaction throughout the world. With
approximately 5,500 hearing care professionals, the company is committed to delivering the highest quality
of service and care, in order to achieve the best hearing experience for customers worldwide

Pest analysis
Political
Regulations regarding the safeguard of the health can influence the firm. First, European Union defines the
acceptable quality standards for health care products sold in the EU and the EEA member states. These
standards are defined in a series of European Union directives staging the progressive introduction of
increasingly stringent requirements. Moreover, every state stimulates the purchase of new and easier
models. On the other hand introduction of government reforms to promote healthcare facilities across the
country is one of the remarkable political trends in the market. Cons: high costs for engineering, new
machinery purchases and further employee training needed. Pros: due to new progressive regulations, the
products of the firm are even more technologically advanced and able to satisfy the new market
requirements

Economic
The macro environment of the company is multi-faceted and depends upon the country in which the
products are sold and also on its life quality standards. Even if hearing care problems usually occur
independently from the country, products prices related to hearing aids, lack of information on the effects
of overlooked hearing loss and on the development and progresses of hearing solution technologies can
affect sales. Other key economic factors are the companys foreign directed investments, specifically those
in India and in southeast Asia, areas of high potential market growth coupled with relatively low labor
costs. Here the company has a weak presence with its own manufacturing facilities and network of retailers
situated almost exclusively in Europe.

Social and Cultural

Estimates published by the WHO suggests that the global population base pertaining to the age group, 65
years and above is expected to rise from 7% in 2000 to 16% in 2050. Furthermore, these estimates also
suggest that in 2012, North America, Western Europe, and Australia had nearly 1 in 3 adults, over the age
of 65, suffering from mild hearing loss. In addition, the statistical prevalence is based on the average
frequency threshold values ranging from 500 to 4000 Hz with a decibel range of 26-40. Aging is considered
as the greatest risk factor for the development of deafness and hearing loss disorders; and therefore, the
growing global geriatric population base is expected to act as a high impact-rendering driver.
Lifestyle and health play a very influential role on the groups sales of products. With regards to the first
one, customers may be interested in different products that the group offers depending on their specific
needs. For example, hearing aids are suitable for young people, suffering from a partial hearing loss. On
the other hand, hearing loss products are mostly used by old people who carry on serious hearing
problems. Products size and affordability are also important factors. Large demand for high performance,
higher efficiency and ability to enable the use of technological advancements such as wireless and
Bluetooth technologies highlight the latest market needs.

Technological
Hearing solutions & services are advancing rapidly in terms of functionality, aesthetics and service level,
increasing customer satisfaction. In 2009 customer satisfaction in the sector was around 75% and in 2016 it
rose to over 80%. Amplifons Center for Research and Studies (CRS) is a specialized partner to the medical
and academic communities and leader in the fields of audiology and otolaryngology. Key factors attributing
for the large share and fast growth of digital hearing aids include their ability to provide enhanced listening
experience in noisy environments, wireless connectivity with smart phones and these can be customized as
per the patients requirements.

Porters Five Forces

Suppliers Power

Amplifon has a strong relationship with its suppliers thanks to the recent acquisition of Ultravox that
includes a long term supply agreement with GN ReSound, which until now has been owned for a 25% by
Ultravox and by a call option on the remaining 75%. Ultravox purchases and already guarantees optimal
supplying prices. Hence, optimisation should only be realisable for the remaining 30% of purchases from
other suppliers. The supply agreement between Amplifon and GN ReSound not only regards the UK market
but also includes the renewal of the existing contracts for the European market. However, the Company
said that it would not substantially change the current balance among Amplifons suppliers, which now sees
Siemens with a 65% stake of total supply, GN ReSound with 15%, Phonak with 15% and others with 5%.

Buyers Power

Buyer power is quite weak in general, especially in small-scale retail trade, however customers are
generally more well-informed thanks to the Internet and can sometimes push for small discounts. A
stronger bargaining power is exercised by big buyers with customizable hearing healthcare packages to
meet the needs of organizations and their members. Amplifon offers discount and funded programs to reach
potential customers with less financial availability.

Competitive rivalry
Siemens Healthcare, Sogeca, William Demant and Sonomax Technologies Inc are the principal competitors. The
market is oligopolistic in nature with limited players present, moreover, limited product differentiation options
coupled with competition due to rigorous prices is expected to keep the industry rivalry at a high level throughout the
forecast period.
Even if companies like Sonomax and William Demant have higher incomes, Aplifon has had a 11,1% growth in sales in
respect to the 8,1% of the peers. This growth is determined by the expansion of Amplifon retailers, especially in
Germany and France. Siemens Healthcare instead is a company focused more on chirurgic machinery and less on
hearing aids.

Threat of Substitute Products

There are no significant threats from this area, due to the fact that the only alternative is represented by
surgical interventions, like the middle ear cochlear implants, when possible. These cochlear implants render
better results in terms of functionalities, and therefore, are expected to witness acceleration in their
market penetration rates in the developed economies with high disposable incomes, higher patient
awareness levels, access to sophisticated healthcare, and defined reimbursement frameworks. However,
the high prices associated with these implants are expected to promote hearing aids as a preferred
alternative in the emerging markets with relatively lower patient disposable income levels. People may
prefer this solution for health conscious concerns and if they found hearing devices uncomfortable .
Cochlear implants can be adopted either by very young people who dont want to live their entire lives with
something behind their ears or by old people with serious hearing diseases . In addition, the perception of a
hearing aid is becoming more acceptable over recent years.

Threat of New Market Entrants

Small new entrants pose little to no threat, given the groups domestic and international market share.
Furthermore the health industry presents high entry quality/standard barriers by default, where new risks
arise consistently only when introducing new products. In order to succeed in such a market a new
competitor is required to put out a product that complies with all the relevant norms on safety and
efficiency and that also has a competitive price. To avoid new entrants threats, Amplifon invests a lot in
technological innovation, in order to update its products and meet the latest market needs.

Strategy
Amplifon defines 4 pillars as the strategies adopted to succeed in the market.

Differentiation and market expansion

Clear and differentiated growth strategy, focused on core worldwide countries: increase market share in
the United States, consolidate leadership position in Italy and Australia, and expand network in Germany,
France and Spain.

Marketing
Further strengthening of customer engagement through a new approach to communication, the launch of a
new brand identity, leadership in digital marketing and development of advanced CRM, supported by
increased marketing investments.

New Business Model

Innovation of the service model thanks to unique proprietary knowledge, superior in-store experience and
innovative digital tools in a multi-channel approach and new state-of-the-art proprietary service technology
and counseling tool, leveraging Amplifons unrivalled network of hearing care providers worldwide

Sustainable Sales growth and margin expansion

Investments to support effective execution capability through a new, distinct people proposition, attraction
of the best talents, sharing of best practices worldwide and the expansion of the integrated IT platform
globally.
KPIs
SWOT Analysis
Strengths: Weaknesses:

Global presence in a growing market
Strong operational leverage thanks to high
purchase power to suppliers
Unique relationship with ENT community
Strong cash generation
Opportunities:
USD exposure (about 20% of total sales)
and GBP exposure (about 5.5% of total
sales)
Sudden changes in the health regulation
Potential failure or delay of the
restructuring process in the USA
Threats:

An ageing population Weakness in a global economic scenario

entails a strong slowdown in the
Acoustic pollution consumption trend

Even higher prevalence driven by modern Evolution of Hearing Aids market from
lifestyle Medical to Retail oriented due to
deregulation led to growing importance of
Improving adoption rate traditional marketing tools

Price pressure from optical chains, venture

capital, traditional competitors moving
abroad
Accounting quality and practices
The company employs the International Accounting Standards (IAS/IFRS) issued by the IASB in drafting its
financial statements. These statements have been prepared on a historical cost basis and they have been
audited by PricewaterhouseCoopers SpA.

The key accounting issues

The study of this topic is conducted on the base of the healthcare industry, which comprehend the industry
in which the group operates. We made this choice due to the lack of a well-defined business model for
Amplifon and also of the hearing aid, devices and products industry. In the automotive industry, we can
find some significant accounting issues

Property, plant and equipment. The healthcare industry is capital-intensive, demanding significant
investments in manufacturing facilities and the related equipment. Therefore, this is an area with a
significant impact on the entitys financial statements.

Tooling. Tooling poses some practical challenges for accounting in the industry. The practical accounting
difficulties for automotive entities primarily arise from complex master supply agreements and range from
assessing the ultimately has the risks and rewards associated with the tooling in determining how revenue
from tooling should be accounted for.

Intangible assets. Intensive research and development activity around devices components, systems,
production processes and new basic technologies can give rise to a variety of intangible assets in the
healthcare industry. The development activity can be either internal, outsourced or acquired from other
entities in the industry.

Impairment of non-financial assets. Non-financial assets, including intangible assets and goodwill, are
vulnerable to impairment based on the risks in the healthcare industry. This is because the this industry is
capital intensive and knowledge intensive. If sales of a vehicle model are less than projected, then a
significant impairment loss may arise.

Inventories. These range from raw materials and finished devices to spare parts.
Revenues. In a very competitive environment, healthcare entities aim to expand their market share by
creative sales promotion strategies, especially trying to focus on the categories more subjected to use their
products

The accounting policies

Measuring charity care for disclosure The Task Force noted diversity in practice in how entities
measured charity care for disclosure purposes

Presentation of insurance claims and related insurance recoveries In ASU 2010-24, 2 issued in August
2010, the EITF addressed the industry practice of netting insurance claims and anticipated insurance
recoveries related to medical malpractice and other similar liabilities such as workers compensation and
employee health claims.

Presentation and disclosure of patient service revenue, provision for bad debts and the allowance for
doubtful accounts for certain health care entities The amendments in ASU 2011-07 4 require an entity that
recognizes significant amounts of patient service revenue at the time the services are rendered but does
not assess whether patients are able to pay to reclassify its provision for bad debts from an operating
expense to a deduction from patient service revenue (net of contractual allowances and discounts). The
amendments also require enhanced disclosures by the entity of its policies for recognizing revenue and
assessing bad debts, disclosure of patient service revenue (net of contractual allowances and discounts)
and qualitative and quantitative information about changes in the allowance for doubtful accounts

Accounting for loss contracts by health care entities ASC 954-450-305 requires that losses under prepaid
health care services contracts be recognized when it is probable that expected future health care costs and
maintenance costs under a group of existing contracts will exceed anticipated future premiums and stop-
loss insurance recoveries on those contracts.

Accounting for medical malpractice claims by health care organizations

To improve consistency, FinREC recommends discounting medical malpractice liabilities only if all of the
following conditions are met:
The amount of the liability, individually or in the aggregate, is fixed or reliably determinable.
The amount and timing of cash payments for the liability, individually or in the aggregate, based on the
health care entitys specific experience, are fixed or reliably determinable.
Expected insurance recoveries, if any, are also discounted.

In addition to disclosures about discounting medical malpractice liabilities, FinREC recommends

that medical malpractice disclosures include:
The nature of the insurance coverage (i.e., claims made or occurrence)
Related factors (e.g., self-insured retention and excess levels)
The basis for any loss accrual and expected insurance recoveries

Management Incentives and Conditionings

The primary objective of the Amplifon Groups Global Reward Policy is to align the performance targets of
the Companys resources with those of the Group, as well as to attract, motivate and retain talented
managers and the key resources within the organization. The key principles that inspire Amplifon Reward
Policy are updated every year based on internal and external trend and are then tailored, in different ways,
to all Company population. The Company identifies and utilizes different reward leverages in order to
balance short and medium/long term objectives and motivate resources in a selective way, incentivizing
conduct which maximizes value for the Company and for the Shareholders.

Amplifon Remuneration Policy is defined consistently with the Group strategy, the governance model
adopted by the Company as well as with the recommendation of the Code of Conduct in order to attract,
motivate and retain talents and to align the interest of the management with the primary objective of the
value creation for the shareholders in the medium-long term. Therefore, the remuneration of the Director
and the Key Managers of the Group is defined based on the following principles:

- the non-Executive Directors emoluments is defined on the basis of the commitment needed to carry out
their assignment in the Board itself and in the different Committees. Unless approved differently by the
Shareholders Meeting the non-Executive Directors are not granted any share incentive plan nor other
plans linked to the Companys results.

- The overall remuneration structure of the CEO/GM and of the Key Managers, consistently with the
principles of the Remuneration Policy, show an appropriate balance between fix and variable components
linked to the Company results and defined within maximum limits. The total remuneration is also
consistent with the applicable market data for similar roles in terms of responsibility and complexity,
assessed through specific remuneration benchmark (peer group).

- The short and medium-long term variable compensation is linked to different complementary targets
clearly measurable in coherence with the Companys 3Yr Plan targets. The variable incentives are paid at
the end of an accurate process of targets assessment in order to appreciate the real Company performance
originated from the management action.

- As provided by the Code of Conduct (art.6.C.1), the variable incentive is subject to a specific claw back
clause that foreseen the right of the Company to claim for reimbursement of the amounts paid on the basis
of materially inaccurate performance metrics. Considering also the international best practices, a lock up
clause for the shares eventually vested related to the LTI Plan of which the CEO/GM and the Key Managers
are beneficiary, has been introduced too.

- The remuneration package of the CEO/GM and the Key Managers also includes different benefits which
seek to guarantee equal treatment in the Company and general consistency in the remuneration systems,
while also maintaining a competitive position in local markets and complying with the law in the different
Countries.

The cost of hearing aids doesnt always affect sales, because people could decide to improve their hearing
anyway, and often opt for higher quality products.