Thank you for standing by, and welcome to the Coloplast Q3 twenty twelve-twenty thirteen Financial I must advise you that this conference is being recorded today, Tuesday, 13th August, 2013 at 3 pm CET. I will now hand the conference over to your speaker today, Lars Rasmussen. Please go ahead, sir.
Thank you. Good afternoon, and welcome to this Q3 twenty twelve-thirteen conference call. I'm Lars Rasmussen, CEO of Coloplast. I'm joined by CFO, Lina Skoln and our Investor Relations team. As usual, Lina and I will start with a short presentation, and then we will open up for questions.
Please turn to Slide number 3. I am very pleased with the results that we have reported today. Our strong set of Q3 numbers supports the fact that our strategy of investing for growth, while at the same time improving our profitability is working. Our European business continues to perform well, and we see increasing growth rates both in the U. S.
And in emerging markets. Our Chronic Care business had a good quarter with solid growth in Ostomy Care, whereas our Continence Care business, as expected, slowed down a bit. I'm especially satisfied with our performance in Wound Care and Royalty Care this quarter. Wound Care continues its good performance from last quarter and Urology Care takes market share in a very difficult market. Our organic sales growth for the group was 6% year to date and in line with our overall expectations as was the EBIT margin of 31%.
Today, we have approved an expansion of our Neerbaase production facility. This will increase our global volume manufacturing capacity by around 25%. We expect to invest a total of approximately €130,000,000 to €150,000,000 kroner over the next 2 fiscal years in this expansion. For twelvethirteen, we continue to expect a revenue growth of 6% to 7% organically and 5% to 6% in Danish kroner. We also continue to expect an EBIT margin between 31% 32%, both in local currencies and in Danish kroner.
Please turn to Slide number 4. Revenues were up by 6% organically and in Danish kroner and amounted to DKK 8,700,000,000. In Ostomy Care, organic growth was 7% year to date and 8% for the quarter. The growth was driven by continued good performance from our Centura portfolio as well as a strong and increasing uptake in the market of our Braava accessories. We also continue to see a strong sales performance of Asura in markets like China and Brazil.
In Continence Care, organic growth was 6% year to date and 5% in Q3. Growth was driven primarily by our SpeediCath product range. Our collecting device business, especially in Europe and our U. S. Self cath business continue to face increasing competition.
Growth in sales of peristeen product of our peristeen product for bowel management remains satisfactory. The 5% growth in the quarter should be seen against very high sales in Q3 last year, where we had the effect of the distributor consolidation in the UK. In Urology Care, organic growth was 9% year to date and 10% for the quarter, which is very satisfactory. Sales of penile implants continued the strong performance and so did Restorelle, our lightweight mesh for pelvic floor repair. We are very satisfied with the launch of our single incision mini sling, Altice, which meant that we in Q3 broke the declining growth trends within slinks.
With regards to the mesh cases in the U. S, the number of claims has increased significantly as expected up to the expiration of the statute of limitations in July 2013. The processing and progress under the MDL and tolling agreements are as expected. Based on the current information available to Coloplast, we still do not expect this to have a significant impact on the financial position of the group. In Wound and Skin Care, organic growth was 4% year to date and 5% for the quarter.
Growth for Wound Care in isolation was 2% for the 1st 9 months and 5% for the quarter. We are very pleased with this development, which is in line with our strategy for the business. Growth was driven by our biotin product range and the market has responded very positively to our new biotin silicone. The growth is derived mainly from emerging markets where China and Brazil continue their good performance. We also saw strong growth rates in the U.
S. Where we continue to deliver on a large contract won earlier this year. Our European wound care business is still declining, but at a slightly slower pace than in the first half of the year. Our U. S.
Skincare and contract manufacturing business contributed with satisfactory performance also in Q3. Turning to our geographical segments. We continue to see stable organic growth in our European markets of 4% year to date and in Q3. The performance continues to be driven by stable performance in major markets, especially in the UK, our Nordic region, Germany and France, whereas the Spanish and Dutch markets remains challenged by tough local market conditions. Looking at the strong Q3 performance in isolation, then in addition to what I just mentioned, the Continence Care business was impacted by distributor consolidation in the UK last year, which was partly offset by good performance in our European Urology business.
Organic revenue growth in other developed markets was 8% year to date and 10% in Q3. Overall, our U. S. Business delivered strong growth rates backed by strong broadband uptake in the markets. Our Continence business saw a slowing performance impacted by the competitive pressure in the uncoated market.
Conversion to SpeediCath continues as planned and the launch of SpeediCath compact set in the U. S. Is off to a good start. We therefore expect stronger performance within Continence Care in the U. S.
Over the next 12 to 24 months. The U. S. Wound Care and Urology business both delivered very strong performance in Q3, whereas the remaining part of this sales region saw improving growth rates compared to the performance earlier this year. Revenue in the Emerging Markets grew organically by 15% year to date and 17% in Q3.
Emerging Markets have seen a significant pickup during the year and performance remains very satisfactory in markets like China, Brazil and Argentina. This way this was further backed by strong sales in Greece. Our Russian business saw a challenging quarter as tenders continue to be at a very low level. I will now hand over to Lena, and please turn to Slide number 5.
Thank you, Lars. Gross profit amounted to DKK 5,800,000,000 equal to a gross margin of 67%.
This is
an improvement of 1 percentage point compared with the same period last year. The improvements are primarily driven by higher revenues on a stable fixed cost base. The gross margin in fixed currencies was also 67%. The gross margin in Q2 improved slightly to 68% compared to 67% for the 1st 6 months. The SG and A to sales ratio came in at 33% against 34% in the same period last year.
When adjusting last year for non recurring items of DKK 123,000,000 the ratio was in line with last year. During the 1st 9 months of 20 twelve-twenty 13, we invested a total of DKK 105 1,000,000 in sales initiatives, of which half were in the emerging markets and the other half in established market. DKK 45,000,000 of the investments were realized in Q3 as we continue our investments in growth in markets like China, Brazil, Middle East, North Africa and India. This quarter saw no new initiatives as FERCUS is currently on securing satisfactory progress on existing initiatives. In total, we have committed more than DKK700 1,000,000 in sales investments since the strategy update in March 2012.
The R and D to sales ratio was 3% in line with the full year 201112 level. All in all, this results in a reported EBIT margin of 31% compared with 29% in the same period of last year. Net of currency impact, the EBIT margin was also 31%. Adjusted for one offs, last year the EBIT margin showed a slight improvement compared with last year. Looking at Q3, our EBIT margin was 32% and that's higher than the year to date number.
The increase is primarily related to higher sales in the quarter and the reversal of DKK 10,000,000 in provisions for bad debt. Net financials were DKK 81,000,000, a decrease of DKK 145,000,000 compared with the 1st 9 months of last year. The change was mainly due to foreign exchange adjustments where we last year realized losses of DKK94 1,000,000 in cash flow hedge contracts compared with a gain of DKK18 1,000,000 in the 1st 9 months of this year. Our net profit for the period increased by 24% to DKK 1.96 2,000,000 corresponding to diluted earnings per share of DKK 9.14, an increase of 23 percent compared with the same period of last year. CapEx amounted to DKK295 1,000,000 corresponding to a CapEx to sales ratio of 3%.
The increased CapEx compared to last year was due to higher investments in production equipment mainly for new products. Over the past years, we have optimized our production capacity through site consolidation as well as production efficiencies. We are however reaching near full capacity utilization. And as Lars mentioned earlier on, the Board has today approved an expansion of our Nyabazov production facility. This will when completed increase our global volume manufacturing capacity by around 25%.
The total investment is in the range of DKK130 1,000,000 to DKK150 1,000,000 over the next 2 fiscal years. We have been granted up to DKK140 1,000,000 in Hungarian subsidies. The subsidies are conditional on meeting a number of milestones over the coming years. The subsidies will take the form of direct subsidies as well as tax concessions. Free cash flow amounted to DKK 1,650,000,000 compared with DKK 1,467,000,000 last year.
This is due to increased earnings, net gains from realized foreign exchange rate, hedging contracts countered by increasing CapEx and net working capital as well as higher taxes paid. Return on invested capital after tax was 42%, up 6 percentage points from last year as we continue to increase earnings on a stable asset base. And finally, we completed the second half of our 1,000,000,000 share buyback program. Now I'll ask you to please turn to Slide number 6. For 20 twelve-twenty 13, we continue to expect revenues to grow 6% to 7% organically and 5% to 6% in Danish kroner.
The growth guidance continues to be based on stable growth in the European business, whereas we expect the U. S. Market and our emerging markets to exceed last year's growth. Growth in the U. S.
And emerging markets, however, remain volatile due to difficult to forecast distributor uptake between quarters. From the 1st September 2013, we expect reimbursement prices to be lower at 5% in France on chronic care products. Coloplast expects to absorb 3.2% of the decline leaving the remaining 1.8% to distribution. This will have an estimated annualized impact in the range of DKK 30,000,000 to DKK 40,000,000 on the top line and most of this will flow through to operating profit. Further, the sale to the French Wound Care community channel of products containing silvo or Ibuprofen has been stopped as of May 27, 2013 as we can no longer get reimbursement for these products.
This will have an annualized impact of DKK 10,000,000 to DKK 15,000,000 on top line and operating profit. For twelvethirteen, we continue to expect an EBIT margin between 31% 32% both in local currencies and in Danish kroner. There are no changes to the underlying assumption behind our EBIT margin guidance, which are that we expect 6% to 7% organic growth, gross margin improvements within the 0.5% to 1% range and continued cost discipline in the organization. Our CapEx guidance for twelvethirteen continues to be around DKK 400,000,000 whereas our effective tax rate is expected around 25% due to changes to the Danish corporate tax rate and the subsequent impact from accounting changes to deferred tax balances. Now this concludes our presentation.
Thank you very much. And operator, we are now ready to take questions.
Thank you. Your first question comes from Martin Wells from UBS. Please ask your question.
Good afternoon. Can you start by giving us a little bit more color on the impressive growth in the Wound Care business, obviously, 5% in Q3 versus 2% for 9 months, particularly impressive given that you said Europe is still declining. Can you give us a little bit more detail on how you're driving that growth? And whether you'd really have to turn the corner here?
It's been quite a long journey, I have to say, because when we started the turnaround of the wound care business, we had to stop selling in some of the markets that were not profitable for us. And on top of that, we have had quite an impact from the financial crisis on the pricing in Europe. So for quite some quarters, we have been suffering with, you could say, a declining business in Europe and an uptick outside of Europe. But we have, over the past years, invested quite significantly in stabilizing the situation in Europe and then investing in growth outside of Europe. And that is what you see coming through now.
That is then topped off by the fact that we have launched a new silicon product, which has been received extremely positively by the market. So it is a combination of all of this. Unfortunately, we are not still growing in Europe as a total. But it's so much stabilized now and the growth elsewhere is so strong that we now see a growth which is starting to become on par with and even stronger than the market. So if you look at the trend curve over the last 12 months, it's going up.
So it's not one single quarter we are talking about, but it's actually it's simply something that a momentum that we have been building over the last quarters. So we feel quite confident about the uptake we see in Wound Care, and we are very pleased with that.
And do you think you're taking market share in Europe despite I think you could decline in this
That's very, very hard to say. I don't know.
Okay. And just a question on your R and D spend, which having cut R and D last year, it seems to be growing if more strongly this year. Where are you spending the money?
We have and we also shown that on several occasions. We actually have a very strong pipeline of new products that we are going to launch in the coming quarters and the spend is primarily for that.
Okay. So
that changed. Thank you very much.
Your next question comes from Alex Kleben from Barclays. Please ask your question.
Thanks for taking the questions. First off, just wondering if you could give a comment on the KCI and Sysogenix deal. So just in the past, you talked about a sort of dead lock in the wound care asset market. I'm just wondering if you see that as kind of breaking the dead lock. And also, if that's something that you were involved in or kind of asset that you're looking at and kind of why or why not?
Since Adenix have been for sales for a very, very long time, I think that's been no secret to anyone. I think that everybody in the market who is a player like we are have spoken to Cystogenix and their owners. We it's hard for me to comment on why somebody or why they do the deal that they do. We can only say that our strategy have been to, 1st, create a healthy business and then to then look at what are the options. And now we have a healthy business and then we look at what the options are.
Okay. Very clear. And then just moving over to Assamie. I just saw that one of your competitors recently revamped its own accessories line in the U. S, and they're doing a big focus on the online channel.
And just wondering if you're hearing any feedback about that, if it's something that you're considering in terms of making the push online or whether you just plan to continue working directly with dealers and using that channel?
We first of all, we have done a lot within accessories. You also see that in the sales numbers. So that is not something which is unfamiliar to us. We also, as you may know, already have direct sales to end users in a smaller number of countries, like for example in UK where we have quite sizable business with the channel healthcare with CEVA in Germany and also Japan. So it's something we know a lot about, you could say.
Within the U. S. As it stands right now, we are doing our trade through dealers. We do a lot of online activities, and all the business that comes out of that is business that we direct to the dealers and to our trade partners and it's working very well for us. If you look at the growth rates in the U.
S, just a couple of years back, it was single digits and now it's healthy double digits. So we are quite pleased with the way it goes.
Thanks very much.
Your next question comes from Vounika Dova from Goldman Sachs. Please ask your question.
Good afternoon and thanks for taking my questions. I have 3. The first one maybe we can start with just the outlook for the full year. And congratulations, you've delivered quite an impressive acceleration in growth if I look at the 9 month period. But it seems that despite that pickup in revenue growth, you're still very much trending towards the bottom line of that EBIT margin guidance.
So as we think about the full year and I guess the outlook beyond, I mean, when would you expect these investment efforts to start materializing, not just in upside in revenue growth, but also on the EBIT level? And what are the sort of pulls and pushes that you think about as you make those investment
decisions? Right. If we think about the EBIT margin, we're actually quite satisfied with the development in the EBIT margin. And as we have mentioned also at several occasions, we believe that potential to sorry, I'm hearing that you can't can you hear what I'm saying now?
Yes, yes.
Good. I'm sorry, I got a message. I couldn't hear what I was saying, so I'll just start again. Thinking about the EBIT margin, we're actually quite satisfied with the way that that's developing. We believe that we are delivering according to what we have said is the potential in the business, which is 0.5% to 1% improvement on gross margin that will then flow through to the EBIT margin.
So if you look at the year to date numbers, for instance, and you strip out one offs last year, you will see a slight improvement in our EBIT margin to the tune of that around 0.5%, 8%. We're satisfied with that. If you look at the quarter in isolation and strip out one off last year, it's correct that you see a slightly lower EBIT margin. However, Q3 last year, because of the vast sales we had in the U. K, was also the highest EBIT margin we've ever had.
So being that we are totally for the year in line with a slight improvement at the same time as we've actually invested DKK 105,000,000 in growth initiatives. We actually believe we are delivering on what we said we would and we're quite satisfied with that. And we are also confident that we will be within the range that we are guiding 31% to 32% for the year.
That's helpful. And maybe I can ask the question a little bit more longer term as opposed to just what you've done here today. But as you think about investment versus margin improvement, I mean, is it fair to say that maybe for the next year to 2 years as you invest into the business, you'll be towards the lower end of that 5,200 basis point target? And then as those investments start coming through, you'll end up being towards the higher end of that margin expansion target? Or I guess, I'm trying to understand what the timing is and the trade off between growth
and margin. Yes. I can understand fully what you're asking, Veronika. I just think trying to talk longer terms about something that's a movement of potentially 0.5% is just not that's not very easy. And I don't think anyone can have the ability to forecast that accurately.
I think it's the way you should think about it is that we are investing in growth. We want to invest in growth. As I mentioned in the conference call, we've already committed €700,000,000 since we updated our strategy March last year. It's important for us to get the growth up. As Lasse also commented on, our growth momentum is higher now than it was.
So a focus on investing in growth and actually seeing that growth coming through at the same time as continuing to see that potential to half for 0.5% to 1%, I think is what you should be looking at also for the next couple of years.
Okay. I completely understand that. And then hopefully just two quick questions. Once you lean, which is distribution costs, is $850,000,000 the new run rate that we should be thinking of or were there maybe some one off expenses in the quarter? And the second one is for Lars, just on Ostomy in the U.
S. Lars, can you give us an update on actually what was the growth that you saw in the quarter and maybe where you are in terms of market share with new patients? Thank you.
The distribution line, there were no one offs that the pickup there reflects the additional investments in growth for the quarter of the EUR 45,000,000 that I just mentioned, but we didn't have any one offs. The only one offs that we had in this quarter was actually on the admin line where we had a positive impact from the right back of provisions for that debt.
Yes. And when it comes to the growth rates in the U. S, It's I don't think that we normally give a precise number for that, but it is very, very high and many times the market growth.
I thought I'd try anyhow. And Marc is there.
Good try.
But that was good news, wasn't it?
And market share with new patients?
Market share with new patients is more or less what it was and still significantly above the community market share.
That's great. Thank you so much. I'll jump back into the queue. Thank you.
Your next question comes from Christopher Leiberg from Carnegie. Please ask your question.
Yes, thank you. I have three questions. First, a follow-up on the distribution costs and how we should think about them for the Q4 relative to the Q3 if you're planning any additional investments and particularly given that costs price negatively in the final quarter last
year? Sorry, what was the last part of your question? You said
I remember last year, cost in Q4 surprised negatively, both I think what consensus had and I guess also relative to your own expectations. And therefore, I'm a bit curious how you're thinking about distribution costs now for the Q4?
Okay. In terms of distribution costs, we expect we will continue to invest in additional in growth initiatives. We had 45 in Q3, and we would expect that we probably will have a little bit more, but not a lot more in Q4. So at least the 45%, maybe 45% to 50% that we would expect to have in Q4.
Higher cost in Q4 than in the Q3?
Yes. Due to investments in growth initiatives. Okay.
And is there any other seasonal effects that will mitigate that?
I do think there is. I think the only thing that we can talk about with Q4 that will also impact, if nothing else, at least the distribution relative to sales is that as we had the negative impact from the U. K. Consolidation in Q3, we will have a positive impact in Q4.
Okay, Okay. The second question on the financial net that were worse than I thought. First of all, the other financial items minus EUR 10,000,000 what that is? And secondly, shouldn't there have been somewhat higher positive hedging gains this quarter?
And you could well, depends really where the individual contracts when they are running out. If we look at it for the full year, because that might help you to think about it is for that for the full year, we expect net financial expenses of around DKK 30,000,000. So that means that for Q4 with so with the knowledge we have today, then we would expect a DKK 50,000,000 positive in Q4. So that would at least give you for the year how we think about them.
Okay. And that positive financial
And by the way, you also asked about the 10 in the minus 10 that's related to some swaps that we unwound in connection with the repayment of loans.
Okay. And the final question I have, the investment you will do now in new manufacturing capacity and the fact that you are nearing full capacity, as you said, how is that impacting the potential to continue improve the gross margin from scale effects of 0.5 percentage points to 1 percentage points that you have been talking about?
The half to 1 percentage point, as we have said, would be over the next couple of years or so because that's related to the specific plans we have had for improvements in our production unit. What will happen after that, we can't really comment on now because those plans are not finalized.
But do you see improvements elsewhere that will continue to compensate for the gross margin? Or is it fair to assume that it will become much more difficult now for you to improve it further as you reach full capacity?
There is no first of all, when you say compensate for the gross margin, I first you believe whether we can continue to improve our gross margin. With the new factory, of course, we have placed that and decided on that in a way that is the most cost efficient for us to do. And we will continue to work on that. But I cannot at this point in time, we cannot give you a guidance over and above what we said at our Capital Markets Day with the 0.5% to 1% potential uplift over the next couple of years.
Okay. Thank you.
Your next question comes from Scott Bardo from Berenberg. Please ask your question.
Yes. Thank you very much for taking my questions. I have a few, please. So firstly, just on margins and just to get a just a better understanding of the full year guidance. I appreciate you're tracking very well with your top line forecast.
And just following on from Veronika, it seems to me you need to post something like a 34% margin in the Q4 to get to the upper end of your targets, which is clearly a strong 300 basis point progression on the prior year. So I'm just trying to understand whether there's any special sort of one items that we might one off items you might see in that quarter or actually that is a hurdle too high. So just if you help us understand that, please, that would be helpful. Secondly, very pleased to see the growth in North America continue at a strong pace. And I think you've confirmed your anticipation to accelerate on top of last year's growth there.
It seems though that there were a few potentially negative developments in the quarter with respect to GPO contracts. The big GPO contract that I think was a press release from the company with Novation, neodyneostomy. It seems now that that's been scaled back quite considerably from the initial expectations. And similarly, you weren't included on the Premier contract. So I just wondered, can you help us understand whether this becomes a disappointment to you?
Or is that in line with your expectations? And how are you responding and shaping your SME strategy in the U. S. To make sure you pin down the sort of growth that you want there? So they're the first two.
I have a follow-up, please.
Okay. To start with the EBIT margin guidance, we guide between 31% 32%. We don't guide around 32%. We guide in that range. And we feel comfortable with that guidance.
And why should you believe that we will meet that. We do expect higher sales in Q4 and that should have a good and positive impact on the EBIT margin and those higher sales will of course not least be because of the or the flip side of the negative impact we had on the U. K. Comparison numbers in Q3. Of course, we'll have it go the other way around in Q4.
So the higher absolute sales will be what will what make that is what makes us feel comfortable with the guide that the range we're guiding in.
When it comes to the TPO contracts in North America, then let me just start by saying we are not satisfied with the development that we have there. But maybe I should paint a little bit of a bigger picture because the situation is that we do actually have still a higher market share in the hospitals, the NPD shares than we do have community markets here. And therefore, you could say short term, new GPO contracts are not vital for us to keep the growth up. And as I said, we have an extremely healthy growth in Ostomy in the U. S.
Long term, however, if we do not get the place that we need to have in the DPOs, then we will not be able to keep a high growth in the U. S. But here, we are talking more years going forward. So what I'm mostly disappointed with you could say is that we have not been able to hold on to everything that we got into the innovation contract originally. The reason for it is that we came in off cycle, you could say, and there has been quite some activity also from our competitors to mitigate us coming in there.
So we could say we're definitely visible on the radar screen in the U. S. And therefore you see a lot of activities there. So we only managed to stay on board with the new products there. And as you know, there are coming more new new products, so let's see if we can get them in also.
And us not getting into Premier, that's not what we anticipated, but that's the situation as it is, and we have to do it better from there on. So it's more that we heard on our pride than we heard on our business results with this because our business results are accelerating in the U. S. And continue to do so. But we, of course, need to be have a better presence in the GPOs.
Thanks Lars. Just wanted to follow-up on that. And with regard to one of your competitor actions, I think we also see confirmation now that they're using the 180 medical channel to introduce ostomy direct to consumer. And do you think this is something that you could ever contemplate? I know you've historically shied away from this, but it seems to me that the channel is getting a little bit tighter in the U.
S. And I just wonder whether that's going to help you develop your strategy.
First of all, we are investing in sales pressure outside of Europe, and we are also investing in further sales pressure in the U. S. We are investing to get a much higher market share in the U. S. And we go by all means you could say, but we have no plans to go direct as for example with 180 Medical.
We think that the right way for us to go about this is to work with the distribution partners we have today. They keep adding business to us and at a very healthy pace. And we feel that this is the right strategy for us where our company is today. As you do know, we are not unfamiliar with forward integration activities. We have been or we are forward integrated, as I also mentioned before, in several geographies, also with sizable businesses.
But you always have to take stock of the situation. And we think that the current strategy we are pursuing in the U. S. Is serving us very well, and we keep pushing that way.
One last question for me then if it's possible. So Russia has been a very important emerging market for you and a major growth driver in the past. I was a little bit concerned to see some of the commentary about cancellation in tenders and uncertainty there. So can you still shed some light what's going on in Russia and how that's
sort
of affecting your investments?
I can do that. It's really, really strange what is going on. But what we have seen in Russia is that when we when there have been tenders and the companies have been delivering the prices and the bids, the terms to go for a tender, we have lost to somebody who came with returns that were unheard of. And then afterwards, it turned out that this company that have made several offers have not at all been able to follow through. So they have basically not been able to deliver.
And therefore, the whole tender process have been is going over again. So it's starting from scratch. And that have postponed the sales in Russia, but it's not so that we see that the market is gone. It's simply disrupted by somebody playing a very, very strange game in the market. But now it's known to the authorities who it is.
Thanks so much for taking the questions.
Okay. I just have one thing here, which is actually to Christophe. I've just been reminded that on your very direct question as to whether the plant expansion was going to do anything to our gross margin, I got so carried away. We're talking about our gross margin. I didn't actually answer you specifically on that.
And the answer is that we don't expect any significant impact on the gross margin solely due to the expansion of our site in Hungary, just so we get that clear. Sorry about that, Christopher.
Your next question comes from Hans Mahler from Handelsbanken. Please ask your question.
Thank you. I have two questions. First, when it comes to the reimbursement cuts in France, what was the key reason that you took more than half of the hit here but nothing when it happened in Spain? And then second question on the same subject is, when it comes to the reimbursement cuts in France, will you be able to offset that already in the next fiscal? Or what do you plan to do to offset that impact given it's such a large market for you?
Thank you.
I think it's a new negotiation in every country that you are in, and it's also a story about how the distribution of profit already is in the current value chain. So this was the result in France. And as you do know, this is something which is also negotiated year over year. So it's just very visible what the result is right when you come out with a health care spend cut as we see here, but contracts are actually constantly renegotiated. The total amount that we talk about here is part of the guidance that we have about the approximately 1 percentage points downward price pressure per year.
And it is to be contained in that. So it doesn't change our guidance to the market about us being able to deliver 50 to 100 basis points year over year in improvements.
Okay. And also in the beginning of this fiscal, you said that the underlying market were growing at the pace of, I think, 4% to 5%, given the uptick for Wound Care and the rather solid performance you have seen elsewhere. Should we regard that as somewhat conservative at this stage? Or do
you have any comments on that? No, no, I don't really have any comments on that. It's always negative to have a price cuts like we had here. It goes from the top line. It goes directly from the bottom line.
But we have a strong organization in France and we have good progress in many places with the business. So we'll be able to mitigate this.
Okay. Thank you very much.
Our next question comes from Oliver Metzger from Commerzbank. Please ask your question.
Yes, hi. Two questions, if I may. First is also regarding your price expectation. For this year, you mentioned that you expect a lower price pressure than 1% which is your long term guidance. Going forward for next year versus the reimbursement change in France, which was an answer in the question before.
But more generally, do you have any indication to be a little bit more optimistic on your long term price guidance for next year? Then the second question, do you see some significant tender businesses in the next quarters? And more general question, if yes, would these tenders be included in your organic growth guidance mainly
for next year?
Okay. Maybe for the price expectation or the price expectation for price pressure, we stick to the 50 basis points to 100 basis points up to 100 basis points on price pressure. Specifically of how we account for tenders, I mean, yes, they will. They are part of our organic growth. That is the way we have always accounted for tenders.
Yes. And do you see any larger tenders in the next quarters?
Not something out of the ordinary.
Yes. Okay. Thank you.
Your next question comes from Ingeborg Aji from Jefferies. Please ask your question.
Hi, good afternoon. Thank you for taking my questions. A couple of quick ones and then one a bit longer one. First, on the tax expectation going forward, will the additional tax breaks that you're getting in Hungary impact the mid- to long term tax rate? Secondly, on FX and going into next year, what part of your exposure have you already hedged?
And what could we expect in particular given the FX moves in Australia and Japan? And then my final question is on competition. And you've touched a bit on it, but it feels like there's a bit more talk about competition, both in Continence and in Ostomy. Could you talk about what you see as the best response to competition maybe waking up a bit?
Maybe we can do the tax rate because that's relatively quick. We don't actually expect any tax conditions in Hungary to impact our tax rates. Remember that we actually repatriate approximately 80% of our profits to Denmark. So the vast part of what we make is actually taxed in Denmark. So any changes and there are no small changes in a country is not going to impact our tax rate.
And we have hedged on average around 11 months, so not quite next full year.
When it comes to competition, maybe a good place to start with competition is that we at this point in time are growing significantly stronger organically than we did a year ago. And that is of course due to the fact that we are more competitive. So we have more new products in the markets. We are also significantly more salespeople than we were a year ago. So when we talk about more competition, it's very much linked to the catheter situation, intermittent catheter situation in the U.
S. Because as you probably do know then the intermittent catheters in the U. S. Are primarily low technology catheters and we are upgrading that market to become, you could say, a high spec market. We also take a higher price for the products that come in there and that means that the distribution have a lower margin on the products that they sell for us.
And we have the highest price in the low spec segment. So therefore, we are bleeding in that segment or meaning that we're not growing as fast as the market in that segment, but we are mitigating that by the uptick that we have from the SpeediCath conversion of the market. So in that sense, the downward trends that we see on the self care business is in a sense due to more competition and it is a competition we can only counter by launching higher technology, higher priced products in the market. And that is what we talk about. But you could say that if you sort of take the Constance Care numbers that are a bit weak and strip out the effect from the high sales in UK last year due to the wholesale consolidation, you are more or less back to par with where we used to be.
So we are growing significantly more than the market also in constant care.
And just one more, Ingeborg, because I believe you also asked about what gains you could expect the results on financials from the hedges we've done that would come in next year. And that would be for those that are already in place. And of course, we haven't covered all of next year. You should expect about 50 for next year as it looks now.
Great. That's very helpful. Thank you.
Your next question comes from Niels Leth from SEB. Please ask your question.
Yes. My first question would be kind of a household question regarding your depreciation and amortization, which in the quarter fell with something like DKK 15,000,000, 20 1,000,000 compared to the previous quarters. Is that due to the completion of amortizations related to the Mentor Urology acquisition back in 2026? That's my first question. My second question would be a question regarding the gross margin development.
And as you mentioned, you talked about 50 to 100 basis point gross margin improvement on your Capital Market Day for the next couple of years. Does it mean that for this fiscal year and in the next fiscal year, you would still be expecting gross margin expansions and after that we should expect more like a flattish development? Thank you.
Okay. I can do it actually very quickly. Depreciation, you're absolutely right. So that's a yes. And the gross margin, yes, that includes also next year.
What will happen after that, we can't really guide on now.
Okay. Thank you.
Your next question comes from David Adlington from JPMorgan. Please ask your question.
Pretty much all my questions have been asked. Just maybe one on the bad debt side. I just wondered if you had if you would be reassessing any further bad debts in the Q4 and whether we could see any further write backs in that quarter? Thanks.
At the moment, we don't expect any further write backs. I mean the write back that we have done is due to positive development in Greece because we do decent specific customers. And whereas last year, we have we saw and I think we also talked about that in conference call, a slight prolongation in how long it took our group distributor to pay. We have now actually seen him come back on normal payment terms and that's the key reason for the write back of bad debt. But we don't sort of have anything up the sleeve.
Okay. Thank
you. Your next question comes from Chris Gretler from Credit Suisse. Please ask your question.
Yes. Hi, good afternoon. Actually, most of my questions have been answered. Maybe just one on the decision to expand the Neurobat toll facility. As I remember right, that was mainly Continence Care facility.
It's basically the strategy with respect to capacity expansion with this mainly for Continence Care? And would you basically be looking at applying new technologies, production technologies, production technologies? Or is it just basically a replication of lines you have already in place?
It's this means that most of the expansion that we will do on Constance Care will be in the facility because there are a lot of basic technology stuff that you need to have in place in order to be able to manufacture such products. And therefore, it's more cost effective just to keep doing more of catheters, for example, where you already do catheters. But the basic principle of the way that we do manufacturing is that we choose one place where we tend to do all manufacturing of 1 type of products because it makes more sense. So therefore, because we already do constants there, we'll do more constants, But it doesn't mean that it will only be Constance. It might also be other products.
So basically but you can't use this facility easily now to expand in Ostomy, for example? Yes,
we could do that because when it comes to Ostomy, they are more standalone machines where, for example, Constance Care, they are more part of a process line. So you need much more backup technology to be able to perform that type of manufacturing.
And in terms of cost, did you look at auto facilities to expand as well? Or is it just basically was it a no brainer to use this specifically anyway?
No, I don't think that the expanding manufacturing footprint is by any sense a no brainer. We are quite elaborate in the way that we are conducting the service on where to make to sort of put the next big part of our manufacturing that we do. But at point in time, it turned out that Neerwasser was the right place for us.
That's interesting. And then maybe just on the urology business, you mentioned I think at the beginning that there was now relatively no difficult market conditions. Was this primarily referring to the Sling business or in general? Because
I think in general, the business is doing really well. So the female pelvic health is peaking up, but also men's health is doing well and the Processes business, which is more the, you could say, things that are not implantables, they also they have also had a very nice quarter. So it's all business areas within Urology Care that are doing well.
That is reflected because you mentioned, I think, maybe I have heard it now but badly it was referring to difficult environment. But also it basically means now you are gaining share here. Now that would be your assessment.
Yes. Yes, we are growing significantly more than the market in this business for the time being. There's no doubt about that.
Okay. Good. Yes. Thanks. That's all for the moment.
Thanks.
We have another question from Scott Bardo from Berenberg. Please go ahead.
Just a quick follow-up, please. Yes, just in terms of your product launch schedule, I just wondered if you can confirm, are we likely to see any new significant product launches before the end of your fiscal year? Or is this something we should expect into 2014?
We are not commenting on that, but you have seen the plan and we are basically following the plan.
So if I understand correctly, according to the plan that there's a launch slot for Ostomy and Wound Care for the second half of twenty thirteen, which we haven't seen yet. So that would probably mean 2 more product launches before November.
We are launching 1 to 2 new products per year, and that is also what we expect to do this year. And one of them have been launched, and that's the new biotin silicone product.
Sorry, Lars. Just remind me. So I remember that Biosin Silicone was launched in 2011. Is this sort of an adaptation on that Biosin Silicone?
Yes. You're wrong on that one. The new biotin silicon was launched just a couple of months back.
Perfect.
You haven't seen that?
Missed that.
That's a magnificent product. You should see it.
How does it differ?
It's the best silicon product in the market, of course.
I'll do more work on that. Thanks.
Your next question comes from the line of Laura Kasztybijova from Goldman Sachs. Please ask your question.
Thank you for letting back into the queue. Just one quick follow-up on continent. Boris, you mentioned that you would expect growth in the U. S. Continent business to accelerate over the next 18 to 24 months.
Can you comment on kind of what you see as the key drivers and the size of the SpeediCath opportunity on a 2 to 3 year view? Thank you.
Then I think you have misunderstood me. What I meant to say is that we are seeing that we have an increasing growth rate in our business in the U. S, and that goes for the business in its entirety. I'm not commenting on any of the specific business areas. But having said that, what we are doing now is that we are operating the markets in the U.
S. To higher value products seen from a manufacturer's point of view. And over time, of course, that is going to be very positive for us. Right now, we have this balance where we are losing a bit out on the sales cap and we are waiting on speedy cap and that is a very delicate balance to throw. But longer term, that's of course going to come in very handy for us.
Understood. Thank you for clarifying.
And then I think we're in for the last question.
The next question comes from Yi Dan Wang from Deutsche Bank. Please go ahead.
Thank you for taking my question. I've got a few questions. The first one is on the U. S. Ostomy.
Can you give us a sense of how that growth rate or how much of the pickup in growth rate is actually coming from accessories versus the bag part of the business, just qualitatively fine. And how would you think about that, meaning how long would the accessories benefit be there for?
Sorry, Yvonne, it's really, really hard to hear you. Your voice is breaking up.
I'm really faint. Reception is right. I'll get
The part that I did understand of your question is you asked about the U. S. Ostomy. And if we could quantify it a bit more. I don't know when you entered the call, Yudan, but what I have said earlier in the call is that we are growing very, very with very satisfying growth rates and several times faster than the market.
And we do not disclose what it means or how much of this will be from 1 piece or 2 piece of ureostomy or from accessories. So it's we have growth on all of our business lines within the ostomy.
Can you hear me a bit better now?
Yes.
Better. Okay, great. Yes, so I was just asking for the if we look at the growth rate, and I can understand you don't want to disclose exactly how much, but the accessories benefit, is that more of a short term benefit versus a longer term benefit? Another way to ask it would be if you look at the opportunities that you have in accessories, maybe not just in the U. S.
But generally, is that more of a 3 to 5 year kind of benefit? Or should we think about it like your traditional opportunity Bag business more of a much longer time is required for you to get the full benefit out of that portfolio?
If you talk about with the limited understanding we have at this point in time because we have not been that long time in the SSRS market. I'd just like to remind you about that. It's still a new venture for us. Then the what we see in the nature of it is that we are reselling these products. So it means that the sales that we obtained is here to stay most of it.
But I don't know about the growth rates for it, of course, how much further we can penetrate the market. But at this point in time, it's very, very early days for us. So we have a limited market share there. So I would expect that this will give us growth for a very long time. Still, we have just begun.
Okay. And then the second question is on the U. S. Osterline Bag part of the business. Are you able to confirm that your share in the community care channel part of the market is growing or has been growing sequentially quarter after quarter and that your new patient discharge share is also growing at the same time, maybe the growth in the community share part is faster than the new patient discharge part given your earlier comments about the GPO contract?
It depends how many quarters you go back.
As many as you can remember.
I can say that with the current management's tenure in the U. S, we have basically seen growth quarter after quarter, month after month. But we have not seen that all the time that Colp has been in the U. S, but I think that we have a very strong management team in place now, and they are doing a fantastic job. With regards to the market share, you still know that we are at 5% to 10% in community.
So it is we are growing from a low base.
And would you tell us once you've reached that 10% at some point?
I think that Ian, he will think about that.
Right. Okay. Because I was in Aspen, do you think you can reach that 10th of that point?
Yes. That's a good question.
We do our best every single day, but I can't give you any answers to that. And having said that, we are very pleased with the growth rates and the uptake of growth rate that we see in the U. S.
Right. And then the last question is on the upgrading of the U. S. Catheter market. If we say that the whole opportunities out of 100, we're along that line, do you think you are at the moment?
I think that we have more to cover than we have already covered, that's for sure. We are not 50% into this yet, but I can't give you a more precise answer to that.
Okay. Thank you, Pascal.
Thank you. And I think that concluded the presentation from our side. So thank you very much for participating, and we are looking forward to seeing a lot of you over the next weeks.
That does conclude our conference for today. Thank you for participating. You may all disconnect.