Good afternoon, welcome to our full year 16/17 conference call. I'm Lars Rasmussen, CEO of Coloplast, and I'm joined by CFO Anders Lonning-Skovgaard, and our investor relations team. We will start with a short presentation by Anders and myself, and then open up for questions. Without further ado, please turn to slide three. Today, Coloplast has presented a new long-term guidance for the LEAD20 strategy period. The new guidance is driven by changing market dynamics, which create opportunities to accelerate growth. Furthermore, Coloplast intends to pursue inorganic opportunities to further strengthen our service offering to the consumer. The organic revenue growth guidance is maintained at 7%- 9% per year, where the ambition is to reach the upper end of the interval.
Consequently, the EBIT margin guidance is changed from 50 to 100 basis points improvement per annum, to a guidance of delivering the EBIT margin of more than 30% in constant currencies. Please turn to slide four. The growth acceleration is to be driven by two key pillars. First, we will invest more aggressively to drive top line growth by increasing our organic investments in commercial opportunities. We are committed to investing up to 2%, two percentage points of our revenue on a yearly basis in incremental investments. In addition to the new investment cases presented at our meet the management event, we see further opportunities to drive growth. In the U.S., we will invest more offensively to win across our business areas and to further leverage our investments in Comfort Medical.
In emerging markets, the macroeconomic environment is improving, and we see opportunities to capitalize on this and gain market shares. In Europe, we see opportunities across selected markets. The second growth pillar involves pursuing inorganic growth opportunities to further strengthen our service offering towards consumers. We have built an industry-leading consumer machine through Coloplast Care and direct-to-consumer activities. Since acquiring Comfort Medical, our appetite for servicing our consumers has increased, and we see opportunities in several markets. We continue to strive for unparalleled efficiency, and we are committed to maintaining our financial discipline. Today, I'm pleased to present further details on our new Global Operations Plan four, which aims to deliver 150 basis points of margin improvements with full effect from 2021. Please turn to slide number five.
Turning to the results, Coloplast continues to demonstrate industry-leading organic growth and profitability, which I'm very satisfied with. Coloplast delivered a strong fourth quarter of 8% organic growth and a 34% EBIT margin in constant currencies. For the full year, Coloplast delivered a growth of 7% organically, and a 33% EBIT margin in constant currencies. Today, the board of directors approved an ordinary dividend of DKK 10.5, amounting to a total of DKK 15 per share in dividends this year, an increase of 11% compared to last year, demonstrating the strength of our business and commitment to increasing shareholder value.
Our guidance in 2017-2018 is an inorganic revenue growth of around 7% in constant currencies and 5%-6% in Danish kroner, and an EBIT margin of 31%-32% in constant currencies and around 31% in Danish kroner. Anders will explain the details around how we arrived at this guidance. Please turn to slide number six. In Ostomy Care, organic growth was 7%, and growth in Danish kroner was 6%. In Q4, organic growth was 7%. Growth continues to be driven by our SenSura and Brava portfolios, especially in the UK, Germany, and China. SenSura Mio Convex was relaunched in April this year and has contributed significantly to the growth in the second half of the year. Our Assura Alterna portfolio growth was driven by strong performance in China and Argentina.
In Continence Care, organic growth was 7%, and growth in Danish kroner was also 7%. In Q4, organic growth came in at 7%. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact category performs well. In the compact segment, we continue to see strong performance in markets like the US, France, and UK. SpeediCath Flex has been launched in 14 markets and contributed strongly to growth in Europe and in the US. In the US, SpeediCath Flex has received very positive feedback due to the product's strong and innovative features. Over the summer, the product was unfortunately moved from the code reimbursement category to the standard reimbursement category. To address this unfortunate issue for our consumers, we will launch a new redesigned SpeediCath Flex code product in the US next year.
We are seeing healthy growth rates in Japan, Australia, and South Korea following the introduction of reimbursement in these markets for intermittent catheters last year. Performance in our Convatec collecting device portfolio remains challenged by higher competitive pressure. Finally, we remain satisfied with sales growth of our PST products. In Urology Care, organic growth was 10%, and growth in Danish kroner was also 10%. In Q4, organic growth was 7%. The growth was mainly driven by sales of female pelvic health products, a segment in which we have gained market share after our last competitor left the market in March last year. We also continue to see satisfactory growth in sales of the Titan range of inflatable penile implant devices. Finally, our end urology business saw satisfactory growth in Europe, in particular in France.
In Q4, the growth was negatively impacted by Hurricane Harvey that struck Florida, which is an important market for Urology Care. In Wound & Skin Care, organic growth was and growth in DKK was 4%. Organic growth for wound care in isolation was also 4%. For Q4, the organic growth for wound care, for Wound & Skin Care was 16%, and for wound care and isolation, it was 8%. The growth was driven by Biatain sales, in particular, Biatain Silicone in Europe, European markets like the U.K. and Germany. After a challenging start to the year due to price reforms in France and Greece, as well as weaker momentum in China, the wound care business posted strong growth in Q4. The growth was driven by double-digit growth in China and strong performances in Germany and Brazil.
The Skin Care business posted a strong, stronger than expected Q4 due to new contract wins in the U.S. Contract manufacturing of Compeed impacted growth positively. Turning to our geographical segments, in our European markets, we saw organic growth of 5% for the full year and 5% in Q4. The growth continues to be satisfactory across the portfolio of countries, and in particular, in the U.K., and Germany, and also in France. Organic revenue growth in other developed markets was 8% for the full year and 7% in Q4. Growth in the U.S. was negatively impacted by DKK 70 million in Q1 due to inventory reductions. The full year Ostomy Care and Continence Care grew double digits. For the full year, Ostomy Care and Continence Care grew double digits.
Growth rates in Japan, Australia, and Canada were all satisfactory. Revenue in emerging markets grew organically by 13% for the full year and 22% in Q4. The growth was primarily driven by China, Argentina, Russia, and the Middle East. We continue to see satisfactory growth rates in China within Ostomy Care, and performance within Wound & Skin Care improved over the course of the year. The strong growth in Q4 was mainly driven by tenders in the Middle East and North Africa, predominantly in Saudi Arabia and Algeria. In Brazil, the economic environment remains challenging, but we saw an improvement in public sector funding and decent growth in Q4. With this, I will now hand over to Anders, and please turn to slide number seven.
Thank you, Lars. Good afternoon, everybody. In 2016-2017, gross profit was up by 5%, amounting to DKK 10.6 billion. This equals a gross margin of 68% in both constant currencies and Danish kroner. We continue to see improvements in production efficiency at our volume sites, and in particular, a positive impact from the relocation of SenSura Mio and Compeed to Hungary, which compensates for the negative gross profit impact from the launch of new products, where the production economy is not yet fully optimized. The gross profit was also negatively impacted by wage inflation in Hungary, increasing depreciation levels and costs associated with the relocation of production to Hungary. In addition, the gross profit was negatively impacted by around DKK 20 million in restructuring costs related to the reduction in the number of production employees in Denmark.
The distribution to sales ratio came in at 28%, on par with last year. The ratio was impacted by incremental sales investments in wound care, Urology Care in the U.S. and Japan, Australia, and South Korea. In Q4, the distribution to sales ratio was 28%, compared to 27% last year. The admin to sales ratio came in at 4% of sales and was up DKK 62 million compared to last year. The increase was due to patent litigation costs and transaction costs related to the acquisition of Comfort Medical. In Q4, the ratio was 4% and on par with last year. The R&D to sales ratio came in at 4% of sales and was up DKK 65 million compared to last year.
The 13% increase reflects a higher general activity level and our ambition to bring more clinical differentiated products to the market. In Q4, the ratio was 3% and on par with last year. Overall, this resulted in an increase in operating profit of 4%, which corresponds to an EBIT margin of 32%. In fixed currencies and before the one-off adjustment related to the U.S. Veterans Affairs in Q3, operating profit increased by 9%. This corresponds to an EBIT margin of 33%. Operating cash flow amounted to DKK 3.3 billion and was approximately DKK 200 million higher than last year. The positive impact came from primarily higher absolute earnings. In 2016-2017, mesh payments totaled DKK 1.8 billion, and the total mesh payments to date now amounts to DKK 4.2 billion.
Cash flow from investing activities was impacted by the acquisition of Comfort Medical for approximately DKK 1.1 billion and capacity expansion in machines to produce existing and new products, and the site expansion in Tatabánya in Hungary. Investments in intangible assets and property, plant, and equipment amounted to DKK 685 million, up 6% compared to last year. Sale of bonds provided a DKK 144 million cash contribution. Adjusted for payments made in connection with the mesh litigation and the acquisition of Comfort Medical, the free cash flow amounted to approximately DKK 4.1 billion, compared to DKK 4 billion last year. Underlying free cash flow was in line with last year.
Adjusted for the low amount of taxes paid in 2015-2016, following a large voluntary tax payment in 2014-2015, the free cash flow in 2016-2017 was approximately DKK 500 million higher than in 2015-2016. Cash conversion, defined as free cash flow before interest tax, M&A, relative to EBIT, was 98% for 2016-2017. With respect to the mesh litigations in the U.S., the status is that we have settled more than 95% of the known cases. We still view the provision as sufficient, and we are now in the final phase of the mesh litigation. In 2017-2018, we expect to pay out the remaining DKK 1 billion of the DKK 5.25 billion provision. Please turn to slide 8. As Lars mentioned at the start of the call, the new Global Operations Plan four has been finalized.
The plan aims to deliver 150 basis points of EBIT margin improvement, with full effect from 2021. The savings will primarily come from an increase in efficiency at our volume sites, procurement savings, and a reduction in the number of production employees in Denmark as a result of the planned closure of the Thisted factory. By the end of 1920, we intend to reduce the number of production employees in Denmark to 200. Going forward, pilot activities will be consolidated in our innovation factory in Mørdrup. The implementation of Global Operations Plan four will require us to strengthen our organizations in Hungary and China, and to build an organization in Central America. Most of these costs will be incurred in 1819 and 1920.
The closure of the Thisted factory will involve restructuring costs of approximately DKK 50 million in 2018-2019 and 2019-2020. In terms of the phasing of the 150 basis points improvement in 2019-2020, I expect to begin to realize benefits from the increased efficiency and procurement savings in 2021. I expect to realize the full 150 basis points margin improvement, as the benefits from the planned closure of the Thisted factory are already realized. Please turn to slide number nine. For 2017-2018, we expect revenues to grow around 7% organically in constant currencies and 5%-6% in Danish kroner. Our guidance for next year is impacted by two larger factors. First, our guidance assumes a negative impact of DKK 100 million from the patent expiry on SpeediCath standard catheters.
In 2017, 2018, we expect a negative pricing pressure of more than one percentage point on our top line. This is driven by developments in Greece, where the Ministry of Health is currently working on an extensive reform package impacting medical device suppliers in 2017 and 2018. Last week, price cuts of around 25% were implemented for Ostomy Care, Continence Care, and Wound Care. The actual reform outcome and impact remain highly uncertain. We have assumed an impact of DKK 100 million in our guidance. Aside from the impact of the patent expiry and the healthcare reforms in Greece, our guidance assumes stable growth trends across our regions. The guidance in Danish kroner is significantly impacted by the depreciation of the U.S. dollar, as well as a number of dollar-related currencies against the Danish kroner.
The currency impact is based on spot rates as of October 31st, 2017. Since the start of the calendar year, the dollar has depreciated against the Danish kroner by approximately 10%. For 2017-2018, we expect an EBIT margin of 31%-32% in constant currencies and around 31% in Danish kroner. The EBIT margin guidance includes the impact of our assumptions around the SpeediCath patent expiry and healthcare reforms in Greece. In Greece, we enjoy above group level margins. On our operating expenses, we expect broadly stable trends into 2017-2018. Next year, as part of our up to DKK 2 billion LEAD20 investment commitment, we will invest up to 2% of sales in sales-enhancing initiatives, primarily in innovation, wound care, emerging markets, and in the U.S. across all our business areas.
High growth from our new product launches still means pressure on the gross margin. As previously communicated, we continue to relocate manufacturing out of Denmark to Hungary, and we will reduce the number of production workers in Denmark by additional 100 people in 2017-2018. We expect the benefits to be absorbed by the cost of relocation and restructuring costs of approximately DKK 20 million in 2017-2018. We expect high single-digit wage inflation in Hungary next year. We also expect depreciations to increase at the same level as last year, as a consequence of the last couple of years' increasing CapEx. In summary, the EBIT margin guidance is negatively impacted by healthcare reforms in Greece, as well as patent expiry. Despite the downward pressure on the EBIT margin from these factors, we are in accordance with today's new long-term guidance, accelerating our commercial investments to drive growth.
We currently expect our net financials to end the financial year 2017/18 at DKK 0 million due to hedging gains on the US dollar. CapEx guidance for 2017/18 is expected to be around DKK 700 million and is driven especially by investments in more capacity for new and existing products, as well as the factory expansion in Nyírbátor. Finally, our effective tax rate is expected to be around 23%. This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question over the phone at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star 1 to ask a question over the phone. We will pause just for a moment to allow everyone the opportunity to signal. Now we take our first person from the queue, Romain Zana from Exane BNP Paribas. Please go ahead, your line is now open.
Yes, good afternoon. Thanks for taking my questions. The first one regarding the 150 bips you mentioned with full effect as of 2020. Could you please clarify what is the base margin level for such an improvement? Second question: what makes you more confident to better deliver on cost optimization, as it has already been a key focus for several years, while the margin has been rather flattish. Why it has not worked over recent years, and why it should better work looking forward? Just a last question regarding the wounds in Q4 was strongly up, and I was wondering why we saw such volatility and what level should we extrapolate looking forward? Thank you.
All right, Anders, would you take the first question?
Yeah. The basis for our Core four plan, as I said, we are expecting to have an improvement from the Core four plan on the EBIT margin of 150 basis points, with full effect from 2021, and the baseline is 2016, 2017.
Yeah.
There's a question around... What?
It's in DKK or in constant exchange rates?
That's in constant currencies.
Okay.
Your second question, I didn't get it, if it was about cost optimization or customization?
Cost optimization.
Oh, okay. we'll still leave that with Anders.
As I understood your question, it was around why the margin has been more flattish over the last, yeah, three to four years. One reason is, or the main reason is that the currency has impacted us quite significantly. The sterling has dropped, and also now the US dollar is also decreasing quite significantly. The other thing is that we, over the years, has also increased our investments into commercial activities in order to drive growth.
I'm a little bit sorry, but your line is really bad, so could you repeat the question about the Wound Care?
Yeah, sorry. No, I was just wondering why we saw such a volatility through the year with a strong pickup in Q4, and what level of growth should we extrapolate looking forward for this division?
We don't guide per division going forward. With that, I cannot help you, but I can put a little bit more light on it anyways. What we see is that China is coming back over the years. China is doing increasingly better and very nice growth. Brazil is also coming back and Europe is doing really strong, apart from France, where we are having a really bad pricing regime. Apart from that, we are growing above the market in all markets in Europe. We have had a skincare opportunity in the U.S. because basically one of our competitors have had FDA issues.
That has given some tailwind in that market. That's, so all in all, we're actually in a pretty good shape.
Okay. Thank you.
Thank you. Now we'll take our next person from the queue, Maja Pataki from Kepler Cheuvreux. Please go ahead, your line is now open.
Yes, good afternoon. Thanks for taking my questions. I have two. First of all, the investments that you're taking into growth, the two percentage points of revenue coming up, is that directed to any specific business area, or is there a focus on one of the divisions? The second question is, Anders, just to understand, you say that the basis is the 33% EBIT margin that we had in 2016, 2017, which gives you quite quite an attractive margin in 2021. What kind of underlying growth assumption is there? Do we need to see an acceleration towards 9% to really get the full 150 basis points coming through and margins above 34%?
Would you actually also be able to deliver this kind of margin with, let's say, 7.5% growth? Thank you.
For the last part, I think I can answer that and say that that's a yes. With the current growth rates, we think that we can deliver the 150 basis points on the gross margin expansion. When it comes to the growth investments that we're looking at, I'd like to maybe talk a little bit more about what it is that we are seeing, because we are writing in the release that we came with, that we are seeing changing market dynamics. You can basically view that as as either we think that it's just harder to grow and we need to invest more.
That was not what we meant with it, but you all know that one of our big competitors came with a profit warning in the quarter that we just went out of. Saying that it's harder to grow, and it's also harder to deliver on the profitability. We also see a number of the other companies inside of our business areas that are struggling to deliver growth. Seen in that light, we have a different view on our current performance. We think it's better than what we maybe had in mind previously. We think that with that, there is the right moment in time to become more bullish, more aggressive.
We think that we have some opportunities to grow that we'd like to pursue. We see that emerging markets is coming back. Emerging markets, there are a number of investment opportunities that we like to go for. We have doubled the growth in the U.S., but we are not satisfied with the growth that we're seeing in the U.S., and we'd like to invest further, to have a significantly stronger growth in the U.S. There are a couple of opportunities in Europe that we'd also like to go for.
On top of that, we'd like to take the inorganic opportunities to pursue further home care opportunities, to simply come up with a better offering, service offering for our customers, and that's what we go for. With the guidance that we have today, we give ourselves the opportunity to invest up to 2% instead of 1%, as we had before. That means that we are upping from around DKK 160 million to approximately double up, that we can invest if the right thing comes, we, you know, are there. I'd also like to say that we have an incredibly strong financial discipline in the company.
While we are doing this, we are going through the Core four plan to further enhance our earnings. We are staying very committed to run the company as we're doing today. We are wasting no money, but basically keeping market-leading profitabilities. Of course, we don't invest unless there is a reason for it. We think it is basically a long-term view on the market. It is the market leader who is stepping up the game, and that's what we go for. That's how we should see what we're doing.
Thank you very much.
Thank you, and now we take our next person from the queue, Carsten Madsen from SEB. Please go ahead, your line is now open.
Yeah, thank you very much. Two questions, I guess. First one is, in the period around 2021, where now expect this margin lift to occur, what should we think about top-line growth from that period? I know this is extremely long-term, right now it feels like if you don't invest a lot, then you also don't get a lot of growth. What are your thoughts about long-term growth and the need to continuously invest a lot of money into sales and marketing, we should not see this as an incremental cost, just a sustainable high cost for you? Secondly, in other developed markets, you deliver 7% organic growth here in Q4, that's one of the weaker quarters in the last three, four, five years.
I guess, any chance that you could dig a little bit more into that number and explain where you're seeing weakness? Maybe highlight a little bit about the U.S. growth. Thanks.
We, when it comes to 2021, you're right. We can't guide on that right now. What we are saying, nevertheless, is that we would, we are pursuing growth in the upper end of the interval of the 7%-9%. Of course, there's a very big difference of how much extra firing power you are creating, or how much extra bottom line you are creating if you're growing 8%-9% instead of 7%-8%. There is a kind of a knock-on consequence of having higher growth, of course, which is positive.
It is the aim of what we are doing here is to get out of the 7% growth momentum, and up to something which is at the upper half of the 7%-9%. It doesn't sound like much, but it's basically growing doubled up compared to the market. I guess that that's as good as I can explain it. When it comes to Q4, the primary way that we look at it is that we have a tough baseline in the US in Q4. Last year, where we had around 10% growth in that quarter. That's more or less what it is.
Thanks.
Thank you. Now we take our next person from the queue. Ian Douglas-Pennant from UBS, please go ahead, your line is now open.
Yeah, thanks very much. It's Ian Douglas-Pennant at UBS. My understanding of the investments you're announcing today is they are mostly the same initiatives that you have already, just at a different magnitude as they were before. Or am I wrong, and this is a completely new strategy, like Coloplast Care was when you, when you first announced it? That's the first question. The second question is on the timing of these investments. Given I understand they're mostly salesforce investments, and you may correct me there, are you making them already?
Therefore, should we start to see the revenue growth rate start to tick up in, you know, fiscal year Q4 this year, or might it take a little bit longer than that? The final question, because I flatter myself that you were referring to our note this morning when you said some people are saying this is more expense to drive the same growth? Why, if this is a new growth trajectory, have you not increased your organic revenue growth target going forward?
What is new in the strategy that we come out with now is that we are clear about the fact that we would like to do more on the inorganic side. That also have an impact on the EBIT margin, and that's also contained in the way that we are guiding the EBIT margin. That, of course, when you are moving forward in the value chain, you move into companies that have a lower EBIT margin than the one that you have in the base business.
That part of it is new, that we are so clear about that we want to be further forward integrated. Then what we are, what we're doing with the other initiatives that we look at, it is also now a bit more consistent that we see that the emerging markets is coming back, so we see more opportunities there than we saw six months ago. Those are the basic changes that have been to the strategy.
You're right, we could, of course, go out and guide further than the 9%, but we basically think that in a three-year horizon, to move from around 7%, as we have performed over the last three years, to be at the upper half, it's a big move. To do that with an earning which is over and above 30%, we think that's really interesting if you take a longer term horizon on this, and that is what we are doing because that's also how we drive the business. To grow, double up the market with our current market position, we think that's extremely attractive.
Thank you. Now we'll take our next person from the queue, Anette Falberg from Handelsbanken. Please go ahead, your line is now open.
Yes, thank you very much. My question is related to the investments you're doing, Lars, and it's... I know you have tried to answer this in different ways, but my question is that, with these investments, is that necessary to secure your seven percent, or 7% top line growth? How much do you think these investments could, sort of, result in terms of reaching the 9% growth region? I could also ask differently, do you see any reasons where market would, where you from a negative market conditions, are necessary to do these investments? I will do my questions.
Yeah, okay.
Yeah.
All right. We have had two quarters with 8% growth. We have had a full year with 7% growth. In a sense, with what we're investing now, we are between the 7% and 8%. That's what we are seeing. Of course, we have all of the things that are moving in positive and negative ways as we are delivering these numbers. We see a number of things that are working for us, and we also see an opportunity to consolidate the way that we go to customers, the way that we are servicing our customers, which we believe that will give us further growth.
That will give us the opportunity to get to the upper end of the 7%-9%. This is not an investment that we need in order to stay at the 7%. We are quite clear about that this is what we do to move up and be at the upper end of the interval. And we find that that is really attractive because it is double up compared to the market growth, and it is the right thing to do in the current environment because we do have the firing power to invest, and that is what we are utilizing.
In respect to the Q1 results, or Q4 results here, how much of a, I would not say donation, but help did you see from, Convatec, having issues to deliver on wound care and ostomy care?
That's a very good question. I think it's a tricky one. We have asked our sales subsidiaries across the globe, you know, what they experience, and they report back that they see a normal situation. We have had other issues like, for example, in Skin Care, where we have seen an extraordinary growth because one of our competitors, you know, they are also really hard hit by the fact that the FDA closed down one of the factories. We have not heard, through the tune, the same issues on any of our other competitors.
That's how we see it, but it's not, you know, of course, it's not the same. It's just that we have not observed it.
Okay. Then in respect to the investments in direct marketing, is it gonna be smaller bolt-on acquisitions, or are there opportunities to see larger acquisitions in this respect?
I consider it would be smaller deals. But it's. Of course, we don't know if the deals will be there, and then we don't have the dilution of the margin, of course. We just made sure that there's space for it, and we go for it in to the extent where it makes sense financially, of course. It is a change in our guidance because we have learned so much now from Comfort Medical that we can see that we see ways to combine care, and also the products that we're having to come up with a good outcome.
Let me try to give you an example of what kind of outcomes that we're also seeing on other parameters. We talked to you on the last call about the fact that we have one Encompass, the home health agency unit in the U.S., with more than 200 different locations. One of the things that made us win there was that we had evidence that if you combine Coloplast Care with the Coloplast products and the quality of that, then you see a 30% lower readmission rates in ostomy patients. The readmission for one patient is $9,000.
So the fact that we can do something with Coloplast Care that really makes a difference is now underpinned and publicly available knowledge, and peer reviewed, and everything else. It's those kind of things where we see how we can use that in a fashion where we are forward integrated, that gives us the opportunity that we can basically do other things today than we were able to do before we had this access, before we had this knowledge, and that's why we want to build on it.
Thank you so much.
Thank you. Now we take our next person from the queue, Christian Ryom from Nordea. Please go ahead, your line is now open.
This is Christian from Nordea Markets. First a question on the new guidance that you have on the EBIT margin. Guiding now for a constant currency EBIT margin above 30% for the rest of the strategy period, what should we expect for the margin beyond the next year? This seemed to imply that we should expect a continued margin decline also into next year. Secondly, on the U.S. and your announcement that you intend to relaunch or launch a redesigned version of SpeediCath Flex, will you be removing the existing SpeediCath Flex from the market once the new redesigned version launches?
Yeah, let me start with the last one. Yes, we are going to remove the existing one. We're only going to have one version of SpeediCath Flex in the market.
In relation to the 30%, what I said earlier is that for 2017-2018, we expect an EBIT margin in constant currencies of 31%-32%. We are not giving any, you can say, specific guidance on what we expect our EBIT margin to be in the following years. That depends on the top line, but it also depends on how much we are going to invest into our business. The reason of the 30% is for us to have some maneuver room in order to invest into the business and to be in the upper end of our growth ambition.
Thank you.
Thank you. Now we take our next person from the queue, Scott Bardo from Berenberg. Please go ahead, your line is now open.
Hello there, it's Jacob Barry on behalf of Scott. Just a few questions left. Firstly, you mentioned there are plenty of inorganic opportunities in the retail distribution channel. I'm just wondering why you haven't been more active on the M&A front, if this is the case, given the flexibility of your balance sheet, and how much competition there is for these assets, given that some of your competitors don't have the same flexibility you do? Second question, given the heightened investments you're making, I'm just wondering how you think about your dividend policy going forward, and the prospect of any further buyback programs. Lastly, you seem to be baking in a reasonable amount of caution for SpeediCath next year. Are you aware of any concrete timelines for new competition coming in?
Could you provide an update on that? Thanks.
Yeah. Why not more active on the forward integration side? There's no doubt that when you do forward integrate, you forward integrate into companies that are much less profitable than our current business. There's no reason to do that unless you have a model by which you will grow your business over and above what you could do in other ways, or protect your business in ways that you could do or protect your business better than you could do in other ways. In a sense, you could consider what we did in the U.S. as kind of an incubator thinking.
We have bought something which we have had as a lab to figure out how can we connect the quality of performance of our products with the quality and service of Coloplast Care, and make that, together with a forward integrated organization, a stronger offering to the customers than if you were just bolting on something that you didn't do anything with. It's actually tricky to do that because first of all, you are very tied on both the hands and feet when it comes to the legal consequences of owning both sides of the value chain.
At the moment, you are a manufacturer, you, and you are running a patient support program, you have to be very, very careful how you connect that to a direct business which is in direct contact with the patients. All of that we needed to understand better, and we understand it to a much larger degree today. That's also why we, why we are being more, having more appetite on these type of investments, because we know now what we can do and what we cannot do, and how to pursue growth in a profitable way in this setup.
It's not difficult to buy something, but it's very difficult to make it a good business, and that's what we have been concerned with. When it comes to dividends and share buybacks, there's no changes. We pay back excess cash. We will continue the share buyback program to the tune of DKK 500 million per year in order to have a backing for our share option programs. That's basically also what you see today in the payout that we are having. What was the last question?
just on the SpeediCath.
Oh, yeah, on the SpeediCath. Yes. We have had, we have not seen any news, on that front, at this point in time.
Okay. Thanks for taking my question.
Thank you very much. We'll take our next person from the queue. Ina Lissner-Jacobsen from Bank of America Merrill Lynch, please go ahead. Your line is now open.
Hi. Good afternoon. Thank you so much for taking my questions. Firstly, my first question is: Could you be more specific in what exactly changed, in your view, in the markets where you operate, where that made you realize that the current cost structure that you have would not enable you to grow ahead of 7%? My second question is, in regards to a potential M&A strategy that you have alluded to, would you be willing to sacrifice margins, even if it was temporarily, in order to pursue a vertical integration opportunity?
What changed is that we see that our competition is growing less than what we anticipated that they would do. That sort of puts our growth rate into perspective. We think that there is an opportunity. It's our clear impression from working in the market and what we see in the market on a daily basis. Of course, we are much closer to that than you are, that there is an opportunity to grow faster than what we're doing.
We think that with the profitability that we are showing here, of +30%, and in that environment to be able to really gain market share to the tune of 2x the market growth, we think that's extremely important, and extremely interesting to us to go for that now that we see the opportunity. It is basically, it's based on what we are picking up in the market of our current strength vis-à-vis our competitors. When it comes to M&A, we gave a guidance of the +30%, and that includes the M&A activities that we are thinking about.
Thank you. Even so, I understand it includes it, but if you, in a certain year, have a certain margin, and then would you be willing to sacrifice some of that margin or, in order to pursue an M&A opportunity, even if in the end of the day, the margin would still be up above 30%?
We expect that we can keep our margin above the 30% with all the plans that we can think about. We are not, we don't anticipate that we, in this plan period, will come back and say, "By the way, the 30% was not what we could live with. We need to go deeper than that." We think that we can stay above the 30%.
I'm sorry, maybe I'm not being clear. Let me try to ask the question in another way.
Yeah.
Do you anticipate any M&A opportunities where, the opportunity would be dilutive to the margins, at least in a short-term perspective?
I think that the way that I think about this is that we want to, if at all possible, we will do more home care acquisitions. Home care companies, they have a lower margin than Coloplast current market margin is. When we take some of those and bolt them onto the company, that will have a dilutive margin effect on the whole thing. That is why we are explaining that as we have plans to take some home care companies and add to the base, it will also mean that we will see margins above the 30%, but maybe not in the level of 34% and 33%.
That's how you should think about it. It's smaller things that we are bolting on, and it has an effect, but we do not go below the 30%. Does that clarify?
Thank you very much.
You're welcome.
Thank you. Now we take our next person from the queue, Niels Granholm-Leth from Carnegie. Please go ahead, your line is now open.
Yes, just a quick question on the progression of earnings over the next couple of years until we reach 2021. Is it fair to assume that we should expect a couple of years with more earnings volatility between quarters that we have seen historically from Coloplast?
That depends on the growth, Niels. It depends on how the growth will develop, and it also depends on how aggressive we will be in our investment plan. No, I don't see a big change in the volatility quarter-over-quarter in the planning period.
Okay, thank you.
Thank you. Now we take our next person, Yi-Dan Wang from Deutsche Bank. Please go ahead, your line is now open.
Hello?
Me? Hello, can you hear me?
Yeah, now we can.
Great, great. I had it on mute. I think three questions. The first question is on the return on investment that's been improving very nicely in your business while you've developed it organically and not increasing your presence in distribution. With all the benefits that you can see, that you can get from distribution, how should we think about the returns? In short term, I fully understand that they will be, you know, lower, but once you do all the work you need to do, what would returns be? That's question number one. The second question is regarding the organic growth guidance that you've given, the 7%-9%.
If I look at the business historically, over the last two, three years anyway, you've had to deal with a number of issues in those businesses. If we adjust for those issues, the underlying momentum of the business was growing on at least 9% on that level of investment. If you, I mean, to keep or to have the growth at the higher end of that, but with additional investments, you're effectively baking in, you know, significant issues that you need to overcome to the same sort of degree as you've seen over the last two years going forward. Just wondering what sort of issues that we should be thinking about that's moving you in that direction. Maybe we'll start with those. Thank you.
Yeah. Okay. Let me start with the organic question. You're right, Yi-Dan, that if you clean up for all of the unforeseen things that came in, or said it another way, if you have a perfect year, you are growing around 9%. You don't have a perfect year. You'll have a lot of smaller things that hit you. When you have that, you arrive at the 7%. So it is with years where we have these normal things coming in that we say that we want to be at the upper end of the guidance.
You are right, then, if we, at that point in time, then hit, you know, that perfect year where nothing really is out of the ordinary, then you will have more, of course. That's how we have thought about it.
Yeah, just follow up on that.
Yeah.
I suppose if I look at the business over the last, you know, three, four years.
Yeah
... in terms of the new products that have come out, in terms of the investments you've placed, which has delivered some, but probably not fully delivering what you have invested for. The underlying momentum of the business was going to accelerate anyway, which should be enough to absorb the unforeseen issues, if you like, and then you put the additional investments on top. Can, can we take it that you're just being very conservative?
Yeah. Yeah. It's, you know, if what you say is, if I would like to up the guidance right now on this call, it's not in my plan. What, you know, I think the basic of this is that we are seeing opportunities to pursue more growth, and we think we can do it at a reasonable price. We think it's a very good point in time to increase the investment capacity so that we can really go for it. That is what we are doing. We have this upswing beginning in emerging markets.
We see some opportunities in the US, and that's why we're not satisfied with around 10% growth in the US. That's what we go for. I think that can bring us to the upper end of the interval. Yeah, but it's.
Well, two, three major issues.
I see where you're coming from, Yidan, but the reality really also is that you are hit from things that you don't expect in most years. With that, we have been able to grow around the 7%. To be able to grow at the upper end of the interval is that's a big difference to us.
Okay. The return?
Yeah. In relation to the return of investment, after we have acquired Comfort Medical, we have delivered a return of investment last financial year of 47%. It, of course, depends on how big the acquisitions we are going to make, how big they are. I would still believe that we are in the mid-40s moving forward.
I suppose the question is really on the return of the assets you're going to buy. Maybe the easiest thing to do is just to look at Comfort Medical, where you've had some experience already, and you know how much dilution that you've had from it. You know, once you're done all the stuff you need to do with it, that you could possibly do with it, will the return of that acquisition be similar to what Coloplast was on before it acquired it? Or would the return of acquiring distributors generally be lower? If we were to model going forward, obviously it depends on the mix, how much of these acquisitions do you do? Just academically, how should we think about that?
Should we just, as you increase the amount of acquisition in your revenue, should we just sort of taper down the return accordingly? Am I making sense?
Overall, as Lars also mentioned earlier, the profitability levels we look at in the dealer space is significantly lower than our group margin. Initially, they are diluting our group margin. We believe that we can accelerate growth from acquiring dealers across some of our markets.
Right. My point is, yes, you can accelerate growth, but the incremental growth you get relative to the capital you've committed to get that growth, is that similar to the incremental growth you would have gotten on your existing business for the capital that you would commit on the existing business?
No, it will not be at the level of our existing business.
Eventually, the return will be lower.
Yeah, eventually, also, the return on potential acquisition will not be at the level of our existing business.
Okay. Now, how much lower do you expect it to be?
That, of course, depends on the acquisitions that we are planning to do, the size, the growth, the profitability level. That depends, yeah.
Right. No, I can understand that. I'm just saying, take Comfort Medical as an example. You've bought it already, you've owned it for, almost a year. You obviously see opportunities where you can make it more, value accretive, I suppose, is the word for it. At the end of, and I'd expect your acquisition to be similar to-
It's, I think that your question, even though I appreciate your question, I think that it's maybe a little bit too precise because.
Sure.
Because we are also taking these investments to get a place at the table with the payers. That's where we are, that's where you are negotiating for the future. That's where you are part of the negotiation when you set prices. That's also part where you are part of deciding whether and on what terms that new products are offered to the market, whether you arrive at lump sums or not lump sums, and so on. You have more into it than is this an investment in line with what you're doing in the business.
If you take an investment in a new product, and if you take an investment in a new sales force, we come up with something which is almost 50% return on invested capital. It's really, really strong. But what we're looking at here is expanding the business out of where we are today and also to have, what do you call that? You call it more, how do you secure more loyalty, and how do you make sure that you are, you're part of the negotiations of what the market is going to look like going forward? In that sense, we have a bit more into it than just return on invested capital.
Of course, it needs to be significantly positive, but it will never be as positive as a new investment in a salesperson or a new investment in a new product.
Okay. Thank you. That's very clear. We watch and wait and see and watch how it goes.
Yeah
question on the direct-to-consumer platform. Now, I suppose Convex Mirror is the first time that you're using that platform to sell the sort of the bigger part of your ostomy revenue, well, products on that account for a bigger part of your ostomy revenue. When can we start to see some benefits from that? Actually, before we even get there, how significant do you think this channel is to the industry as a whole, not just for the coming year, but over the next three to five years?
The home care companies, or?
No, the direct-to-consumer platform that you've been building, the DTC.
Oh, yeah. It's.
You know, that says 1 million patients in the database, that one.
Yeah. Yeah, exactly. Exactly. The DTC platform is you could say that it's a way to get to get data on what is going on in the different markets, but it's also a feeding channel, if you will, for Coloplast Care, where we are in much closer contact with the end users. As I just explained, there's one example before, that when you have Coloplast Care and our products combined, we start to be able to make offerings that we could not do before because we have more data.
The investment in DTC is giving us growth, and we have said historically that we think that a couple of percentage points of what we see of growth in the company comes out of the direct-to-consumer activities. I think that's more or less the same today. That's what we are seeing. That in and of itself is actually extremely value creating.
Right. Do you think that couple of % would increase? I suppose historically, you've only really used it for your accessories products. Those accessories
Yeah, well, that's of course, what we are investing for. No doubt about that.
Right. The question is, do you expect the benefit from DTC to be, you know, increasing from the 2% that you see currently?
Yeah. What we are implying today is that we are investing to increase the impact of the DTC channel. That's our aim with this. It is to be able to grow faster, and this is one of the ways. If that's the question, yes.
Okay. Thank you.
You're welcome. Actually, we are out of time. Thank you for all of your questions, and we know that we are going to meet a lot of you in the coming days. Thank you very much. We are looking forward to meeting you.