Good afternoon. Welcome to our full year 2015-2016 conference call. I'm Lars Rasmussen, CEO of Coloplast. I'm joined by CFO Anders Lønning-Skovgaard and our investor relations team. We'll start with a short presentation by Anders and myself, then open up for questions. Please turn to slide number 3. For 2015-2016, Coloplast delivered organic growth of 7% and a 34% EBIT margin in constant currencies before special items. With these results, Coloplast continues to demonstrate industry-leading organic growth and profitability, which I'm satisfied with. We continue to see healthy demand for our products across our business areas and have launched a number of innovative products this year, including SpeediCath Flex and Biatain Silicone sizes and shapes. The year has also seen improved reimbursement for hydrophilic catheters in Japan and Australia.
In addition, we continue to expand the scale and scope of our consumer efforts, including our support program, Coloplast Care, which has more than 400,000 enrollments today. This year, we saw strong performance in Europe across our business areas. In addition, we saw a strong performance in Ostomy Care, where we are currently growing 9% organically, which is approximately twice the market. The SenSura Mio Convex launch continues to be very well received by users and nurses, and we look forward to bringing more SenSura Mio Convex capacity to the market next year to be able to meet the strong demand. The underlying growth in the U.S. market for Coloplast products is strong and double digits, and I'm excited about the future of our U.S. business. Within Ostomy Care, Coloplast continues to gain market share and to close contracts with large hospital systems.
This year, our reported U.S. number had been negatively impacted by the buying patterns and inventory reductions as a result of contractual changes with our distributors. We did, however, see strong growth in our U.S. urology business due to the market share gains. For next year, we expect higher growth in the U.S. compared to this year. While performance in individual emerging markets varied, emerging markets as a whole is seeing a lower growth momentum explained by, among other things, weaker momentum within wound care in China, Saudi Arabia and Brazil. We have increased the provision for the U.S. mesh litigation by DKK 750 million, and we now estimate that we have settled more than 90% of the cases against Coloplast as we move towards the end of the multidistrict litigation.
Today, the board of directors approved a DKK 9 ordinary dividend, amounting to a total of DKK 13 and a half per share in dividends this year. Our guidance for 2016-2017 is an organic revenue growth of 7%-8% in constant currencies and 5%-6% in DKK, and an EBIT margin of 33%-34% in constant currencies and 33% in DKK. Anders will explain later how we have arrived at this guidance. Please turn to slide number 4. Revenues grew 7% organically and 6% in DKK, and amounted to DKK 14.7 billion. In Ostomy Care, organic growth was 9%, and growth in DKK was 7%. In Q4, organic growth was 8%.
Growth continues to be driven by our SenSura and Brava portfolios, especially in the UK, Germany, Nordic markets, and the US. In particular, the launch of SenSura Mio Convex has contributed to the strong growth momentum. In Q4, growth was negatively impacted by back orders on urostomy bags due to quality issues related to an external raw material supplier. This led to a back order value, which was approximately 30 million DKK above the normal level. The back order situation is expected to normalize in Q1 2016-2017. Our Assura/Alterna portfolio growth was driven by good performance in China, Russia, Algeria, and Argentina. In Continence Care, organic growth was 5%, and growth in DKK was 3%. In Q4, organic growth came in at 6%.
The SpeediCath ready-to-use intermittent catheters continue to drive growth, especially the compact versions performed well. In the compact segment, we see strong performance in markets like UK, France, and Germany. As mentioned earlier, distributor buying patterns and inventory reductions in the US have had a negative impact on growth this year, in particular in Continence Care. In addition, the value of the national tender in Saudi Arabia was lower this year compared to last year. Our Conveen collecting device portfolio posted slightly positive growth due to improved momentum in Russia and France. Finally, sales growth for our Peristeen products remains satisfactory, especially in UK, US, and France. In Urology Care, organic growth was 9%, and growth in Danish kroner was 10%. In Q4, organic growth was 11%.
The growth was driven by sales of the Titan range of inflatable penile implant devices and female pelvic health products, where we continue to gain market share. Our Endourology business saw satisfactory growth in Europe. However, overall growth was dampened by weaker emerging markets performance. In Wound & Skin Care, organic growth was 6%, and growth in DKK was 5%. Organic growth for wound care in isolation was 5%. For Q4, the organic growth for Wound & Skin Care was 3%. The growth was driven by Biatain sales, and in particular, Biatain Silicone in Europe. China contributed to growth, yet the overall growth momentum is lowered compared to last year. In addition, growth was negatively impacted by a price reform in France and weaker performance in emerging markets due to challenging market conditions.
The Skin Care business saw satisfactory growth rates for the year, and our contract manufacturing of Compeed contributed to growth. Turning to our geographical segments, we saw organic growth of 6% for the full year and 5% in Q4 in our European markets. The growth continues to be satisfactory across the portfolio of countries, and in particular in the U.K., France, and the Nordics. In the U.K., our home care business, Charter, grew strongly and continues to take market share. During the year, we have been able to successfully mitigate the pricing pressure in the Netherlands and Germany. Organic revenue growth in other developed markets was 6% for the full year and 10% in Q4. As explained earlier, buying patterns and inventory reductions by distributors impacted full year performance negatively in the U.S.
Revenue in emerging markets grew organically by 14% for the full year and 9% in Q4. The growth was driven by China, Argentina, Russia, and Greece, whereas Saudi Arabia impacted growth negatively. We continue to have satisfactory growth rates in China within Ostomy Care, yet performance within Wound Care has weakened. Russia and Argentina are delivering on tenders, tender wins from earlier this year. Overall, we see lower growth momentum in emerging markets due to more difficult market conditions in a number of countries. With this, I'll now hand you over to Anders, and please turn to slide number 5.
Thank you, Lars. Good afternoon, everybody. Gross profit was up by 5% to around DKK 10 billion. This equals a gross margin of 69% in constant currencies and 68% in Danish kroner. We continue to see improvements in production efficiency at our volume sites and a positive impact from the reduction of around 100 production workers in Denmark this year, which compensates for the negative impact from the launch of new products, where the production economy is not yet fully optimized. The gross profit was also impacted by increasing depreciation levels and relocation of manufacturing to Hungary. The distribution to sales ratio came in at 28% on par with last year. The ratio was impacted by incremental sales investments in the U.S., China, U.K., and Germany. In Q4, the distribution to sales ratio was at 27% compared to 28% last year.
The admin to sales ratio came in at 4% of sales on par with last year. Last year was impacted by a non-recurring cost of DKK 75 million. In Q4, the ratio was 4% compared to 3% last year. The R&D to sales ratio came in at 3% of sales on par with last year. This year was impacted by higher general activity levels compared to last year as a result of, among other things, the launch of SpeediCath Flex and Biatain Silicone sizes and shapes. In Q4, the ratio was 3% and on par with last year. The provision for the mesh litigation has been raised by DKK 750 million. The entire amount is booked in Q4 under special items.
The total provision is now DKK 5.25 billion and is our current best estimate of the total potential cost, including existing settlements, future potential settlements, and potential results of litigation, as well as other costs associated with the litigation, including legal advisory costs. This has resulted in an increase in operating profit before special items of 7%, corresponding to an EBIT margin of 34% in constant currencies and 33% in Danish kroner. Including special items, the EBIT margin was 28% in constant currencies and Danish kroner. Operating cash flow amounted to DKK 3 billion and was approximately DKK 300 million lower than last year. The positive impact from higher absolute earnings before special items and lower tax payments due to higher voluntary on account tax payments last year was offset by payments to settle mesh claims.
During 2015, 2016, mesh payments totaled DKK 1.6 billion, total mesh payments to date amount to DKK 2.4 billion. Cash flow from investing activities was impacted by investments in capacity expansion, both in machines for production of new products and the site expansion in Tatabánya in Hungary. Investments in intangible assets and property, plant, and equipment increased to DKK 649 million, up 5% compared to last year. Adjusted for payments made in connection with mesh litigations, the free cash flow amounted to approximately DKK 4 billion, compared to approximately DKK 2.8 billion last year. Please turn to slide 6. 2016, 2017, we expect revenues to grow 7%-8% organically in constant currencies and 5%-6% in Danish kroner. Our guidance assumes stable growth rates in Europe.
We also assume higher growth rates in North America in 2016, 2017 compared to 2015, 2016. We expect a fairly large difference between the 1st quarter and the remainder of the year due to inventory situation in the US, where we expect additional destocking in Q1 by our largest distributors. As a result, we expect mid-single-digit growth in our Q1. We assume that the current momentum in emerging markets will continue into the next year. We expect a negative price pressure of around 1 percentage point on our top line, and this is reflected in our guidance. The negative pricing pressure is expected to be driven by reimbursement pressure in France and a price reform in Greece within Wound Care. For 2016 2017, we expect an EBIT margin of 33%-34% in constant currencies and 33% in Danish kroner.
High growth from our new product launches still means pressure on the gross margin, but we continue to relocate manufacturing out of Denmark to Hungary, and we will reduce the number of production workers in Denmark by additional 100 in 16 17, as previously communicated. We expect the benefits to be absorbed by the cost of relocation and restructuring costs in 16 17. We also expect depreciations to increase at the same level as last year as a consequence of the last couple of years increasing CapEx. On our operating expenses, we expect stable trends into 16 17, and we will continue to invest into sales-enhancing initiatives, as communicated at the Capital Markets Day in June. We currently expect our net financials to end the financial year 16 17 at 0 million DKK.
CapEx guidance for 2016-2017 is expected to be around DKK 700 million, and is driven especially by investments in more capacity and for new products, including SenSura Mio Convex, SpeediCath Flex, and Biatain Silicone, as well as a new factory. 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. We'll now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, that's star one if you wish to ask a question on the phone line. Your first question comes the line of Ian Douglas-Pennant. Please go ahead.
Oh, hi. Yes, thank you very much. The first one is on SenSura Mio capacity. Could you just remind us, when do you hope that will come online, and how large is the capacity shortfall that you have currently? I'm just trying to gauge the potential uplift in growth coming from that. The second one is kind of a longer term question. Do you feel like you need to innovate again in order to grow above the market as your guidance calls for longer term? I think it's just striking your guidance again this year is just slightly below your longer term growth rate, and I recognize it is slightly. I mean, you seem to have fallen behind Hollister in catheter innovation.
Your agent distribution strategy in the U.S. is being eroded by people like Bard, amongst others. I mean, how do you, how do you stay ahead on a 3-year view? Do you need to invest more in the sales force? I mean, how do you think strategically from here?
Thank you very much for that. I think you have, last part of the question.
Lars, I think I can hear you speaking in the background, but it's super quiet. I don't know whether the problem is my end or your end.
Yeah, no. Thank you very much. Is this better?
Yes, that's perfect. Thank you. Sorry.
Okay. Thank you. No, I'm sorry about that. It was just because I was not near to the microphone. Let me start with the last, or the last part of your question first. We have a guidance of 7% to 9%, and that is in a market which we just did the analysis again, and we think that the market is growing 4% to 5%. With the current momentum of 7% to 8%, I think that we are growing well above the market.
I think your question must be, if we want to be at the upper end of the guidance that we are coming with, which suggests that we grow twice as much as the market, then we would need to see that there is a stronger underlying demand in emerging markets. As it is, we are hit, I think, the whole industry by the fact that China is not moving as fast as it did a couple of years back. South America is not moving as fast as it did a couple of years back, and that the demand in Middle East and Russia is very weak compared to what it used to be.
In that sense, in my view, 7%-8% organic growth is I think we have to work to do that, and I think it's a pretty solid performance. But, you know, that's of course something that I think. That's just where I'm coming from. But I would need to see emerging markets grow more to come with a bolder statement on the guidance for top line growth.
If-
Would I like to grow more than 7% to 8%? You bet. You have to get up early to grow the 7% to 8%. When it comes to Convex, I would not be able to answer your question about what is the demand. We have had to take a bet and say, how much are we increasing capacity? That's a lot. We can't gauge the demand in the market because we have given a......
Or allocated a certain volume per market and said to the, to each of the markets that this is what you get, because this is, when we add the different countries together, this is 24/7 capacity that we sit on. That also means that this product have not been launched on our DTC channel at all. This also means that it's not even been launched in all of the hospitals where we would like to launch it. Once we start to push those buttons, what kind of demand are we able to create? We don't know, of course. That's. That will come in the second half of the current fiscal year.
Okay, great. If I could just ask a quick follow-up on the first question that you answered.
Mm-hmm.
On China, I mean, is it tracking in line with your expectations now that you communicated to the capital markets there? Have things got worse there? I mean, negative growth doesn't seem to be consistent with what you were saying before.
That's correct. If we look at China, then we had around 20% total growth in 2015, 2016, which is well below what we expected to have. If you then add a little bit more detail, we have the demand and also the sales that we expected to have in Ostomy Care, and that's very strong. That is also that is an primarily an out-of-pocket business, and it's a community business. In Wound Care, that's where we have seen different changes in the year and where we have had to reset our strategy. What we do in Wound Care is that we have a pretty wide coverage in China. We don't expand that coverage for the coming year.
We simply go for the hospital accounts that we have and go to get more out of them. It means that we will grow a little bit slower, but it also will impact positively, of course, our profitability in the country. That's the current strategy. We don't see a need to expand further right now. We need to get more out of what we already invested in when it comes to Wound care in China.
Perfect. That's very clear. Thank you. I'll get back to queue.
Thank you. Your next question comes in line of Anette Lykke. Please go ahead.
Thank you so much. Yes, I would like to follow up on the Wound care on the reimbursement situation in France. What sort of impact should we expect in 2016, 2017? If you could elaborate a little bit on more on that. Secondly, on conversion of a low-end to high-end catheters in the U.S., an update here. Is this going according to your plans, how do you see the ahead of the patent expiry in 2017? On the SpeediCath, the Flex, is recently launched. What is sort of the feedback you have got in this context? I know it's early days, but it would be nice to know a little bit about it.
Okay. Yes. For the reimbursement on Wound Care in France, it's one word, annoying, because they have had so many reductions of prices in France, but it is still within a limited part of the company. The impact from it is included in the current guidance for the company that we have. You know, I can't take that out and isolate it and say it's like this, because then you would need all of the other numbers to get to the total number that we give you anyways. It is not something that we consider to be a special thing.
It is included in the overall approximately 1% negative price pressure that we do see. That is included in the guidance that we have given you already. In the U.S., what is driving growth in catheters in the U.S., and the growth underlying is actually pretty strong in catheters, is that is solely the modern catheters, the hydrophilic coated catheters. You know, there are, as we have talked about many times, there are a lot of products that are very close to the product version we have, but none that are exactly the same thing. Nothing is going to change in the U.S. when the patent goes off.
I mean, the prices will still be the same. The reimbursement level will not change at all. I mean, this is one of the markets where it's not converted to modern catheters like everybody else. If there would be another player or 2 that will push the hydrophilic market, I even think that would not be to any disadvantage to us because the market is so huge still on the old-fashioned products that it's almost unbelievable. What is driving our growth, a lot of the growth that we see in the U.S. is the modern catheters. We've also invested to have that.
We have a pretty significant sales force in the U.S., and this is also what we use our DTC muscle to drive. SpeediCath Flex is, as you say, it's early days, but we have extremely positive feedback from the users and also from healthcare professionals. It is launched in the major markets here during 2016, 2017. I'm excited to see more impact from that in the coming period.
Okay. Thank you very much.
Thank you. Your next question comes the line of Martin Parkhøi. Please go ahead.
Yes, thank you very much. Martin Parkhøi from Danske Bank. Just to follow up on this relatively modest growth you expect in the first quarter. I guess that have you also in this included that you should actually see a reversal of growth in the ostomy franchise if you say you get to a normalized order backlog? As I can understand it's impacting your ostomy growth negatively by 2% in the fourth quarter, so should expect to see a similar 2% positive effect in the first quarter of next year. Could you say how firm are you? You seem quite convinced that you will see this inventory reduction in the first quarter.
Can you tell us how, which product groups they are impacting? How convinced are you that this will be the final inventory reduction, because it has been a little bit of a, of a slippery slope, over the last, or the past five, six quarters?
Yes, yes, you are absolutely right, Martin, that that's been less than clear. The problem have been that the distributors have no reason to give us inventory numbers, and it's taken us a long time to get into a dialogue where we are absolutely certain or where we feel more certain about what they have. We are, just to remind everybody, we are impacted by the fact that we changed the contracts, so that it's no longer what they buy from us, that we give a bonus on, but what they sell in the market. They have to give us sales out data.
Then on top of that, there's a pretty large consolidation going on in the market, which means that the distributors overall need a smaller volume of stock. What we have said to the to our U.S. organization is, we don't want to hear about it either going forward. Get it leveled out during Q1, whatever that takes, so that we have a normalized situation going forward. That's why we also say we don't know exactly what that means. It just means that it goes out. We have very good numbers on the sales out, so we know that we're in a very comfortable situation there. We just want that reflected in the numbers.
That's also why we, to come back to the first part of your question, which is, what about the back orders that we left our fourth quarter with? They will come back in Q1. That's correct. We will be delivering and come back to a normal situation in Q1. That means that the extraordinary back orders that we had in Q4 will be positively impacting the numbers in Q1. That would be the positive part. The negative part would be the U.S., and that's why we've been a little bit cautious about this, because we have visibility on the back order situation, because it will be normalized, but we don't have the same visibility on the other one.
That's really why we are guiding like we are.
Okay. Then just on product classes, any product class which hurt more than others on this inventory reduction?
It's more the IC area that we will expect to see the impact on and less on the ostomy part.
It sounds like a lot, it will go down with the mid single digits, given that you will get almost a percentage point from the order backlog. Are we, should we expect to see zero growth in Continence Care in the first quarter?
I don't know. I can't give you a guidance at that level.
Okay.
Martin.
It's okay. Thanks.
Thank you. Your next question comes from the line of Romain Zana. Please go ahead.
Yeah, thanks for taking my questions. I have 2. The first one on the, on the margin.
Can I get your name again? Sorry.
It's Romain Zana from Exane BNP.
Okay.
The first question is on the margin. I was wondering what is behind your more cautious margin guidance for our next fiscal year, and what makes you confident you can improve the margin in the long term by the 50 to 100 basis points, while the improvement has been, let's say, virtually muted over the past 2 years and most likely the year to come? Is, for example, linked to the higher R&D needs in the short terms? I'll have another question.
In terms of our margin improvement, we are for 2016, 2017 guiding a margin in the level of 33%-34% in constant currencies. What we also said at the Capital Markets Day, the main drivers behind our margin improvement, that is leverage effect throughout our P&L when we are growing in the level of 7%-8%. That is the one element. The other element is our program of reducing the number of headcounts in our Danish production facilities. We are running a program where we, over a 3-year period, will reduce the number of production employees with 300.
We reduced with 100 last financial year, and we are expecting to reduce with additional 100 in 2016, 2017, and again 100 in 2017, 2018. Those are the two main drivers behind our EBIT margin expansion.
Basically, you expect, you would expect the margin to go up again as of 2017, 2018?
Our overall guidance to the market is that we would like to grow the company between 7% and 9%, and on a yearly basis, improve our margin between 50 and 100 basis points. That is what we have said at the Capital Markets Day.
Okay. Just a follow-up question on the US destocking impact. You seem to have a better visibility or at least on the lasting of this impact.
Yeah. Yeah.
Do you have an idea or can you give us an idea of the magnitude we can expect on the catch up in the following nine months? We understood Q1 will be still impacted. It'd be a double-digit rebound.
That's, you know, that's, it's a very good question, and we would, we'd like to be able to answer it, but we don't have enough visibility to be precise on this, and that's why we'll have to stick to, at this point in time, it's also early days, but we'll have to stick to that we are delivering 7% to 8% growth in the in this fiscal year. You should expect that U.S. have a higher growth in 2016, 2017, than it did in 2015, 2016.
Thank you. Your next question comes from the line of Veronika Dubrovytska. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. If we can first start on the margin profile in the fourth quarter, and maybe, Anders, you can help us think through the next fiscal year as well. I was a little surprised by just how weak the gross margin was in 4Q. Fourth quarter is normally your strongest quarter. Looking at the full year, it seems like there was a modest margin contraction, excluding currencies. Can you just talk about the various pulls and pushes? I guess, you know, the manufacturing relocation has been taking quite a long time. Relative to the original timelines that you had communicated to us quite a while ago, what has been the cause of the delay, and how are you thinking about that for fiscal year 2017?
Related to that, the distribution costs were quite low in 4Q as well. To the extent that you can comment on any specific drivers, and if your view on the amount of investments for driving top line growth has changed at all? That would be my first question. My second question is, I've noticed in your press release that there has been yet another change to the UK leadership. Lars, I don't know if you can just comment to us and give us a sense for what's going on there, and I know that you're encouraged by the growth in the UK, but why are you having such a hard time maintaining management in place in this business? Thank you.
Yes, could I start out with the last one? That's probably a briefer question or a briefer answer to it. Ulrik Berthelsen, who has been heading up the UK, he's leaving, not because we asked him to leave. We're actually sorry to see him leave. He's leaving basically because he got an offer that he could not refuse.
I think that, well, if you look at the performance of the company, if you sort of take into account how the numbers have improved compared to many other companies, I think you would understand why a lot of people in Coloplast are being approached by other companies. Some of them get offers that they cannot refuse, and that's why Ulrich, he has left. We are sorry to see him leave. Anne Marie, who will take over, she have, she has done a great job for us in Holland, and she will take over in U.K. when she's back from maternity leave. That's basically as it is.
Paul Cooke, who's currently running the UK and have been in the organization for quite a while, he will then take Netherlands. That's what we do, and I'm happy that we have been able to make internal backfills of these important positions. Then over to you, Anders.
Yes. In terms of the Q4 margins, so we delivered in constant currencies a margin of 35%, and in the Danish krona, a margin of 34%. The underlying drivers have been a gross margin of 69% in constant exchange rates, and a gross margin of 68%. On the gross margin, Veronica, we are impacted by currency due to the fact that we are producing a significant part of our volumes out of Hungary. The other thing that has impacted our the Q4 margin, that is our cost. We have had a tight cost control throughout our Q4 in order to deliver on our margin improvements.
We have continued our investment plans, the things we have talked about previously in this year, that we have been investing in the U.S. and U.K., for instance, we have continued that into Q4. We will also continue our investments in 2016, 2017. We said at the Capital Markets Day that we would invest more into innovation, Wound Care, for instance, and that is some of the things we are investing into in 2016, 2017. In terms of your question around relocation of machines from Denmark to Hungary, we are on track. We have been transferring a lot of machines in 2015, 2016, and we will continue to transfer machines in 2016, 2017.
The plan of reducing the number of FTEs in Denmark with 300 within production, we are on plan. As I said earlier, we will continue with that in 2016, 2017, where we expect to reduce with 100 FTEs, and then again, additional 100 in 2017, 2018. Our, our plans of moving production from Denmark to Hungary, we are on plan.
That's very helpful. Thank you both. If I can just one real quick follow-up on the U.S. destocking. Lars, I understand you're sort of trying to get this under control. Your comment is, you know, we'll do whatever it takes. I think, you know, bigger picture, it seems like the U.S. distribution landscape is consolidating quite significantly, and I'm not entirely sure we're done with that process. What can you do as you look forward to mitigate, not just from an inventory management perspective, but also from a pricing perspective, this growing consolidation in the market?
The current situation is sort of a very unfortunate situation because we have this change of contract at the same point in time where we get the effects from the consolidation. We didn't foresee that when we changed the contracts, because that's quite a while ago. At least we do not have two things coming in at the same point in time. You are right, of course, you will see consolidation. I think that we can only do going forward, what we are doing right now with the prices. We have a very strong adherence to the price bands for each of our products.
We are running with a number of product portfolios to serve the market. It means that, for example, to give an example, in the U.S., in catheters, we have non-coated catheters, which come in at a certain price point, which is very low, where we actually have a very huge stake in the market, and we also are winning with the high-value modern products. In the same category, we are actually handling two, sometimes three or four different product types with different price bands attached to them. I think we need to be able to handle this complexity in the market, because that's how the market is set up. It's where you very often in Europe see that the market is driven clinically.
The market is driven much more by a financial logic in the U.S., and I think we're set up to do that, to run that game. Actually, if I look at our underlying growth, it just confirms that we are actually able to both grow and also be profitable in the setup that we have.
That's great. Thank you both.
Thank you. Your next question comes the line of Inês Silva. Please go ahead.
Hi. Thank you so much for taking my questions. I just have 2, please. First of all, I was just wondering if you could help us with your guidance in terms of currency impact on margins for next year. If you could break down or just order by importance, which currencies we should be looking at? Secondly, could you quantify how much was the impact of the changes in reimbursement in France for Wound, please? Thank you.
In terms of our guidance in 2016, 2017, in Danish kroner, we have guided growth of 5%-6% and an EBIT margin of 33%. That is based on the currencies or the spot rates of the 26th of October, and that is based on an organic growth in fixed currencies of 7%-8% and an EBIT margin of 33%-34%. It is as we are normally doing, a mathematical calculation based on the exchange rates of the 26th of October.
When it comes to the reimbursement on wound care, maybe you were not at the call at that point in time. We got the question before, and it's such a small part of the total picture, so we can't quantify that specific one. The fact is that we are guiding a negative price pressure or expecting a negative price pressure of approximately 1% per year. That is included in our guidance for this year, and that does also include the health or the reimbursement reform on wound care in France.
Thank you. Just to follow up on the FX impact on the margins. I was just trying to understand which currencies exactly are you including in your calculations, specifically in emerging markets, in terms of positives and negatives. I assume for negatives, the most important would be the pound.
In terms of, we have also been normally mentioning this in our stock announcement, and you can see that the biggest impact from the currencies we have have in there, that is from the British pound. That is by far the biggest impact compared to 2015-2016.
Thank you.
Thank you. Your next question comes from the line of Yi-Dan Wang. Please go ahead.
Hi there. Thank you for taking my questions. I have three, please. Firstly, just on the Premier GPO, could you please give us any feedback on why you have not been successful again in securing a GPO contract?
...Secondly, just on the mesh litigation provision, what was the reason for the additional DKK 750 million? Is it because of more cases than expected coming forward, or is it because the average settlement figures have been increasing? Maybe more color on that would be very helpful. Thirdly, just on the proposal to include ostomy and urological supplies in the Medicare Competitive Bidding Program, could you please provide us with the latest update? Thank you.
Well, it's a good question, why we didn't make it to the Premier GPO contract. Because it's not because of quality of the products, because actually, if you look at our pickup in the hospitals, it's much stronger now than it was a year ago and much stronger than it was 2 years ago. We are able to sell our products in the hospital. You have to remember that we have a high global market share in Ostomy Care, but we have a low one when it comes to Ostomy Care in the U.S. We grew our market share in the community market from 10% to 15% over the last 3 years.
We have also a very nice pickup when it comes to hospitals. We can grow without being on the contracts, and maybe I should just add a little bit more flavor on that because historically, the GPO contracts that we were part of, was limited, so that the hospital systems could only buy 20% outside of the contract. Otherwise, if they bought more, they would have some kind of fine attached to that. That's not how it is anymore.
When they enter into a contract, they actually get a fixed price point for the products, but they are free to go and make contracts with other companies if they want to do that. We actually feel that a lot. That was the reason why we at the Capital Markets Day this summer, we made a total go through of this. At that point in time, we also gave a kind of statement or guidance in connection to the U.S. hospital systems, that we, for the time being, have access to more than 50% of the total number of hospitals in the U.S.
With the current market share we have, that gives us plenty of opportunities to grow our business, and we also do that. I think that the reason why we haven't made it to the Premier contract is not quality of products, probably a matter of our current market share.
In terms of your question related to the mesh provision, so we have a total provision now of 5.2 billion DKK, and it is our best estimate as it includes potential costs related to existing settlements, future potential settlements, as well as legal costs. On a positive note, we have also said today that we have settled 90% of the claims we know.
Okay. Just on the Medicare Competitive Bidding Program, any update on that?
No, you know, there's a proposed expansion, but we cannot predict the outcome or timing, because, at this point in time, it's just a proposal by the Obama administration.
Mm-hmm. Mm-hmm. Okay. Okay. Very helpful. Thank you.
Okay.
Thank you. Your next question comes the line of Niels Ladefoged. Please go ahead.
Good afternoon. Could you please repeat the timing of the cash payments related to the mesh settlements for the next, well, for the remainder of your provision? My second question would be that if I look at your FX sensitivity table, it seems like your sensitivity towards the US dollar has increased quite a bit. Could you just explain that? Thank you.
Yes. In terms of the payments for mesh, we are estimating a payment in regards to mesh in 2016, 2017 of DKK 2.4 billion and additional DKK 0.4 billion in 2017, 2018. That's the expected cash flow impact from the mesh. In terms of your sensitivity question, Niels, it's increased a bit also because we have had a larger sales in U.S. dollar outside of the U.S., so through our export region.
Okay. Understood. Thank you.
Thank you. Your next question comes the line of David Adlington. Please go ahead.
Thanks for taking the question, guys. First one, I just wanted to clarify that you said that your net financials this year were expected to be 0. If so, I just wondering what was happening to the hedging, because I would have expected some positive moves there, given the change in FX?
Secondly, just in terms of with the devaluation of sterling, I just wondered if you'd had any discussions with any of the payers about adjusting prices given sterling devaluation? Thank you.
In regards to our financial items for 2016-2017, my estimate is 0, as I mentioned earlier. And yes, we will have a gain on the hedges on the sterling, but I also need to use the credit facility to a larger extent than I had originally expected. There will be a bigger interest payment. Overall, we are, with the current exchange rate, we are estimating a level of DKK 0 million. What the second question, can you please repeat that?
Yeah. I was just wondering if you'd had any discussions with payers, obviously, you know.
Oh.
In terms of, you know, adjusting for the fact that sterling has fallen so much.
No, we haven't had that. It's a bit more tricky when you're in our trade to ask for that, and we didn't have a negotiation to lower the price when the British pound was strong either, so.
Fair enough. Great. Thank you.
Thank you. Your next question comes the line of Oliver Metzger. Please go ahead.
Yeah, hi. Thanks a lot for taking my questions, 2 I have. The first one is on the Wound & Skin Care business. Last quarter, you mentioned that a high basic Q2 was basically the reason for slower growth. Now, the basic Q3 was already low, but you've mentioned some other negative effects. Has the low base of the previous quarter still helped you to a certain extent? How should we view on the quarter-over-quarter performances on that going forward? My second question is also in addition to the previous SpeediCath Flex question. The launch appears as very attractive, so it provides a higher compliance to patients. Would you already describe that SpeediCath Flex might create a new standard within Continence Care, within catheters?
In addition, how long do you have patent protection for them? Basically, what are your expectations on a, not only on a short-term view, but more on a multi-year years view?
If I take the last question first, then believe it or not, it can be tricky to understand how a new product performs in the market. I think the best current example of that is the Conveen. Because if we had known how well received it would be in the market, then we would have built a different capacity from the outset. Because right now we are running index 220 compared to original forecast. Therefore, it's extremely hard to answer your question. Yes, we have had a very, very positive receival of SpeediCath Flex.
If this means that is then the new standard and this is how a product works and so on, because it does have different features than what you find in the market today, it's just too early for us to say. I hope it would be great, but I, you know, I wouldn't be able to say that. But it's an innovative product, and we, you know, we are very, very excited to see how that pans out.
Yeah.
For Wound & Skin Care, it's primarily China, where we feel the pain. As I explained earlier on in the call, Last quarter, we spent some time understanding what are we going to do going forward. Where we are now, we know that we have to be much stronger in the efforts with the accounts that we already are taking care of. We are covering the biggest, the by far biggest hospitals in the EU or in China. We have a very big coverage already, this year we are pausing.
We are not adding more sales reps. We are definitely going very hard on getting growth and performance out of the investments that we have already taken in China. I think with the current growth rates in the market in China, that's a very appropriate way to go about it.
Okay, just back on the SpeediCath Flex, one question, because I also asked for the patent protection. How long do you have this patent protection?
Oh, yeah, we have. You know, the norm is that you file for a patent when you discover the new features of a product. With the development time we have, typically when we come out, the patent expectations would be between 15 and 17 years after launch.
Yeah.
Then you come back to, of course, how strong is your patent protection in that period, and how much does it keep other companies out? It's quite rare that you see as strong a patent protection as we have seen at the regular SpeediCath product. That will have to be tested, and that's what happens when you go into the process afterwards.
Okay, that's helpful. Thank you very much.
Thank you. Your next question comes the line of Scott Bardo. Please go ahead.
Yeah, thanks very much for taking my questions. Firstly, I think you mentioned that you've still got access to around 50% or so of hospitals in North America for ostomy, which I think you've highlighted in the past. I just wondered if you could give us a bit of an update, Lars, as to where we are with this advanced technology contract from Vizient, because it was my understanding that there should be some clarity on that around this time of year. Is it possible to share some thoughts related to how the outcome of that and how that might potentially change the access that you describe? That's question number one, please.
The second question is, well, obviously, we've seen quite a bit of stocking, and that's a little bit out of your hands, but by and large, it certainly seems that some larger distributors are having some pain in this environment of lower drug prices. The question I have is that, is it your expectation or are you hearing any signs that they're looking to share some of that burden and pain with medical technology suppliers such as Coloplast, and if things are getting a little bit more tougher in terms of some of the procurement prices they're willing to pay?
I'm sorry, Scott. For some reason, you broke up a little bit on the last question. Could you repeat that? Because I'm not sure that we got it.
Oh, sorry, Lars. Yeah. The question was related to some of the pain that the distributors seem to be having, particularly in North America, surrounding drug prices, which has already been quite evident thus far, and expect to continue into 2017. The question was, are you feeling any indirect knock-on effects from that, or any discussions about potential procurement prices for medical device companies, including Coloplast?
Okay. On the Innovative Technology contract with Novation, Vizient, it will expire in the 31st of this December, this year. We have moved all the customers accessing Coloplast products through the Innovative Technology contract into local contracts. As we explained at the Capital Markets Day, we don't think they will have to use advanced technology agreements within Ostomy Care anymore because their contracts are no longer standardized. That means that if a hospital wants to buy our products, they can just go do it. There's no fines or punishments or anything attached to them buying even 100% of their volume from us.
In that sense, you know, standardized just means that in the old world, where it was standardized contracts, if you're buying more than 20% of your value, outside of the GPO contract, you would get a fine for that. It doesn't apply anymore to this category. Therefore, it doesn't make sense to have advanced technology agreements. We don't expect it to be renewed when it runs out, because there is free access for everybody in that hospital system who wants to buy our products. I don't know if that answers your question.
You wouldn't expect access to change as a result of not being on this, but presumably, you need all of those customers that were on that contract to recommit with you. I mean, is that?
We have done that.
Yeah.
Everybody who are there, we have done that. They are on a local contract.
Mm-hmm.
Also going forward, there's no, for hospitals under the Vizient GPO, there will be no, they will have absolutely no problems in accessing whatever product they want to access in our portfolio, because they're free to do that under the new contract that they have been set up.
Thanks, Lars. Okay.
With regards to distributors, yes, of course, we have discussions all the time with distributors, but we have not had any issues or, but we have not had any reasons to change our pricing in this regard. We are with many of our distributors, well, many of our distributors are not pharma distributors, but for those who are, we are probably not the source for income for them.
Okay, thanks very much for taking my question.
All right. I think we go for the last question now.
Okay, you have 1 more question from the line of Ian Douglas-Pennant. Please go ahead.
Oh, thanks very much for squeezing me in at the end. Just a question on the destocking you're seeing from McKesson and Cardinal in the U.S. It seems to be dragging on longer than even you thought, from what I'm gleaning from this call. Have you worked out why there was quite so much inventory in the channel in the first place? It seems to me like, given my understanding of the market structure, they shouldn't actually have needed that much inventory, but maybe I'm missing something. The second one is on the urology margin. We saw a pretty good improvement, that much inventory, but maybe I'm missing something. The second one is on the urology margin.
We saw a pretty good improvement this quarter, and indeed, this year from Urology and relatively little elsewhere. Can you help us to explain what drove this? Was it just operating leverage, and how high do you think those margins can go over the medium term, or do you not think about it this way?
If we think in margins? You bet. Why do we have these inventories in the U.S.? It is because we had a wrong contract set up. Of course, it's not correct to have a setup where you pay bonuses or rebates based on what distributors buy from you. It needs to be based on what they sell, and that's what we've changed to. I think we pay a price for that, and of course, by this change of contract, we are also in a position where there is an incentive from distributors, because many of the distributors also have a muscle where they can sell stuff, right? They're not just box movers.
That gives them an incentive to use their selling muscle more on us than on anybody else, and that incentive was not completely aligned historically. I think that's part of the explanation. The other part of it is that there is a strong consolidation going on in the U.S., and with distributors, and that had been more than what we were not able to foresee that. That's the main part of it. When it comes to margins in urology care, there's a lot of scale effect in that. There's no doubt about that, especially inside of the female health.
It's growing pretty strongly, and that helps us. We are very satisfied with that. Thank you very much, and we are looking forward to seeing you all over the next weeks.