Good afternoon. Thank you for standing by, and welcome to the Coloplast Financial Statement Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you'll need to press star and one on your telephone. I must advise you that the conference is being recorded today on Tuesday, the 3rd of November, 2015. I'll now turn the conference over to our first speaker today, Lars Rasmussen. Please go ahead.
Thank you. Good afternoon, and welcome to our full year 2014-2015 conference call. I'm Lars Rasmussen, CEO of Coloplast, and I'm joined by CFO Anders Lonning-Skovgaard and our investor relations team. We'll start with a short presentation by Anders and myself, and then open up for questions. Please turn to Slide 3. In Coloplast in 2014-2015, the 2014-2015 fiscal year will not be remembered for being an easy year. Despite this, we did deliver an organic growth of 7% and 33% EBIT margin. These are great numbers, but we ended the year believing we could achieve more. We saw positive momentum in most European and emerging markets, but we underestimated the impact of the DOJ subpoena in the U.S. and the slow pace of recovery of our U.K. home care business.
We also had to increase the provision for the U.S. mesh litigation, triggering our third downgrade this fiscal year. These performance issues overshadowed the fact that many good things also happened in 2014-2015. We saw a fantastic performance in our wound care business and a very nice uptake of our new products across our business areas. In addition, we continued to expand the scale and scope of our consumer care efforts, now reaching out to almost one million consumers. Today, the Board of Directors approved an DKK 8 ordinary dividend, amounting to a total of DKK 12.5 per share in dividends this year. We also proposed to the annual general meeting to cancel four million shares.
Our guidance for 2015-2016 is an organic revenue growth of 7%-8% in fixed currencies and 8%-9% in Danish kroner, and an EBIT margin of 33%-34% in fixed currencies and in Danish kroner. Anders will explain later how we arrived at this guidance. Please turn to Slide 4. Revenues grew 7% organically and 12% in Danish kroner and amounted to DKK 13.9 billion. In ostomy care, organic growth was 6%, and growth in Danish kroner was 9%. In Q4, organic growth was 7%. Growth continues to be driven by our SenSura and Brava portfolio, especially in the Nordic region, U.K., Germany, Italy, and France. Even though the situation in Charter has improved, it has had a negative impact on the growth rates over the quarters in 2014-2015.
We continue to see significant pricing pressure in the Netherlands and increased competition in the German home care segment. Our SenSura portfolio growth was driven by good performance in China, Mexico, and Argentina. In continence care, organic growth was 8%, and growth in Danish kroner was 13%. In Q4, growth came in at 10%. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact versions performed well. In the compact segment, we see strong performance in markets like France, U.K., U.S., but also a tender win in Saudi Arabia in Q1 contributed to growth. Performance in our Conveen collecting device portfolio was unsatisfactory due to increasing competition in the urine bag segment, especially in Holland, U.S., and U.K. Finally, sales growth for our Peristeen product remains satisfactory, especially in the U.K., France, Germany, and Italy.
In urology care, organic growth was 5%, and growth in Danish kroner was 13%. In Q4, the growth also came in at 5%. Our injury urology business continues its satisfying performance, especially in Europe and Middle East. Sales of the Titan range of inflatable penile implant devices continue to drive the performance, but we continue to experience a low number of procedures and higher competition for these products in the U.S. We also continue to experience low growth within female pelvic health due to low market growth and declining sales of our older Aris sling. In wound and skincare, organic growth continued at 9%, and growth in Danish kroner was 16%. Organic growth for wound care in isolation was 11%. For Q4, the organic growth for wound and skincare was also 9%.
The growth was driven by Biatain sales, in particular Biatain Silicone in Europe, very good growth rates in China and Greece, and finally, a tender win in Saudi Arabia earlier this year. In Q4, the skincare business saw strong growth rates, our contract manufacturing of Compeed contributed to growth. Turning to our geographical segments, we saw organic growth of 5%, both for the full year and in Q4 in our European markets. The growth continues to be very satisfactory in France, the Nordics, and the Southern European region, whereas both the Netherlands and the U.K. continue to have unsatisfactory growth rates. The pricing pressure remains and has even increased a bit in the Netherlands. As mentioned earlier, we are experiencing increased competition in the German home care segment. Organic revenue growth in other developed markets was 6% for the year and 8% for Q4 alone.
Order buying patterns from one of our largest U.S. customers continue to impact quarterly performance in the U.S., and the impact in Q4 was positive. Overall, the growth trend in the U.S. improved over the year. The U.S. business also remains impacted by the U.S. subpoena investigation, which reduced the level of campaign activities in the U.S. We have achieved an agreement in principle with Department of Justice over the summer on the subpoena, and while the DOJ is finalizing this, we are increasing our sales and marketing activities again. For example, we are currently running our own first direct response TV ad on national TV in the U.S., so I'm quite excited about the future for our U.S. business. Finally, our growth rates in Canada, Japan, and Australia all remain satisfactory. Revenue in emerging markets grew organically by 21% for the full year and 24% in Q4.
The growth was driven by China, Saudi Arabia, Greece, and Argentina, whereas Algeria and Brazil impacted the growth rates negatively. We continue to see high growth rates in China, especially in ostomy care and wound care, and both Saudi Arabia and Argentina are delivering on tender wins from earlier this year. With this, I'll hand over to Anders. Please turn to Slide 5.
Thank you, Lars. Good afternoon, everybody. Gross profit was up by 12% to around DKK 9.5 billion. This equals a gross margin of 69% on par with last year. We continue to see a negative gross profit impact from the launch of new products, where the production economy is not yet fully optimized. This negative impact is compensated for by improvements in the production efficiency at our volume sites. The gross profit was also impacted by increasing depreciation levels, the write down of the negative pressure wound therapy inventory, and costs associated with the expansion of our Nyírbátor site and relocation of manufacturing to Hungary. In Q4, it was announced that a further expansion of the Tatabánya site has been initiated. This is a DKK 150 million investment.
The expansion will add 20,000 sq m and is expected to be finalized in the summer of 2016. The distribution to sales ratio came in at 28%, on par with last year. The ratio was impacted by incremental sales investments in China, emerging markets, U.S., and U.K. of around DKK 200 million. Q4 in isolation was in line with last year. The admin to sales ratio came in at 4% of sales, up DKK 102 million compared to last year. The underlying admin to sales ratio is flat. In Q2 last year, we reversed a provision of DKK 20 million, mainly related to bad debt in Spain.
Q3 this year, we took a total provision of DKK 75 million, partly due to the Department of Justice subpoena investigation in the U.S., and partly to increase the provision for bad debt in Greece. On the DOJ investigation, we have previously announced that an agreement in principle has been reached, we can now add that the settlement amount will be $3.1 million. On top of this, we have legal advisory costs, which are covered by the provision. The R&D to sales ratio came in at 3% of sales. This year was impacted by higher general activity levels compared to last year, also by restructuring costs associated with the organizational changes announced earlier this year. As you all know, we announced an increase in the provision for mesh litigation of DKK 3 billion.
The entire amount is booked in Q4 under special items. Overall, this resulted in an increase in operating profit before special items of 9%, corresponding to an EBIT margin of 32% in fixed currencies and 33% in actual currencies. Including special items, the EBIT margin was 10% in fixed currencies and 11% in actual currencies. Operating cash flow amounted to DKK 3.3 billion and was slightly higher than last year. We saw positive impact from higher absolute earnings before special items and product liability insurance payment of DKK 150 million, which was offset by a high voluntary on-account tax payment and cash settlements on currency hedging activities, and finally, payments on escrow accounts to settle mesh claims.
Cash flow from investing activities was impacted by investments in capacity expansion, both in machines for production of the new products and the site expansion Nyírbátor in Hungary. CapEx increased to DKK 617 million, up 16% compared to last year. The sale of bonds provided a DKK 352 million cash contribution compared to last year. Please turn to Slide 6. For 2015, 2016, we expect revenues to grow 7%-8% organically in fixed currencies and 8%-9% in Danish kroner. Our guidance assumes stable growth rates in Europe, we expect our growth rates to normalize throughout the year as performance in Charter improves. We also assume growth rates in North America and emerging markets continue its stable trend from last year.
It should also be mentioned that we expect a fairly large difference between the first half and the second half of the year, due to the gradual improvements in the U.K. and the U.S. We expect a negative pricing pressure of around 1 percentage point on our top line, and this is reflected in our guidance. The negative price pressure is especially driven by Holland and to lesser extent, by the German home care market. For 2015, 2016, we expect an EBIT margin of 33%-34% in both fixed currencies and in Danish kroner. Higher growth from our new product launches still means pressure on the gross margin, but we have started the relocation of manufacturing out of Denmark to Hungary. We expect the benefits to be absorbed by the cost of relocation in 2015, 2016.
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 to this year as we continue incremental sales investments of around DKK 150 million. We currently expect our net financials to end the financial year 2015-2016 around - DKK 100 million, impacted primarily by cash flow hedge losses on especially British pound and U.S. dollar. CapEx guidance for 2015-2016 is expected to be around DKK 700 million, and is driven especially by investments in more capacity and for new products, including SenSura Mio, Biatain Silicone, SpeediCath Compact Eve, and the Tatabanya expansion. 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. As a reminder, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel the request, please press the hash key. Press star and one to ask a question. Your first question comes from the line of Annette Lykke from Handelsbanken. Please go ahead.
Very much, as the first caller, I'd like to congratulate you with a very nice result. First of all, I would like to hear if you could put a bit more color on the U.K. Charter situation. What sort of initiatives you need to initiate a more positive development where you can regain part of the lost market share? Then as an additional quick question to that, I would like to hear a little bit about your SenSura Convex launch, when you expect to do this in the U.K., and whether this will have any sort of a positive effect on the development there and the ability to regain market shares.
Thank you for that. If you look at the Coloplast Charter situation, we actually think that we have normalized the situation now. What we have done in the course of last year, was that we had to reprogram the underlying process for the entire Coloplast Charter operation, because there was an underlying flaw in it that means that we were not able to handle the number of prescriptions that we should. This is quite a big operation for us, so afterwards, we had to train the whole pack. Sorry about that. Did you get any of what I said? Because my.
It was very hard to hear.
Okay, I'll start over again. Sorry about that. Actually, if we look at the Coloplast Charter operation, because we had this underlying flaw in our programming of the process for the entire Coloplast Charter setup, we had to reprogram the underlying IT system. Afterwards, we had to retrain the whole staff, and that's a pretty large staff that we have there. It's a sizable business. Now, we think that things are actually working really, really nicely. We know that the wait times are definitely competitive compared to any other homecare company that you would like to compare to in the U.K. when you're calling in.
With that, we think that we have fixed the issues. And we gave that a quarter to be absolutely certain that things are working as we want it to work. That also means that now we start the winback campaigns, but I have to be honest and say, I don't know if we're able to win back people who left us because of the bad performance in Charter. We can see on the underlying volume that our volume growth have been intact. Where we have lost out is people who are leaving Charter Healthcare because they want a better delivery performance. They have not changed products.
They are just leaving because they want a better supply of the products, they can get that in any of the other homecare companies. That's not the case anymore. I think that we are absolutely competitive. As I said, I don't know if we will be able to win back customers. To the SenSura Convex situation, yes, we're launching it as we speak in the U.K. It's been extremely well received both there and also other places where it's available at this point in time. We have, i t's been a pre-launch, so it's only been for sale in the market for the last two weeks.
It's the first convex product in the market where we can clinically prove that you have less leakage when you're using this product, and people are reacting extremely positive to it. We have very good expectations for this, also outside of the U.K.
Thank you.
Thank you. Our next question comes from the line of Ian Douglas-Pennant from UBS. Please go ahead.
Thanks very much. The first one, please, on the margin guidance, and a kind of nitty-gritty question. Does 33%-34% mean, as it has in the past, 32.5%-34.5%? If so, in your mind, is the distribution of risk within that range equal? Rather, is 32.5% as likely in your mind as 34.5%? Are you just saying it's the normal 50 to 100 basis points of margin expansion, so we should think about it as 33%-33.5%? The second one is on the continence care growth, which is obviously very strong this quarter, having been very weak last quarter.
Should we connect the two, when we're thinking about the growth rate? Should we look at it for the second half as a whole? Within that, how important was the restocking in the U.S. and the Saudi Arabian tender? Could you just give an indication of those two? Thanks very much.
Ian, in terms of the, your question around the guidance, we have guided the 33%-34%, that is 33%-34%, and not what you were saying, 32.5%-34.5%. It's 33.0%-34.0%.
On the continence care side, I think that we have a pretty strong uptake in most places. As you have also noticed, the whole situation in the U.K. have taken away so much, so much of our efforts, that we are, we are a bit marked there when it comes to the uptake on the NPDs. Fortunately, we have a very strong community machine, and that also means that we are able to convert afterwards. We actually see that we have a nice growth across the globe, and especially on the compact side, where we see that France, U.K., U.S., and Germany are really driving performance for us.
Okay. If I could just follow up on the first one, because it was a much easier answer than I thought. Could you quantify the magnitude of the H1 versus H2 shift? I just went quickly back through my model, and I noticed normally it's about 48%-52% H1 to H2 at the EBIT line. I mean, should we expect as much as 45%, 55%, or can you give us any idea there?
What I also said earlier is that we expect to have a better second half than the first half. The first half, we expect to be in the lower end of our full year guidance, and in the second half, in the higher end of our full year guidance. That's how we see it.
Okay, great. That's very clear. Thank you.
Thank you. Your next question comes from the line of Niels Leth from Carnegie. Please go ahead.
Good afternoon. Just a clarification question about the back-end loading of earnings for this year. Why would it be so back-end loaded when you have fairly easy comparison in at least in quarter one? Secondly, could you talk about your growth rate in the U.S. isolated, and which impact that you're seeing from the promotional campaigns as of yet? Finally, just the timing of your mesh settlements on your cash flow. Thank you.
Niels, the first question, I think you said, why is it the back-end loaded on the margin. When we are starting out the year, we are also starting out with the new investments into sales. We are investing into the business from the beginning of the year. The other thing is that we have also, in the last couple of years, seen a strong Q4, where the nominal sales is higher than the previous quarters. In terms of your third question, the mesh, we expect it will hit our cash flow over the next 12-2 4 months.
We are actually going out and borrowing money in order to handle the cash flow in that period, and we expect to borrow in the level of DKK 1 billion.
To the growth rates in the U.S. that we're a little bit cautious on that because we have started campaigns as I also said in the opening presentation in the U.S. together with dealers, and we did that already last quarter. Right now, as we speak, we are running a campaign in the U.S. where we are for the first time going solo. It's only us who are promoting our compact catheters there to see what kind of uptake we will be able to create there. It's not because we want to sell the products ourselves, but we want to be able to make a much stronger lead stream of leads to the dealers with whom we make business.
That is an activity that we have not tried before, and therefore, we need to learn how to do that and to get bang for the buck or value for the money. Therefore, there's no doubt that our sales in the year that we have had have been impacted by the DOJ subpoena. How fast the uptake will be over the course of this year, I don't know. Nobody knows.
We think that will be in the latter part of the year, and that's also why that's part of why we say that we will have a stronger growth in the second half than we had in the first half of the year.
As we speak, are you growing your U.S. business by double-digit numbers?
Well, that's a very leading question, and I don't think that we are prepared to be that specific.
Okay, thank you.
Thank you. Your next question comes from the line of Romain Zana from Exane. Please go ahead.
Yeah, good afternoon. Two question on my side, please. The first one on SpeediCath. In light of the patent expiry coming in 2017 on the ready-to-use technology, could you tell us what is the proportion of customers that has been converted so far to the SpeediCath Compact? That would be my first question.
No, we don't give that number out. It's no secret that, of course, we spent the majority of our efforts in converting people up to the SpeediCath, the SpeediCath Compact catheters. Because they don't expire, the patents on those don't expire until 2022. I also think that it's probably worth to remember that there are many products in the market today that are very close to the ready-to-use technology. You can find quite a bit of catheters out there that does have a hydrophilic coating, and that does have a water sachet or water ampoule inside. All you do is that you press on the packaging, and then you just don't open it until 30 seconds later.
In that sense, there's a lot of products out there that are quite close. You also have the fact that in most markets, these things are supplied by prescription. In those markets where it's not supplied by prescription, it's because there's either public tenders or because there's a home care company in between us and the end user. Where you have these tenders and home care companies, that's 15% of the total sales in catheters. In that sense, it's, I think it's, yeah, you have to be a little bit careful on how you interpret this because there is a tendency, and that's why I'm talking a little bit about it.
There's a tendency that you think that this is, this is pharma, where the moment the patent runs out, there will be a lot of very cheap alternatives in the market. They're already there. We get the same price for the products, whether it's a high, highly sophisticated product or whether it's a more old-fashioned product. They're already in the market at the same price. That will not change.
Okay, very helpful. Thank you. Just a clarification, that would be my second question on the organic growth guidance for next fiscal year, which is obviously a bit more cautious than your long-term ambition. What are the main reasons for being more cautious on the short term? I mean, is it the increasing pricing pressure that you told about, or the ongoing challenges in the U.K., U.S.? How do you expect the pricing to evolve looking forward?
Well, we would not like to issue a longer term guidance, a longer term fixed guidance than for the full year. When it comes to this year's guidance, there is an uptake that needs to take place in the U.K. and U.S. compared to the growth rates that we had the last year, and then getting those businesses back to normal growth rates. We don't know how long that is, but we expect it to be during the first half of this year. That is why our guidance is so clear that we will have a weaker first half than second half year.
Okay. It's all clear. Thank you very much.
Thank you. Your next question comes from the line of Michael Jüngling from Morgan Stanley. Please ask your question.
Thank you very much. I have three questions. Firstly, can you give us a guidance for net financial charge for the year 2016, so your next fiscal year? Secondly, on U.S. GPO contracts, what is your view on getting onto some of those, and what is the next event or catalyst that you are looking for? Thirdly, on the EBIT guidance range, the 33% and 34%, just on a very high level, what is the difference between those two numbers? Is it sales growth, or is it a more focus on cost control that gets you to 33% versus the 34%? Thank you.
Let me start off by the GPO contracts. First of all, we are on most of the GPO contracts when it comes to wound care and skin care. Those are just multiple source contracts, so more than two vendors there. We are on none of the formal contracts when it comes to ostomy care. We are with one of the bigger GPOs, we are at an advanced technology contract. That means that our SenSura Mio platform is launched in that one. All of the GPOs are having during the course of 2016, they are opening up for the contract.
That means that we are right now preparing bids for all of them. That is very important, of course, for us, because in the long term, it's hard for us to grow to the size that we have elsewhere if we don't get on the GPO contracts. Those contracts are today, dual source contracts. As I mentioned, we are only in because of the technology that we have. It's hard for me to say what the likelihood is that we'll get into those contracts, but we definitely do the best we can to be in there.
I think it's very nice that we are in a situation where the GPOs come back to us and say they would like to get our products in on a technology contract.
On that point, please, is what is the next catalyst or the next meaningful GPO contract are you looking for in 2016? Is it like a January, February, March? Some sort of detail, please.
The innovation will be ready for this from the summer 2016. The Premier, which is another big one, will be in the spring of 2016.
Thank you.
Mike, in terms of your question around the net financial losses, we expect to have a minus of DKK 100 million in 2015-2016. You also had a question around our EBIT guidance. Our EBIT guidance is driven by scale from growth, and it's also driven by that we expect not to have as many one-offs as we had in 2014-2015.
The difference between 33% and 34%, I mean, what's, to get to 34%, what needs to happen, please?
In order to get to the 34%, we need the growth to be in the high end of our, of our guidance.
It's purely sales growth that would get you to 34%?
Yeah, in combination with the activities we are doing on the cost side, and also that we expect not to have as many of the one-offs as we had in 2014- 2015.
Okay. Also follow up, please, on the margins, because in the third quarter, when I asked the question about what is the reference point for margins in fiscal year 2016, you sort of mentioned 32%, which was a, obviously a consensus downgrade, and I guess you managed the numbers down very well. Sort of three months later, we're back to a possibility of a 34%. Why did you feel it was necessary to become quite negative on the margins in the third quarter call?
The situation was that we actually got out with a better Q4 than we thought. We had a slightly better growth, and we also had an EBIT margin that was higher than we thought back then. We also got a little bit of the tailwind from the currencies, and that actually meant that we ended the full year with an EBIT margin of 32.6%. That is the base for our guidance for 2015-2016.
Okay. That's very helpful. Thank you.
Thank you. Your next question comes from the line of Alex Kleban from Barclays. Please go ahead.
Yeah, hi. Thanks for taking the questions. For my three, wanted to ask about margins. First on the restructuring charges, just how much do you have in restructuring charge for the 300 headcounts transferring out of Denmark? Is that DKK 25 million-DKK 50 million about right for that? The second one is going to be on DTC in the U.S., just wondering if you have an early sense of what the response rate is going to be around that and what kind of ROI you can drive from that investment? Last question is on surgical urology on the U.S., in particular the men's health side. You'd flagged up a bunch of issues that could potentially be impacting that earlier in the year at the H1.
And just wondering if you have a better sense of what those are now, whether it's utilization or more competitive dynamics, and what that means going into next year. Thanks.
Yeah. Let's start taking from the number three and then backwards. The surgical urology business in the U.S. T here is more competitive pressure because there is more certainty about the ownership of our largest competitor when it comes to men's health. That's one thing that is impacting us and that's of course new. Secondly, we also see that there is a pattern where it's a bit harder to get insurance coverage for these types of surgeries. Those two things in combination have impacted us this year. I would still expect us to be impacted by that next year.
Having said that, overall in the urology business, despite of these issues, we had around 5% growth. That talks to that a lot of the rest of the business is actually doing quite well. And we also expect that we can do a bit better performance in the year that we're in now. On the, on the, on the DTC, return on this, both the activities and also return on investment on DTC in the U.S., I think it's too early for us to say. This is, this is a, this is a discipline where we are new. I know that many other, business areas, they are very, very well versed in running TV campaigns and understanding the return on investment and so on.
Up until now, on our own drive, we have only been running TV commercials in France, on our connecting devices. There we had a very fast payback, of less than 12 months. U.S. is a different market, and these are different products that we are talking to. In that sense, we are learning, and we are just weeks into this experience, it would be way too early for me to share, any learnings on that part. On the restructuring costs, in Denmark?
Yes. We are working hard on moving the machines from Denmark to Hungary. We are expecting to reduce the number of workers in Denmark with 300 over the next three years. Our expectations in terms of restructuring costs for 2015-2016 is in the level of DKK 15 million-DKK 20 million.
Okay, that's good. We're taking something like 10 basis points back on the margin. I guess to the other questions, 33.10%-34.10% in adjusted, is that fair?
I'm not going to a specific dialogue around that.
Okay, it's a little bit on the higher, like, there's some cushion in there, I guess, is the point of the question. Just given that in adjusted terms, you know, we have some additional costs that are gonna factor in this year.
Yeah, we also had the restructuring costs last year.
Okay.
In 2014-201 5.
Yeah, fair enough. Fair enough. Okay, thanks.
Thank you. Your next question comes from the line of Veronika Dubajova from Goldman Sachs. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. I have three. The first one's just on the U.S. Lars, I appreciate you may not necessarily want to talk about how your U.S. business has grown, but can you just give us a sense, if you think about the previous fiscal year or the fiscal year that you've currently reported, what the difference in the U.S. growth rate has been? I guess, is your expectation that's embedded within the 7%-8%, that you're going to return to the historical, you know, 13%, 14% level of growth? That's my first question. The second question is just on the manufacturing relocation to Hungary. Anders, when would you expect to have completed the bulk of the move? What's the gross margin impact from that?
If you can help us think through that would be very helpful. My last question is just on Germany, and I noticed your comments in the prepared remarks about the situation still being challenged on the home care front. Anything that's changed versus the last quarter there, or is it just more of a status quo? Thank you.
Yeah, without being overly detailed, I'll say that the U.S. was impacted last year by the Department of Justice subpoena, and of course also by the reduction of the growth rate in men's health in the U.S. on the Titan. I mean, I'd also like to say that we are in a situation where we are still taking market shares quite rapidly in all of our business areas in the U.S. But how fast that we are coming back to the level that we had before Department of Justice, good question. I don't know, but we are expecting that during the last half or the second half of this year, that we will bounce back somewhat.
Of course, that's one of the things that we are cautious about when we are guiding for the year. In the German home care scenario, it's the same comments that we had, the basis is the same as we had last quarter. We see a lot of fighting going on in the home care segment, and we don't benefit from that on our home care side, on SIEWA in Germany. We actually, due to this, see quite a strong growth in our base business, which is what we call GmbH, the basis business there.
In that sense, we have a growth over and above the market growth in Germany, but we are, as I said, impacted by what is going on in the home care channel. Nothing new from last quarter. That's the same comment.
Yeah. In terms of our transfers, we are working hard on that right now. We are working on moving the production of the Compeed to Hungary. We are also working hard on moving the production of the new Mio to Hungary. We have actually already started the production of the new Mio in Hungary, and we expect that this will contribute to our EBIT margin expansion of 0.5-1 percentage point ambition that we have from next year.
Thank you. Lars, can I just follow up on the U.S.? If I were to just, I mean, giving us a range would be very helpful. I mean, is it fair to assume that the business was growing in the mid to high teens in 2013, 2014, and it grew high single digits last year, and your expectation is that you get back to double digit? Is that a fair way to summarize what you're seeing in the U.S.?
That's, you know what, I would rather not go into guiding on each of the countries and each of the business areas there. Our growth is impacted, so maybe if you say growth in, for Coloplast in the U.S. is around double digits, that's probably a good guidance then.
Okay, great. I'll leave it at that. Thanks.
Your next question comes on the line of Martin Parkhøi from Danske Bank. Please go ahead.
Hello, Martin Parkhøi, Danske Bank. A couple of questions. Firstly, on the additional money you spent for additional sales initiatives, they are going down with DKK 50 million in 2015-2016 versus 2014-2015. Can you explain the reason? Are you finding less opportunities? Should we see that a trend which will continue, and then this will continue to go down over the course of your long-term target period? Second question is actually also to the long-term targets. I guess that they are on a three to five years horizon, which naturally means that includes also, at least in the first year, the patent expiry of SpeediCath.
I know we have discussed it before, but can you quantify what kind of effect you have included in that in your long-term focus period? My final question is, maybe also a little bit related to long-term target. That's on the GPO contracts we also discussed earlier. Have you included, that you will actually be on them with the customer care business, in your long-term targets?
That was all?
That was all. I, we don't have a fixed number for what we want to spend right now on growth initiatives. Our growth initiatives are a little bit depressed from the fact that we can't invest as much as we, or we don't want to invest as much as we could in the U.K., for example, right now. We need to see that business swing back before we are ready to invest further. We were in the middle of an investment program for putting more people into the markets that we actually stopped before we were at the target with it, because of the situation in Charter Healthcare.
That is one of the things that are impacting us. If we are in a situation where we see that our TV commercials in the U.S. is really paying off and delivering immediate growth, we'll probably step up the investments. In that sense, it's a more dynamic picture, and we do some things that have a bit of uncertainty to them. Therefore, we are only telling you what we are absolutely certain that we're going to invest. If we see room for more, of course we do more. If we see that some of the initiatives that we've been investing in are not paying, sort of, paying off, then we cut it out.
This is what we expect to do for the coming year, and it's not more firm than that. We, on the GPO side, we have not included that we will enter into the GPOs in the guides that we have. We don't expect that if we win one or all of the GPO contracts on ostomy care, that it will have any immediate effect. That is a long-term thing. On the catheter side, it might be that we just see a different picture than you do, but we don't expect that the patent expiry is going to have any major impact on our performance in catheters.
Because there are so many competitors out there priced at the same level as we are priced by already, and very close to what we have. We don't expect to see a super negative effect from this that we needed, that we think we need to include in the outer year.
Thank you. Your next question comes from the line of Søren Holm from Nordea. Please go ahead.
Yes, hello, everybody. A couple of questions from me. Maybe one big picture on urology. One should think that the current situation in the U.S., both in men's and women's healthcare, could drive some consolidation in the market. Could you please share some of your thoughts on that, and if you're seeing any of that at the moment? Secondly, on the DTC campaigns in the U.S., could you share what kind of setup do you have there? Are you working with a single or multiple partners, and is prices fixed on the beforehand, and what kind of prices do you see with your partners?
Finally, the kind of partner you choose for this, if it's the case, is that Cardinal, or is it more, like the Liberator kind of guys?
We don't see any consolidation movements in the U.S. on the urology side, apart from what just happened with between AMS and Boston Scientific. The whole women's health side is completely frozen right now due to the mesh litigation. In that sense, there's absolutely no activities there. On the DTC side, I just have to say, if I didn't make it clear from the outset, we are running a pilot in the U.S. Of course, we attach a number of dealers to this pilot, but this is small scale.
The moment we believe that we can take this large scale, we'll take stock of how we're going to distribute the lead traffic that we are getting out of these campaigns.
Okay, thank you. Just for clarification, is it fair to assume that the earnings will be more back-end loaded than the revenue next year?
What I said earlier, we expect both the growth and also the earnings to be back-end loaded.
At the same extent?
Yeah.
In that level, yes.
Okay, thank you.
Thank you. Your next question comes from the line of Yi-Dan Wang from Deutsche Bank. Please go ahead.
Thank you very much. I have a few questions. The first one relates to the ostomy business and the pace at which you're gaining market share. When I first looked at the company back in 2008, it was delivering pretty good rates of market share gains already. Since then, you've obviously invested a fair bit of money into DTC, and you've got SenSura Mio into the market, which is pretty differentiated. Can you comment on, you know, how your market share gains in the ostomy systems parts of the business is developing, whether we're seeing faster rates of market share gains, and if not, why not?
The second question is, Anders, you mentioned that the net financials will be about DKK 100 million. Does that include the interest cost for the DKK 1 billion that you expect to borrow for the mesh settlements? If it does, what kind of interest rates should we attach to that?
The, on the OC business, we are, I think that it's fair to say that we are not seeing the uptick in the numbers that I expecting to see from the launch of Mio. That is very much suppressed from the U.K. situation, because U.K. is such a big part of our European business. So there we see that, and also in the U.S., where our campaign activity have been somewhat depressed. Then, yeah, well, then we've also had the situation where a couple of the emerging markets are not growing as fast as we expected them to when we made the plans for them.
In that sense, we see a very nice pickup across the globe, but we actually had expected to see more. I also expect to see, going forward, a higher momentum, both due to the fact that we now have completed the total range of the new products, and also due to the fact that we are coming back in U.K. and U.S.. In that sense, I think that we are standing extremely strongly, but had we had a normal year, we would have had a big uptick than what we see right now.
Yeah. In terms of the net financials, yes, the interest for the borrowing is included.
What interest rates are you getting for that DKK 1 billion of borrowings?
It's actually pretty low. It's less than 1%.
The rest of it is just all FX related?
Yeah. That's the majority of it. That is FX related.
Okay. All right, great. Thank you.
Thank you. Our next question comes from the line of Scott Bardo from Berenberg. Please go ahead.
Thanks very much for taking my questions. The first question, please, on the midterm guidance framework. I think back in 2014, you outlined expectations around 7%-10% top line and around 50-100 basis points margin improvement, by 2019. Just wanted to clarify, please, because if I am to understand that the upper end of that guidance range is to be achieved, and given the relatively stagnant 33% margin over the last few years, including this year, that would imply around 150 basis points margin improvement every year out to 2019 to get to the upper end of the range. Is the upper end of the range no longer achievable, and we should be going for more the lower end?
Perhaps if you could give some commentary around that, given as I say, the last few years' performance on the margin side. That's question number one, please. Question number two, just coming back to the U.S., thanks again for coming back to this point. I think in previous calls you've outlined that despite the Department of Justice intervention or investigation, you still would have expected and have expected a double-digit growth in the North American market throughout fiscal 2015.
Bit confused as to whether that was achieved, so if you could just explain whether you've achieved your aspirational targets in the U.S. this year, and perhaps give a little bit of comment, actually, as to, is there anything you would expect that could surprise or be cautionary ahead of the final language negotiations with the DOJ on the 19th of November? Is there anything we need to watch here which could limit the degree of external marketing campaigns or change the direction of your growth strategy in the U.S.?
Hang on a second. I think there's a bit confusion here. The 19th November meeting is a meeting with the judge when it comes to the mesh litigation. There's no further meetings with the Department of Justice, and there have been no meetings with them since before the summer holidays.
My understanding was from the legal filings that the DOJ was still in some negotiating language. You're quite comfortable that there's no additional language or comeback from the DOJ? We haven't seen any, obviously, release or announcement from the DOJ. Should we now consider this done, or?
Yes, we consider it done. What we are waiting for is just the final document to close the case. We have asked the DOJ if we could publicize the settlement amount which we did today. They obviously agreed to that.
Thanks, Lars. Just following on from that, are we now to assume that you're back to full marketing campaigns as you did prior to this investigation?
Mm-hmm.
With external providers, or are you doing it a slightly different approach now that you're doing direct to marketing? Just to understand that point.
Yes, we are running campaigns again, and we are not the only ones that have been investigated in this, under this DOJ subpoena. Of course we have learned from that, but it does not preclude us in any sense from running campaigns. I think that's very fortunate because that is the business model for the U.K., U.S., where you are running campaigns to convert patients, and you're also running campaigns to sell accessories and so on, and we can still do that.
Great.
We of course, you cannot start from, you know, where you ended you. This will be normalizing during the course of 2016.
Okay, we should consider absolutely no changes in the North American market as to prior to this investigation, under your opinion, we're back to normal?
Yes, we are. We are back to a situation where we can run campaigns with dealers and distributors as we've also done in the past. Where we use our care program to and our DTC activities to get leads and to direct leads to partners with whom we have a cooperation. You also had a question where you, where you asked, you know, about our growth rates. For sure, our growth rates in the U.S. have been impacted during 2014, 2015, due to the Department of Justice investigation. No doubt about that. We are still taking market shares, and we are still growing around double digits in the U.S.
Okay. back within your expectation this year is presumably, as I think you mentioned, a similar sort of growth, so you would expect to do something similar this year?
We would expect that growth will pick up in the U.S., in the second half of the year.
Great. Just back to the first question, actually, please. Just given the margin, the midterm margin outlook that we had back in 2014, is the upper end of the guidance bandwidth now non-achievable? That would imply 150 basis points progression over the next three years annually. Is that the right way to look at it, given the relatively stagnant operating margins over the last few years, or is that still an achievable, you know, something that you aspire to?
The way we look into it is that if we are able to grow more, we will also get more scale benefits. That is one element. The other element is that we are currently transferring quite a lot of production from Denmark to Hungary, that will also impact our profitability midterm.
As we have talked about earlier, this, in this presentation or in this question and answer round, we are quite dependent on the growth rate. And and of course, the more we grow, the more profitability we also deliver because it's very scaled, scale driven, what we deliver on the bottom line.
Understood. You'd be more comfortable if the market expanded margins 50, 100 basis points from next year onwards, basically, just to understand?
With the initiatives that we are working on, both from a growth point of view, but also from a profitability point of view, yes, that's how we see it also from 2016, 2017.
Great. Thanks very much, guys. I'll drop off.
I think we will take the last question now.
Okay, your final question comes from the line of Ian Douglas-Pennant from UBS.
Sorry, I was on mute. Very important. Sorry, it's just a very quick question on working capital levels. Your inventory levels have now stabilized at around 125 days. Should we expect that kind of level to continue? Once your manufacturing changes have finalized, would we expect that to go down again from there back to the levels that we saw two or three years ago?
Our expectation is that, right now it will be at that level because we are transferring production from Denmark to Hungary, and therefore we are also increasing our inventory levels. Over time, my expectation is that we will go back to the levels we saw a couple of years ago.
Okay. Three years' time, we'll be back to 100. Okay, thanks very much.
All right, that concludes the Q&A session. Thank you very much for listening in, and looking forward to see most of you over the coming months. Thank you very much.
That does conclude our conference call today. Thank you for participating. You may all disconnect.