Thank you for standing by, and welcome to the Coloplast full year 2012/13 financial statements conference call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a Q&A session, at which time, if you wish to ask a question, please press star one on your telephone keypad. I must advise you this call is also being recorded today, Thursday, October 31st, 2013. I would now like to hand over to our speaker today, Lars Rasmussen, CEO of Coloplast. Please go ahead.
Thank you. Good afternoon, welcome to this full year 2012/2013 conference call. I am Lars Rasmussen, CEO of Coloplast. I am joined by CFO, Lene Skole, and our investor relations team. As usual, Lene and I will start with a short presentation, then we will open up for questions. Now please turn to slide number three. It has been a great year for Coloplast, and I am very pleased with the results we have reported today. Within our business areas, we continued the strong growth in Ostomy Care. In Continence Care, we had a great product launch of the SpeediCath Compact Set. Urology Care had yet another strong year, and we finally saw a turnaround of our Wound Care business. Most developed markets performed either in line with or better than we expected going into this fiscal year.
The only soft spot is our emerging market business, where performance continues below our ambitions. Organic sales growth for the group was 7%, and our EBIT margin was 32%, both within the guidance for 12/13 that we gave in the beginning of the fiscal year. We continue to deliver a very strong cash flow, and it has been decided to revise the dividend policy so that the liquidity buffer of DKK 1 million, DKK 1 billion has been discontinued, and that all excess cash will be paid out to the shareholders. The board will propose to the annual general meeting a dividend of DKK 7 per share. This brings the total dividend for the year to DKK 10 per share, corresponding to a payout ratio of 78%.
The board also intends to start a share buyback program of DKK 1 billion to cover the next two years. These initiatives are the result of our commitment to return cash to shareholders if we see no attractive alternatives. For 2013/2014, we expect a revenue growth of 7% organically and an EBIT margin of around 33%. Please turn to slide number four. Revenues were up by 7% organically and 6% in Danish kroner and amounted to DKK 11.6 billion. In Ostomy Care, organic growth was 7%, both for the full year and for the quarter. The growth was driven by continued good performance from our SenSura portfolio in Europe and in the U.S., as well as strong and increasing uptake in the market for our Brava accessories.
In addition, we continue to see strong sales performance of Assura in markets like China and Brazil. In Continence Care, organic growth was 7% for the full year and 11% for Q4. Growth was driven primarily by our SpeediCath product range, whereas both Self-Cath and EasiCath saw stagnant growth due to continued strong competition in the U.S. and from moving users to the more advanced SpeediCath products. Our collecting device business faces increasing competition, especially in Europe, and in response, we relaunched our collecting devices portfolio. We have updated both design and functionality, and we have streamlined the product portfolio and brands. The 11% growth in the quarter should be seen against the low sales in Q4 last year, where we had the effect of the distributor consolidation in the U.K.
In Urology Care, organic growth was 9% for the year and 10% for the quarter, which is very satisfactory. Sales of Penile Implants continued the strong performance, and our market share has increased. This was also the case within female health, where Restorelle, our lightweight mesh for pelvic floor repair, and our simple incision mini sling, Altis, continued their strong performance. On the mesh litigation in the U.S., the number of claims continues to increase, but at a slower pace. The processing and progress under the MDL and tolling agreements continue as expected, and based on the current information available to Coloplast, we still do not expect this to have a significant impact on the financial position of the group. In Wound & Skin Care, organic growth was 5% for the year and 7% for the quarter.
Growth for Wound Care in isolation was 3% for the year and 5% for the quarter. We now have three consecutive quarters with growth in our Wound Care business. Therefore, I can finally say that the long-awaited turnaround has been achieved. We still face strong competition in Europe, but performance is steadily increasing, driven by our Biatain product range, and especially our new Biatain Silicone is doing well. Our investments in China and Brazil have resulted in a strong growth. In the U.S., growth increased significantly. I am pleased that I today have announced the distribution agreement with Devon Medical International, allowing us to access the negative pressure wound therapy segments of the Wound Care markets.
We will start commercializing this agreement from the spring of 2014 and expect that the launch into negative pressure wound therapy segments will significantly enlarge our commercial platform in the launch countries. Our Skin Care and contract manufacturing business contributed with satisfactory performance. Turning to our geographical segments, we saw stable organic growth of 5% for the year in our European markets, and 8% for the quarter. The performance continues to be driven by stable performance in media markets, especially in the U.K. and our Nordic region, whereas the Spanish and Dutch markets remain challenged by tough local market conditions. Q4 had very strong growth, especially within Continence Care business, which should be seen in the light of the distributor consolidation in the U.K. last year.
The performance in Q4 was also supported by strong growth in contract manufacturing of Compete, and by the European Wound Care business reporting positive organic growth. Organic revenue growth in other developed markets was 9% for the year and 10% in Q4. Overall, our U.S. business delivered strong growth rates throughout the year. This was especially due to the strong Brava uptake in the market. Our Continence Care business saw slowing performance impacted by the competitive pressure in the uncoated markets, uncoated catheter markets. Conversions to SpeediCath continues as planned, and now more than 20% of our sales of intermittent catheters in the U.S. are derived from the SpeediCath product range. In Q4, all U.S. business areas saw good performance, but also Japan contributed nicely compared with earlier this year.
Revenue in the emerging markets grew organically by 14% for the year and 10% in Q4. During the year, markets like China, Brazil, and Argentina delivered very satisfactory performance. On the other hand, however, our Russian business struggles as tenders remained at a very low level. On top of this, several smaller countries are not yet performing at the level we expect. In connection with the preparation of the annual reports, our market growth estimate have been updated, and it remains in the range of 4%-5%. I will now hand over to Lene.
Thank you, Lars. The gross profit was up by 7% to DKK 7.9 billion. This equals a gross margin of 68%, an improvement of 1 percentage point compared with last year. The improvement was primarily driven by higher efficiency in the production. The gross margin in fixed currencies was also 68%. The gross margin in fixed currencies improved to 69% in Q4, an improvement of almost two percentage points compared to 67% for the first nine months. The improvement was the result of higher efficiency in the production, as well as around half a percentage point improvement from a reversal of inventory provisions and lower amortizations from the Mentor acquisition. In 2013-2014, the amortization related to the Mentor acquisition will be DKK 25 million, lower than in 2012-2013.
The SGA to sales ratio came in at 33%, against 34% last year. When adjusting last year for non-recurring items of DKK 123 million, the ratio was in line with last year. In 2012-2013, we have invested an additional DKK 160 million in sales initiatives, of which half were in the emerging markets, and the other half in established markets, including Wound Care. DKK 55 million of the investments were made in Q4. In total, we have committed more than DKK 700 million in sales investments since the strategy update in March 2012, and we have currently spent just shy of DKK 200 million. The R&D expenses increased by 11% to DKK 380 million. The increase was, among other things, driven by the establishment of a dedicated Wound Care R&D organization.
The ratio to sales was 3% and in line with last year. All in all, this results in a reported EBIT margin of 32%, compared with 30% last year. Net of currency impact, the EBIT margin was also 32%. If adjusted for one-offs, the EBIT margin showed a 1 percentage point improvement compared with last year. Looking at Q4, our reported EBIT margin was 33%. In fixed currencies, the EBIT margin was 34%, an improvement of almost 2.5 percentage points against the first nine months. The increase was primarily related to efficiency improvements in production and to lower administration costs. Net financial expenses were DKK 46 million, a decrease of DKK 254 million compared with last year.
The change was mainly due to foreign exchange adjustments, where we last year realized losses of DKK 154 million in cash flow hedge contracts, compared with a gain of DKK 72 million this year. Our net profit for the period increased by 24% to DKK 2,711 million, corresponding to diluted earnings per share of DKK 12.62, an increase of 23% compared with last year. CapEx amounted to DKK 440 million, corresponding to a CapEx to sales ratio of 4%. The increase in CapEx compared to last year was due to an increase in investments in production equipment, mainly for new products. Free cash flow amounted to DKK 2,699 million, compared with DKK 2,336 million last year.
The 16% increase was due to increased earnings, net gains from realized foreign exchange hedging contracts against the net loss last year, countered by an increase in CapEx, changes in net working capital, as well as higher taxes paid. Return on invested capital after tax was 44%, up six percentage points from last year, as we continue to increase earnings on a stable asset base. In connection with the full year results, we have revised our dividend policy. As we see no immediate investment opportunities outside our investments in organic growth, we have abandoned our dividend policy of paying out around 30% of the net result after tax. Instead, we will pay out excess liquidity to the shareholders in the form of dividends and share buybacks. We intend to maintain the level of share buyback at DKK 500 million per year.
In order not to build up excessive liquidity during the year, we intend to pay dividends twice a year, as we have initiated this year. We have also decided to abandon our minimum liquidity target of DKK 1 billion and only keep whatever liquidity we deem appropriate to run our business. This year, the board proposes a dividend, a year-end dividend of DKK 7 per share, bringing the total dividend for the year to DKK 10 per share, as the DKK 3 per share was paid out after the release of the half year results in May. Last year, the total dividend was DKK 4 per share. The board also proposes to launch a share buyback program of DKK 1 billion to be completed by the end of fiscal year 2014-2015. Now, please turn to slide number six.
For 2013-2014, we expect revenues to grow by around 7% organically and by around 5% in Danish kroner. The currency impact is based on the spot rate as of the 22nd of October 2013, and the negative impact is mainly a result of the depreciation of the U.S. dollar and Japanese yen against the Danish kroner. The growth guidance is based on continued stable and positive development in our European markets. The pricing pressure is expected to increase slightly compared to the 2012-2013 level, but still within a negative price pressure of 1% per year. The guidance includes reforms where the impact is certain. For 2013-2014, we expect an EBIT margin of around 33%, both in fixed currencies and in Danish kroner.
The main assumptions behind our EBIT margin guidance is that we deliver on the top line guidance, and that we continue to deliver efficiency gains in the production of between half and 1 percentage point per year, and that we continue to see a substantial leverage effect, in particular in our European business. Incremental investment in sales enhancing initiatives is expected to be in the range of DKK 150 million-DKK 200 million. Our CapEx guidance for 2013-2014 is around DKK 500 million and includes investments in the planned expansion of our Nyírbátor site. Our effective tax rate is expected around 25%. This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Thank you. As a reminder, if you wish to ask a question, please press star 1 on your telephone keypad. If you wish to cancel the request, please use the hash key. Your first question comes from Ian Douglas-Pennant from UBS. Please ask your question.
Hi. Yeah, thanks for thanks for taking my questions. Just on your market share in ostomy in the U.S., can you let us know how you're making progress taking market share, well, not only at the hospital, but also in the kind of after hospital setting amongst kind of secondary users, if you like? Then going forward, am I right in thinking you now intend to run cash neutral, or would you consider taking out debt to return even more cash to shareholders? Thanks very much.
Regarding the market share in the U.S. for ostomy, the release you have is that we have below 10% market share. We do have a higher new patient discharge rate on ostomy patients than that in the U.S. In a sense, you could say we are in a situation where we're driving more new patients than our current market share is. But it's very important to note that over the last three years, the situation has changed quite dramatically for Coloplast in the U.S. Now we're in a position where we are growing on the ostomy market in the U.S. quite significantly above the market growth.
A lot of that growth comes from, you know, an improved collaboration and cooperation with the dealers in the direct markets. That is really what is driving it, point 1. The second part of it is that we also have a quite large uptake on the accessory business in the U.S. I don't know if that answers the question, but that's I guess that was what you was asking about.
Yes, I was, I was sort of hoping you might give some numbers around that, but I guess you don't want to.
No, that's right.
You also, Ian, you also asked about whether we intend or we plan to take up debt to pay out even more to shareholders. That is not in the plans at the moment, so we don't expect to do that. We expect to run with an unleveraged balance sheet so far.
Net cash neutral. Okay. Thanks very much.
Yeah.
Thank you. Your next question comes from Veronica Dubajova. Please ask your question.
Good afternoon. Thank you for taking my questions. I have 3, if I can. My first one's on your guidance for next year on the revenue side. I mean, you said that you've assumed sort of accelerated pricing pressure. I suppose this is given some of the pricing reforms we're seeing in France, et cetera. Is it fair to assume that, therefore, the year after, assuming there is no significant pricing pressure, you could be growing in excess of 7%? My second question.
Veronika, take that right away.
It's a very, very good question.
We're not there guiding for more than.
We take one year at a time.
I'm thinking about this correctly, is.
Yes.
Okay.
The guidance we have includes the French.
Yes
... the reform in France. Let's see what happens during this year. We have a new, fresh guidance at this point in time.
Understood. Understood. Okay, thank you for that. My second question's on the litigation, and thank you so much for giving us clarity on your insurance coverage. I guess this question is two parts. One is, are you confident that the insurance coverage you have will cover this particular type of litigation? My second question is, you know, looking at the public disclosure that we have out there, it appears there are about 900 cases filed against you in the MDL. You've also mentioned the tolling agreements, which I would read to mean that they're significant in relation to this. Can you give us a sense for how, you know, how big the tolling agreements are in addition to the cases that are filed? My last question is just, have you made any progress in the U.S. with GPOs?
Right. Okay, maybe I can start with the just to comment on the litigation. Maybe Lars, you can continue with the GPOs. Just talking about the number, you're absolutely right, we do have tolling agreements. We do not give out a number as to the total of the filed and the tolling agreements, they're there, it's a substantial number. In terms of whether we are certain that the insurance covers this type of litigation, we are confident that the insurance will cover this type of issues of litigation.
Yeah. When it comes to the GPO coverage, the situation is not satisfactory when it comes to our ostomy and continence care, but it's stable. So that means that we have we have the products in Amerinet when it comes to ostomy care and also continence care. Then they are with MedAssets for continence care and Novation for the newest products within ostomy care. And I think we also explained that last quarter, that the situation on Wound Care is more satisfactory because there we are in Wound Care in all the leading GPOs, except from HealthTrust Purchasing Group and The Resource Group.
When it comes to skincare, we also in all of them except from HealthTrust Purchasing Group and Novation. When it comes to the wound and skincare GPO contracts, there are normally more players than just two or three in them, so therefore, it's harder to say what the outcome is.
Understood. Can I just follow up on the substantial number of tolling agreements? I mean, does that mean they're as big as what's filed against you publicly in the MDL? Smaller, larger?
Veronika, I really can't answer that question.
I understand. I thought I'd try.
Yes.
Thank you so much.
You're doing very well with trying questions.
I'll jump back in the queue. Thank you.
Thank you. Your next question comes from Yi-Dan Wang from Deutsche Bank. Please ask your question.
Thank you very much. I have three questions. The first question relates to the additional investment that you plan to make this year, DKK 150 million-DKK 200 million, that you are planning to make. Can you give us a sense of where that investment will, you know, what kind of investments there will be? Relating to that, on the investments that you have made already, approximately how long it would take for us to see some results from those investments? The second question is on the ostomy growth in the U.S. What would your ostomy growth be excluding Brava? If you don't want to give it quantitatively, you could give it in multiples of market growth rate.
The third question is on the GPO situation for Ostomy and Continence Care. I mean, there's been some ups and downs, clearly relative to what you where you were before the end of 2011. Can you give us just approximately what kind of market access you have now with the existing GPOs that you have compared to the end of 2011? That would be great. Thank you.
That was four questions. Anyway.
Three big questions. Little ones, all wrapped up into one.
All right, the additional investments, they are primarily in people. They are all inside of our existing areas. This is not trying to reach out to new areas per se. Of course, the contract that we now do within negative pressure is being part of the investments that we are doing. You could say that's a new area, but most of what we are doing is primarily people. That's primarily salespeople that are pushing our current portfolio within our existing areas. Most of the investments are outside of the mature markets, we also do have investments in the mature markets. You ask when we when we'll see some effect of it.
I actually think that you are seeing effect of it already. If you look at the growth rate that we have at this point in time compared to exactly a year ago, we are growing more than one percentage point faster than we did a year ago. We already see some effect from what is going on. The big investments that we do are in, I would say, U.S., Brazil, China, and they are delivering very well. Thank you for guiding us, how we could answer your question about being more detailed on the Ostomy Care growth in the U.S. I don't think that we are ready to give more guidance on that than we are doing already.
Brava is important to us in the U.S., but we are definitely also growing our core business on bags and plates. We are winning market shares in the U.S., but we have a small base, so this is something that can last for many years. Finally on the GPO contracts, we are in a much better position when it comes to Wound and Skin Care than we were a year ago. That is where we have improved, and as I said, the visibility on those contracts, what it will bring of business to us, is a bit more difficult to answer. We are quite satisfied with the coverage that we now have when it comes to this business area.
It's, it is, it's primarily the Ostomy and Continence Care side where we need to get a better coverage. You know, it's not impossible to go to the hospitals and make a separate contract with them where you are delivering into them, and you can do that. You just have to do it hospital by hospital, and that we are also doing. We are actually quite pleased with the growth that we see in both Ostomy and Continence Care for the U.S.
Is your new patient discharge growing in the U.S. so is your share of new patient discharge in the U.S. and your share in the community care channels in the U.S. both growing?
I think that I would like to talk about how our growth is in the community, because we don't want to talk about new patient discharge in very concrete terms, because these are not public data, but we are definitely growing at a very satisfying rate in the U.S.
For new patient discharges?
For the community growth. I don't want to comment on the new patient discharges.
Not at all? Not even if it's a little indication whether you're growing that share or not, which is not.
No, not at all.
Not at all. Okay. I did try.
Yes.
I will try even harder next time.
Sure. We know. Thank you for your questions.
Okay.
Thank you. Your next question comes from Ingeborg. Please ask your question.
Hi, good afternoon. Thank you for taking my question. The first one is on negative pressure wound therapy. Could you talk about what has made you change your mind about that area, and now seeing it as one where you want to play, and why you've chosen to do it through this type of agreement rather than an outright acquisition of a product? My second question is on other product gaps in the portfolio. Where do you see these, and what are the emerging areas that you are monitoring to make sure that you are there when the product areas develop? Thanks.
I think it's very important to remember the story or the background for what is happening in Wound Care. Some years back, we had a business which was growing quite nicely but not very profitable. We have spent some years making a restructuring of that business where we are now, or where we made the business, a profitable business, but we lost our growth on the way because we discontinued a number of contracts and products that were not profitable and would never be. Now we, over the last three quarters, we have gradually seen a comeback of the growth. We feel that we have a situation where we are able to deliver stable profitable growth in this business area with the current portfolio.
Therefore, we feel that it's the right point in time to start to add to that portfolio with a bigger reach. With negative pressure therapy, we get access to approximately a market which is approximately $1 billion, which we do not have access to today. We think that it would be a very long journey for us if we had to start developing the development of a new negative pressure therapy product ourselves. We have been looking for options, and we have chosen this option, and we have chosen this specific way of structuring the business, because that was the way where we saw that we could create the most value.
That's basically the story behind negative pressure, or negative pressure wound therapy. For other product gaps, we think we covered a very important product gap with the launch of the Biatain Silicone. And there we only have, you could say, the basic assortment, yet, you could speculate in many other areas or many other parts of that segment that we could cover with, sizes and shapes and so on. I think actually with the addition of the negative pressure wound therapy, for the time being and with the size of the business we have, we actually have a quite competitive, product portfolio.
Okay, thanks a lot.
Thank you. Your next question comes from David Adlington from JP Morgan. Please ask your question.
Good afternoon, guys. Thanks for taking the question. Just a very quick one. I just wanted to check, does the fact that you are kind of altering your returns to shareholders' metrics, does that reflect on a lack of opportunities in the M&A market? Do that, basically, does that reflect pricing of potential acquisitions? Thanks.
David, it's quite clear that when we return more money to our shareholders, then it is because we have actually invested in the business, in the opportunities that we can see that are value generative. We are investing in the business. We're investing in the organic growth of the business, the DKK 160 million of sales enhancing initiatives that I talked about earlier. It is, of course, also correct that we would not be returning this money to shareholders if we saw immediately that a good, nice major acquisition was ready. However, it is or was available.
It is, it's also quite important to say that this change in dividend policy, it does not reflect the fact that or a fact that we are now sending a signal that we would never want to look at an acquisition again. If it's there, and if it's the right one at the right price, we'd certainly look at it.
Understood. Thank you very much.
Thank you. Your next question comes from Oliver Metzger, from Commerzbank. Please ask your question.
Hey, this is Oliver. Thanks a lot for taking my question. First one is on Wound Care business. Obviously you've achieved a turnaround, which is quite good and also helpful. As I remember some quarters ago, you were completely open to strategic evaluations. What should, what you will do with Wound Care business. Is it fair to assume that this possibilities have narrowed after you achieved the turnaround? That's the first question. The second question is on your CapEx guidance of DKK 500 million. Is this increase compared to last year, mainly related to your facility expansion in Hungary? Probably you can give us some more detailed information. Final question on your sharp decline in the ostomy bag segment in Russia in the last quarter.
Is this also only related to a tender or probably to a more aggressive market participants, which, you reported also one or two quarters ago? That's were all my three questions.
Thank you. On the Wound & Skin Care side, I think we can say that it is a keeper. We have no speculations in selling the business or anything else. By the way, I think we have been very consistent in communicating that our preferred option was to do the turnaround of the business and make it grow and be a part of our total overall business. It is a very powerful combination that we have when we come with both the chronic business and the Wound Care business, when we are entering the emerging markets. Therefore, it's been our preferred option all the way through.
The way we see it going forward is that this is a business which we are developing and investing in. When it comes to the Russian tender, we definitely see the, that the reason why we have a decrease in Russia is because we have seen a lower number of tenders, and not because we see a different competition situation. Then I can't remember what your second question was.
I think the last one was regarding our CapEx.
Oh, yeah.
What's happening there, and if we could give more details on the investment in the Nyírbátor site expansion. The investment we expect is in the range of DKK 130 million-DKK 150 million, but that will happen over 2 years. Obviously it's only part of it that's included in our guidance for this year, but I cannot say exactly how much.
Okay. Thank you.
Thank you. Your next question comes from Scott Bardo from Berenberg. Please ask your question.
Thank you very much for taking my questions. I have 3, please. First question is on the U.S. and the indwelling catheter segment. Thank you for giving us the market share penetration of the SpeediCath products there. That certainly seems to have been quite a successful initiative with 20% your business there. Obviously, you highlight there's pressures to the rest of that intermittent catheter business, so it would be very kind if you could give us some sense of a target penetration for SpeediCath in North America and hang some timelines around that. That would be much appreciated. The second question relates to the surgical mesh litigation. Once again, thank you for providing what your insurance coverage is. Two parts to this question.
First of all, why at this juncture do you do this? This has been something you've been quite keen to avoid historically. Secondly, if my understanding is correct, you have something then, like $90 million worth of insurance coverage and over 1,000 or so cases. That would imply then your expectations for settlement less than $100,000 per patient. And obviously, there's been some quite larger numbers being settled. I wondered if you could just talk a little bit about why you have that comfort, and perhaps there's some more details on what the ratio between pelvic organ prolapse and stress urinary incontinence patients are for you, please. I have a follow-up, but I'll leave it there for the second. Thank you.
Okay.
On the IC target.
Yeah.
-for the U.S., I think we could say that we gave you a bit of insight here on where we are with the SpeediCath conversion rate. We don't want to put a number to our ambition and the timing on it. I think that, you know, if you think about it, this is what we do within the current reimbursement regime. We only have one interest, and that is, that as many people as possible have access to the SpeediCath technology, and therefore, we're pushing the product as hard as we can, both on the, on the web and also, the TV commercials.
It's also because this is not a product that you could expect the trade to push, because since we sell the product at the same reimbursement price as the normal catheters, and we sell it as twice as higher price as the current catheters in the market, it simply means that the dealers, they have a lower margin on a SpeediCath catheter than they do have on a standard catheter. Therefore, we have to drive the demand ourselves. We do know that this business is a very, you know, in this business area, the SpeediCath product is a superior product, and if people have access to it, they prefer it. We simply make sure that people get access.
That is, that is really what we go for. For us, we go to convert the markets, but of course, that's not how it works. We don't hold back on this. You could rest assured about that. On the surgical mesh thing, you actually have very, very detailed questions on it, and you do know that this is an ongoing litigation, and therefore it's very limited what we can say apart from what we have been writing already. I do think, however, that Lene Skole will try to give you as much as we can give, but that's very, very limited.
Thank you for that, Lars.
You're very welcome.
Thank you. With that, you asked, why are we mentioning the insurance now and why not earlier? It's a process, and, you know, time passes, and at some point, it becomes the right thing to do to actually mention this amount, and we felt this was the right time to do it. At some point, this will also be known to the defense lawyers, so therefore, we feel now is probably the right time to say what the insurance amount is. You asked whether you can then start from that, deduce from that we also now expect a certain number of cost per case. That is not how you should read it. It is, as Lars said, it's an ongoing case. We have now said how much insurance we have.
We have also said that we are going to fight these cases, and we've also said that we cannot, at this point, give you an indication of how much, because we don't know. We do not expect that this will have a financial or a significant financial impact on the standing of the business. That's about how much I can tell you, and I know it's not a whole lot, but as Lars started out by saying, it is a legal process that is running its course.
All right. thank you very much for what you can give. The last question is, the change of your dividend policy?
Mm-hmm.
-or your net liquidity policy. It seems to me that, in order to, for you to, if you like, redistribute a lot of your net liquidity, given the outline share buyback program that you have, that you'll be potentially having to issue over a 100% payout ratio in dividends going forwards. I know historically this has been something you've been reticent to do, given that it starts to, if you like, destroy your equity or starts to reduce your equity on the balance sheet. Can you perhaps confirm, are you ever likely to make over a 100% payout ratio on a dividend? Or is that sort of a limit that you or hurdle that you're not willing to jump? Thank you.
First of all, we are looking at the free cash flow, and then we have the share buyback. It's the level of the free cash flow, less the share buyback that actually determines the payout ratio. First of all, I can't really guide you on what ratio, payout ratio we expect for the coming years. I think it is fair now that you ask to say that we have not put a specific limitation on what that might be relative to the result of the year.
Theoretically, you're happy to make dividend payouts, even if that means that your equity on your balance sheet goes backward a little?
I think the way you should think about it is that we are happy to pay out any excess liquidity. We don't want to hold onto that. We don't want to become a bank for our shareholders.
Okay. Thank you very much for answering the question.
Thank you. Your next question comes from Kristofer Liljeberg from Carnegie. Please ask your question.
Hi, good afternoon. Most of the questions have been asked already. I have one left, and that's the growth you see in the US. Is that only coming from ostomy, or is continence growing as well for you in the US?
Yes. We are growing in all business areas in the U.S., Ostomy Care, Continence Care, Wound Care, and Urology Care. All of the businesses are growing nicely in the U.S.
Okay. it's not majority of the growth coming from ostomy?
No, it's not. We actually have a very nice growth on all business areas in the U.S. You have to remember also that the Continence Care area is the, or the catheter area, is the only area where we have market leaders in the U.S. That's a big area to us.
Okay.
Value-wise, that's of course important.
Sure. Okay, thanks.
Thank you. Your next question comes from Ed Riley from Bank of America. Please ask your question.
Hi, good afternoon. Lene, you've done a phenomenal job on reducing your operating costs, particularly in administration. I remember a few years ago that you thought, well, we got to 6%, and that was about it. Now we're closing in on 4% of sales. Can you give us, maybe an update on how much more we think you can take that down given the job you've already done?
Thank you, Ed, for those comments. I think both Lars and I have done whatever we can to try to spend as little as possible on admin. As I've said recently, I don't like this admin to sales to come above 5. Sort of in the 4-5 range, and at the same time, I will, of course, promise that we'll continue to do whatever we can to keep our admin low.
Right. No, fair enough. Thank you very much. Just a quick follow-up on negative pressure. Now obviously understand about increasingly the offer of your portfolio, but it does appear that pricing pressure has also increased in that space recently, particularly given not just your partner, but other partners entering the U.S. market. If you could sort of give us a little bit more color about how you sort of feel about that and trading that off against your revenue synergies, potentially.
It's, I think it's quite simple when you're considering the Wound Care business, because when you look at our Wound Care business, it is sustainable. That means that it is very easy when you are modeling the business going forward, if you are able to create growth, and you're able to create it at with gross margins that are just reasonable, we actually do increase the ability of this business to make money quite significantly. We are at a point, you could say in time, or the life cycle of this business, where everything that really matters here is to get scale on the business.
There we see that we can definitely make sufficient and quite nice profitable growth by adding on this particular business area, even though that it also comes with some pricing pressure.
Thank you. That's very helpful.
Thank you. Your next question comes from Justin Smith from [Saltgum]. Please ask your question.
Sorry, all my questions have been asked, answered. Thank you.
Thank you. Your next question comes from Christian Ryden. Please ask your question.
Yes. Hi, good afternoon. Hi, Lars. Hi, Lene.
Hi, Chris. How are you?
Hi. Good. Good. Thank you.
Good.
very good results. Sounds.
Thanks.
Really pleased. Impressive. I have now three questions, actually. Now, the first, you know, on Japan, you know, I saw you conducted some price increases. Now, could you quantify those? Whether that's across the board and whether, you know, that's gonna help you know, early next year. That would be the first question. The second is on emerging markets. Looks like, you know, that's been a bit volatile, you know. Is this something, you know, we should be worried about? Essentially, you know, if you strip out Russia, for example, you know, are you still, you know, growing nicely at double-digit rates? If you could talk about that quickly.
Mm-hmm.
The last question is just on this insurance coverage, you know. Is this for the overall business at Coloplast or specific for Urology Care business, actually? I understand if you don't want to answer, it's just out of curiosity.
Yeah. The Japan price adjustments that we have made, it's actually part of a program that we have been running, where we've been working with the pricing. Of course, over the course of the last couple of years, we have done this in different parts of the world. When you do price adjustments, you always have some fluctuations on the stock. That's unavoidable. Japan does not have a size to the group where you could say that that is going to impact significantly quarterly results that we have this discussion.
For emerging markets, when we say that, and we are quite open about that we find that this is a soft spot. The soft spot here is Russia. We say other smaller markets. You know, we also said to you earlier that we have opened up a regional office for India, Middle East, and Africa. And we are disappointed with how long time it takes to get licensed to operate in these countries, and therefore, this specific part is behind plan. It's not the sort of loss of sales, it's more loss of opportunities, as you could say. It is Russia, which is a big part on it.
For your questions about the insurance, the DKK 500 million is covering the UC business in total.
For the surgical neurology business, you can tell us?
Yeah. Yes. Okay. Thank you. Good afternoon.
Thank you. Your next question comes from Yi-Dan Wang from Deutsche Bank. Please ask your question.
Thank you. Just two quick ones. The liquidity that you talked about, that you would like to maintain, can you tell us roughly how much that is? Effectively, how much cash do you need to operate the business on a day-to-day basis? If we can work out how much you can pay out. The second question is, I remember from your capital markets day that you have a rather large launch of new products in the ostomy category. Effectively starting at about in late 2013. Can you give us an update of where you are on your ostomy pipeline? I mean, I can understand if you don't want to say exactly when you're going to launch, but some sense of where how you're progressing will be helpful.
Right. Yi-Dan , maybe if I start with the liquidity. I can't sort of give you a fixed number of what we need to run our daily business, but obviously it's less than DKK 1 billion. I think maybe if you think, because you were thinking about how much we can pay out, maybe you think it in a different way. As long as that amount doesn't change dramatically from year to year, you know, you can think about this in terms of the free cash flow, less the share buyback.
Okay.
We don't comment specifically on the launches until we start launching. I can confirm that we have launches in the year that we have just started.
Great. Thank you.
What happened? We keep asking more.
Are there any more questions?
Your next question comes from Scott Bardo, from Berenberg. Please ask your question.
Thank you very much. Just a very quick, a quick one, please. Just a financial question for Lene. I wonder if you could help us, given that you've had this sort of debt pay down over the course of 2013, and now into this year. Obviously, currencies are moving all over the show, it would be helpful if you could give us a sense of what you expect net financials for you to be this year, including any potential mark-to-market hedging costs. Just following on from that, Lene, sorry, from another quite difficult question. Historically, we've seen quite a stable DKK 40 million-DKK 45 million financial income from you guys.
I'm guessing if you're paying away in dividend, a lot of your free cash flow, then you won't be getting the financial income. Please do clarify if that's a wrong adjustment. Thank you.
Scott, you're right. This is one of those questions, as you rightly say, where there are so many moving parts that it can be a little bit difficult. If we try to look at the currency part first, if we have with the exchange rates that we have today or when. We would expect that we would have financial incomes of around DKK 35 million. With regards to. Sorry, what was the next one? That was your debt, no, that was whether we should expect less in terms of interest income. Yes, I think you should probably less than what you have seen over this past and the last year.
On the other hand, it's just this year, in April, that we paid back our remaining debt, and thereby, really starting to have some net interest income. Of course, that would be less now that we have less of a balance in terms of liquidity part buffer. You are right in saying that interest-wise, we would be earning less interest because we won't be keeping in excess of DKK 1 billion. With regards to currencies, at the moment, we are around the DKK 35 million, but that, of course, will change when currencies change.
DKK 35 million negative impact, which is for 14?
No, yeah, positive.
Positive for 14?
Yes.
Okay, good. The net financials that we should be modeling for 14 are around about.
Yes.
this sort of 30, 35.
Yes. You know very well that can move by the moment...
Okay.
We stop the conference call because of currencies, but that's sort of the best I can give you for the moment.
Very helpful. Thanks so much, Lars Rasmussen.
Yeah.
Thank you. Your next question comes from Veronika Dubajova from Goldman Sachs. Please ask your question.
Thank you. I just have a quick follow-up, if I can. I don't know, Lars, if you care to comment on the competitive environment in the Ostomy Care market at all. I guess, you know, we've seen some of the numbers from ConvaTec, which have not been very strong, and I don't know if you can give us a sense for what you're seeing from Hollister, and maybe a sense for U.S. versus outside of the U.S. Thanks. Yeah, I think that will be our last question. It's unchanged. We feel that the competitive situation is more or less as it was a year ago. Different from market to market. Where we do feel that we are quite competitive with what we're doing.
If you look at our ostomy growth, if it is anything, it's actually strong, I would say. We are quite satisfied with the progress that we see in this business area, and we feel that we have a good position here and a strong pipeline of new products also. Terrific. Thank you. Thank you very much. Thank you very much, all, for participating, and we're looking forward to meeting most of you over the coming weeks.
Yes.
Thank you. Bye.
Bye-bye.
Thank you. That does conclude our conference call today. Thank you for participating. You may all disconnect.