Thank you for standing by, welcome to the Coloplast full year 2011 to 2012 f inancial statements conference call. At this time, all participants are in a listen-only mode. There'll be a presentation, followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday, November 6th, 2012, at 7:00 A.M. CET. I would now like to hand the conference over to your speaker today, Lars Rasmussen. Please go ahead, sir.
Thank you. Good afternoon, welcome to this full year 2011/2012 conference call. I'm 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 open up for questions. Please turn to slide number three. Eleven/2012 was a year that we are very satisfied with. We delivered results in line with guidance and our own expectations. Our organic sales growth was 6%, we have reported a solid EBIT margin of 30% for the year. At the annual general meeting in 2012, the board proposes a dividend of DKK 20, which corresponds to a payout ratio of 38%. The board also proposes to the annual general meeting that the board is authorized to distribute ex-extraordinary dividends during the year.
This is done to comply with our commitment to return excess cash to shareholders. The board proposes a 1-to-5 stock split and a cancellation of 1 million treasury shares. For 2012/2013, we expect revenue growth of 6%-7% organically and in DKK. We expect to deliver an EBIT margin between 31% and 32% in local currencies and in DKK. We also expect to complete the DKK 500 million share buyback program in 2012/2013. Please turn to slide number four. Revenues were up by 6% organically and 8% in DKK, and amounted to DKK 11 billion. In Ostomy Care, organic growth was satisfactory at 6% for 2011/2012, and 7% for Q4 in isolation. The growth throughout the year was driven by good, stable performance in most European markets, especially in the U.K.
On top of this, we are very satisfied with the performance in markets like China, Russia, and Argentina. The year has been characterized by continued rollout of SenSura Mio and our new Brava accessories product range. We retain our global market leader position with a 35%-40% share of a 12 billion-13 billion DKK market. The global Ostomy and accessories market is expected to continue to grow 4%-5% annually. In Continence Care, organic growth was 8% for 2011/2012 and 6% for Q4. We continue to be satisfied with our performance in Continence Care. We saw very satisfactory sales growth driven by intermittent catheters in the U.K. and in the U.S. Growth in sales of Conveen and urine bags was driven by U.K. and Russia. The strong performance within bowel management continued throughout the year.
Coloplast is global market leader in Continence Care, with a 40%-45% share of a DKK 8 billion-DKK 9 billion market, a market which is growing 4%-6% annually. In Interventional Urology, organic growth was 6% in 2011/2012, and 10% for Q4 in isolation. Sales growth in penile implants was on a positive trajectory throughout the year, as the number of procedures has increased. We continue to see challenging performance in women's health, as sales of female slings continue to decline. Restorelle, our synthetic mesh for pelvic floor repair, continued to deliver good growth rates in a declining market. Our European urology business recovered following a weak Q3 and ended the year with satisfactory performance.
In Interventional Urology, our market share remains around 10%-15% of a DKK 8 billion-DKK 9 billion market, which we expect to grow 3%-5%. This is slightly down from previous growth estimates and is impacted by the uncertainties surrounding the U.S. mesh litigation. Yesterday evening, Coloplast received a 510(k) clearance from FDA in the U.S. for our Altis Single Incision Sling System. Altis is already commercially available in Europe and Canada, and we are now launching it in the important American market. Altis is considered very important in returning our female continents franchise to new growth levels in the U.S. Our Wound & Skin Care saw organic growth of -1% for full year 2011/2012, and +1% in Q4.
Our Wound Care business faced very challenging market conditions in Europe, mainly in France, Spain, and Greece throughout the year, whereas China continued to deliver high growth rates. Our Skin Care business contributed with very satisfactory growth, driven by sales of InterDry products in the U.S. Coloplast holds a share of 5%-10% of the global moist wound healing wound care market, which is around DKK 13 billion in size, and it is growing 2%-4% annually. Looking at our reported geographical segments, we saw a satisfying organic growth in our European markets of 4% in 2011/2012, and 3% in Q4. The performance was driven by stable trends in our chronic care business, offsetting the declining sales we experienced in our European Wound Care business.
The slowdown in Q4 compared to the previous quarter was expected as the wholesaler consolidation in the U.K. led to stock build-up in Q3. Organic revenue growth in other developed markets was 7% for the year and 9% for the quarter. Our U.S. business continued to deliver in accordance with the plans laid out last year. We saw satisfying growth in both Ostomy and Continence Care. Japan saw large fluctuations in sales growth throughout the year as sales were still impacted by the aftermath of the earthquake last year. Revenue in emerging markets grew 13% organically in 2011/2012 and 21% in the quarter. For the full year, the region saw unsatisfying growth rates stemming primarily from Brazil, whereas both China and Russia performed very well. We continue to invest in growth.
Investments span from investing in new services such as Coloplast Care, to increasing sales forces in individual countries. Investments that together will enable us to increase our growth rates relative to the market growth. As an example of these investments, we last month announced an investment in expanding the Brazilian organization with several frontline and sales supporting resources. We are dividing the current sales and marketing organization into separate Chronic Care and Wound Care teams, offering dedicated commercial support to each business area. The new setup is expected to be fully operational during the first half year of 2013. The Brazilian market is one example of a market which offers significant growth opportunities, in particular within Ostomy and Wound Care. I will now hand over to Lene. Please turn to slide number five.
Thank you, Lars. Gross profit amounted to DKK 7.3 billion, equal to a gross margin of 67%. This is an improvement of 2 percentage points compared to last year. During 2011/2012, we continued to deliver efficiency gains in our production economy. Together with higher absolute sales and tailwind from currencies, these were the key drivers in the positive gross margin development. We are firmly on track with our plans, but we are seeing some increases in raw material prices, which we expect will continue this fiscal year. Despite this, we still expect that we'll be able to improve our gross margin. The SGA to sales ratio was 34%, down from 35% in full year 2010/2011.
This year, we took a total of DKK 67 million in provisions against overdue debt in Southern Europe, adding to the DKK 27 million that was provided in Q4 last year. Overall, our distribution to sales cost ratio remained within our guideline of around 29%, and our admin to sales ratio for the year was 6%, and within our previously communicated 5%-6% range. The R&D to sales came in at 3% and continued to be below earlier year spend. The restructuring of the R&D organization in the second half of 2010/2011, reduced the overall spend this year compared to last year, while keeping a very satisfactory pipeline of new products. All in all, this results in a reported EBIT margin of 30%, compared with 25% last year. Net of currency impact, the EBIT margin was 29% for 2011/2012.
The EBIT margin improvement was just about above 4 percentage points. Our net profit increased by 21% to almost DKK 2.2 billion, corresponding to a diluted earnings per share of DKK 51.5 against DKK 42.6 last year. CapEx amounted to DKK 338 million, corresponding to a CapEx to sales ratio of 3%, reflecting continued low spend throughout the year. Free cash flow was up 28% to DKK 2.3 billion compared to last year. Increased earnings, working capital increasing less than last year, and the acquisition of Mpathy Medical Devices last year, were partly offset by an increase in net loss on realized foreign exchange hedging contracts. Return on invested capital after tax was 38%, up 8 percentage points from last year, as we continued to increase earnings on a stable asset base.
We ended the year with a net cash position of DKK 1 billion. Please turn to slide six. 2021/2013, we expect revenue to grow 6%-7% organically and in DKK. The higher growth rates expected for 2012/ 2013, and we have seen in the past 2 years, is a reflection of our revised growth strategy announced in March this year, and our continued sales investments over the past years in markets like U.S. and China, and in new services such as Coloplast Care and the call center activities offered in connection with this service. Achieving the growth guidance will thus depend on our ability to execute on these plans.
The growth guidance implies a continued stable growth in the European business, whereas we expect both the developed markets outside Europe and the new markets to gain more momentum than we saw in 2011/ 2012. As was the case for 2011/ 2012, we expect less than 1% net negative impact on prices in 2012/ 2013. This is due to the fact that the pricing project we started up in 2011 continues to partly offset current price pressure. It's still our longer term view that our business is subject to around 1% annual price erosion. The financial guidance comprises only the healthcare reforms where the impact is known. For 2012/ 2013, we expect an EBIT margin between 31% and 32%, both in local currencies and in Danish kroner. In setting the EBIT margin guidance, we have obviously assumed that we deliver on the growth rate guidance.
Apart from this, we have assumed that we can deliver gross margin improvements within the communicated potential of a 0.5-1 percentage point per year, even in spite of the increased pressure on raw materials that I mentioned earlier. Our CapEx guidance for 2012/2013 is around DKK 400 million, and our effective tax rate is expected between 25%-26%, consistent with last fiscal year. With regards to the use of the free cash flow, we expect to repay our remaining loans in 2012/2013, and provided we do not find any major acquisitions, we may, depending on cash needs, be able to pay out extraordinary dividends towards the end of the year.
The board of directors proposes to the annual general meeting to cancel 1 million treasury shares, as our current option program is more than fully hedged through our holding of treasury shares. Last but not least, there are no changes to Coloplast's long-term ambition. The board of directors maintains the long-term financial ambition of outgrowing the market and at the same time achieving earnings margins that are in line with the best performing medtech companies. We and the board believe this is a challenging long-term ambition, which leaves plenty of room for continuously improving our business. 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 one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Our first question comes from Yi-De Wang from Deutsche Bank. Please ask your question.
Thank you very much. I have three questions. The first question is regarding your revenue outlook, which you have said that you assume that growth in Europe would remain stable, as we have seen this year. Just wondering why that is, given that your pipeline seems to be much stronger than it was before. I believe at your capital markets day, you actually expected to gain more market share in Europe. If you could give some color behind your thinking there, that would be great. The second question is on your EBIT margin guidance. To what extent that also reflects further investments that you plan to place during the 2012/2013 year? Finally, on the FX.
If we, it's primarily on the financial, net financial line, actually, if we assume FX at the current rate, how should we model that line of your P&L? Thank you.
Let me start out with the revenue outlook. We have actually been very satisfied with the growth in Europe for this year. We also think that we can see that we are actually improving our performance in Europe. The comments we have really are that we continue to expect a strong performance in Europe. We continue to see an even stronger performance in the U.S., because if you look at the numbers, we actually growing substantially more in the year we just finished than the year before in U.S. We continue to see that U.S. is improving. We have not been satisfied with our growth rates in emerging markets last year, and we expect the growth rates there to improve.
Okay. maybe I can then talk to the EBIT margin. It is correct that the EBIT margin guidance includes the fact that we will use the leverage, the expected leverage effect on our distribution line, in particular to fund further investments. Investments that we planned for this year are included in the EBIT margin guidance. With regards to FX, with the FX rates as they were at the end of the year, i.e., the end of September, then there would be about DKK 40 million left in losses, and you actually have to add tax to that. That would be the cost of the hedging. The way we hedge, that would be front-end loaded in this year.
Okay. That, so on the clarification. On the effect, on the net financials line, we should actually have around DKK 40 million of impact.
Plus tax, so it would be around DKK 50.
Oh, right.
Front-end loaded.
Right. The tax would also be accounted in the net financial line?
That would be regulated for later or further down on the tax lines.
Sorry, further down in the tax lines, we then take it off?
Yeah. After the EBIT, you know, In the tax line, you would have the tax taken out, but in the net financial line, you would have it included.
Okay, fine.
Yeah.
Thank you very much for that. Clarification with Lars then. Are you suggesting that you expect, you know, continuing improvements in Europe? Or are you saying that, you know, say, for example, last year, Europe was up 4% or 5%, you would also expect Europe to be up 4% or 5% this year? Is that what you meant?
You become very specific on what we expect in each of the regions. What I can say is that Europe is a very large part of the sales in Coloplast. You don't move such a large part up by several % or down by several % over a year.
Right.
It's more volatile, what you have in the regions outside of Europe. Europe, we expect to be in good shape. It is in really good shape, and we expect it to continue to be in good shape. We also expect, we especially maybe expect the markets outside of Europe to be better next year.
Right. The pickup is primarily coming from markets outside of Europe rather than.
Yeah.
Okay. Thank you.
Your next question comes from Ed Ridley-Day from Bank of America. Please ask your question.
Good evening. Thank you. First question on Brazil and emerging markets. Can you remind us of your percent of sales in Brazil? Give us a bit more color on what you've been concerned about there and what you're doing to reaccelerate in Brazil. Also, obviously, we know that thus far, you've focused on the BRIC countries. Are there any other key emerging markets that we should be looking at, where you are targeting to grow in 2013? That'd be my first question.
What we are doing in Brazil is actually what I said when I presented. It's a market which is very interesting, seen from an Ostomy point of view, where we are having or seeing an increasing number of new patients coming our way. It is also a market which is very interesting, seen from a wound care point of view, and we are addressing both in the changes that we are doing there, to the tune where we are separating our sales forces. In essence, we have two separate sales forces working in the Brazilian market.
The reason why we had a downturn really was due to management issues, and we think we're on the other side of that. In that sense, it's not a market which we have really, where we have seen the most of it yet. It's a market which is very much in front of us.
Okay. Thank you. In terms of other emerging markets that you're looking at focusing on, where we can expect maybe?
Yeah.
Additional growth?
Now, we just gave you an example of a market where we, where we are doing something extraordinary. It's, it's clear that China is very important to us. We have very, very nice market share, when it comes to, or market position, when it comes to Ostomy and Wound Care. In China, it's growing by very, very healthy growth rates. The same goes for Russia, for example. We're not in a position where this is the first sort of toe in the water in the emerging markets. We actually have some strongholds. What we, what we want to do with the current strategy is to go further or deeper into the emerging markets.
Very good. Thanks. My second question is regarding the medical device tax. Can you give us an idea if you've got any greater clarity on that? Clearly, it may or may not happen, depending on what happens tonight.
Yes.
But-
Exactly. We have no news on it.
No news on that.
We basically don't even know if our products are included or not.
Precisely.
Yeah.
I mean, when do you think we might hear whether your products might be included or not?
That's a very good question. We are as anxious as you are, but, it could be any day.
Very good. Thanks.
Your next question comes from Veronika Dubajova from Goldman Sachs. Please ask your question.
Good evening. Thank you very much for taking my questions. I have three, if I may. Just actually, first one is on a follow-up from Ed's question. Lene, what have you actually assumed for the medtech tax in your guidance, if anything? To the extent that you can help clarify and share that with us, that might be helpful. If you have any offsets that once you do learn, or if you do learn that your products are subject to it, that you can use to offset it.
Second one is for Lars, more conceptually on the emerging market growth. You said, you know, this year's performance wasn't satisfactory. What kind of target do you have in mind for emerging market growth if you think about next year and then in the medium term? My last question is on capital allocation. Given some of the language around dividends and you not announcing a new buyback plan, do I sense a slight change in the way you are thinking about returning cash to shareholders, or will it continue to be a combination of buybacks and dividends?
Let me start out by taking the first two. On the medtech tax in the U.S., we have not included anything because we really don't know, you know, whether it comes to what magnitude and when. So we are waiting and seeing, and we think that we have tried to make it very clear that we only include reforms that we know the results of and when they're impacting. There's nothing there, as we see it. We have consistently said that we believe that longer term, this is going to equal out because the medtech tax will only be in action if more people are included, or more people will be covered by health insurance.
We think over time, it's not that bad. That's, of course, an easy standpoint to have when you are not, the market leader by far on all of the areas that you work with, because, a bit of turmoil is always good when you, when you're one of the smaller ones. On the growth side, we are not that keen on starting to guide on each of the geographical areas that we have. It is no secret that it's also due to an expected higher growth rate in emerging markets that we are, improving our, guidance for the, for the coming year on the top line. We simply expect the new markets to grow faster than they did the year before.
If I should give you any kind of guidance, it's up.
Okay. With that very clear guidance, Lars, I will answer, Veronica, your questions on capital allocation. There is no change to the way that we look at the, you know, capital structure and how we deploy cash. We would obviously prefer to invest it in our business, and to the extent we can't do that, then it will be a combination of share buyback and dividends. We believe that the level of share buyback that we have been running with over the past two years, which has been about DKK 0.5 billion per year, is a reasonable level, and that is what we believe we'll continue to do.
Then the remaining part, to the extent that we don't, you know, spend it ourselves, will be paid out either as ordinary dividends or as extraordinary dividends, which we now, of course, can also do during the year.
That is very clear. Thank you. I mean, could you just remind us what proportion of your revenues is the U.S., just so that we have a number to work with as we think about the tax?
Let me just find out what we normally say about that. Any quick ones here? Yeah, I think you can think about it in terms of... Because we don't give it so exactly, but we've given a sensitivity to our U.S. dollar or to U.S. dollar changes, which tells us that with a 10% change to the U.S. dollar, that impacts revenue by DKK 150. That would then mean it's about DKK 1.5 billion.
Very clear. Thank you both.
Your next question comes from Scott Bardo from Berenberg Bank. Please ask your question.
Yeah, thanks very much for taking my questions. The first question is actually for Lars. I see that in the guidance where you've called for slightly accelerated top-line performance organically. Within this, you assume to do better in emerging markets and also continue, I guess, the momentum that you've seen in the U.S. Quite important then, is to understand what the current growth rate was for 2012 in the U.S. market. If you could quantify that for us, and also help us understand whether there are any particular one-off factors in emerging markets. I know there were a few Argentinian tenders, for example, that perhaps you've won this year, that can help us understand a bit better how you grow in emerging markets.
More broadly, what gives you the confidence, particularly in the U.S., when we've seen a lot of changes recently? I know one of your competitors has bought a major distributor of continence care products in the U.S. There's also been some movements in the channel, Mediq recently being acquired by private equity. Would love to hear your thoughts on potential impact, or whether you see that as a risk or an opportunity. That's sort of quite a full question, but would love your thoughts there. I have a follow-up housekeeping question for Lene, please.
Okay. The U.S. is growing around 10% for the year that we just passed, which is up significantly from the year before, and we continue to see or expect to continue to see some acceleration there. As I mentioned, during my presentation up front here, we have not been satisfied with the performance that we had, for example, in Brazil, but also we last year had some stock reductions in Greece, for example, that we talked about. Those are two of the major impacts that we had on, you know, going negative last year on emerging markets.
When it comes to the U.S., and especially on the Continence Care side. It's correct that it is a very dynamic market, and it has become much more dynamic after the reform, where more people can, or where people can use a new catheter every time they have to watch. We see that, for example, Convatec have moved forward in the value chain here. What we are doing is that we are upgrading the markets. We are upgrading the market to the European technology, to the SpeediCath technology. It's products that are ready to use with a coated catheter that we are offering in the U.S. market now.
We, we see that that is working really well. Of course, people need to understand that the products are present. We also spend quite a large amount of money on making sure that people can also ask for the products. In that sense, we think they will be very hard to get around. We, we actually, even though we have seen that the competitors are very aggressive in this market, where we are market leaders, we are enjoying a nice growth, which is also a growth that we see is above the market growth in the catheters. There are a number of tactics to make sure that we do upgrade the markets.
When we do upgrade the markets with the SpeediCath technology, we are also upgrading the value of the market, seen from a manufacturer's point of view, because the average selling price that we have on the SpeediCath catheters is significantly higher than the price that we have on the standard catheters in the market.
Perhaps just a quick follow-up. It was my understanding that 180 Medical was one of your, I think, maybe your second largest customer in the U.S.
Yes.
Is this still the case, or have you started to move business away from 180 Medical? Similarly, just to follow up on Brazil, if I may, we've seen with lots of medical technology companies that tend to be successful in Brazil. They end up having to move some sort of manufacturer or assembly domestically. Is that an intention for you guys?
I don't think that I should comment on one specific customer in the U.S. We are actually quite satisfied with the growth that we do see in the U.S., also inside of the coated catheters. That will have to be my answer for it. You're absolutely right about Brazil, that you get a different status, in, you know, when you are manufacturing there. We don't rule out any moves in order to be interesting or an interesting party in a country that we are interested in. I don't want to rule anything out at this point in time.
All right. Thank you very much. Lastly, just a few housekeeping things for Lene. I just wondered, I mean, if you could comment a little bit about the distribution ratio that we saw in the fourth quarter. I wonder whether this particularly surprised you negatively, because when I adjust for maybe the DKK 30 million in net income that you received in the quarter, it appears, and apologies for nitpicking what has been a superb financial performance this year, but it appears that you would have actually missed your margin guidance were it not for that income factor for the full year. Maybe could you just help us understand what was going on there and whether that surprised you?
Last question was just on digging a little bit in terms of your financial expense line. Obviously, you know, this year has been a little bit negatively affected by exchange adjustments. I think we'll have a little bit more next year, but also you're paying off your DKK 200 million private placement debt. Is it a fair assumption to assume that financial expense at an absolute level is, let's say, half of what we've seen this year for 2013? Just to get a sense of perspective, how you see things unfolding when you pay off the debt. Thank you.
Right. You were absolutely right. We're not particularly happy to see more costs coming in in Q4 than we actually wanted to see. Yes, a bit of disappointment there. The good thing, however, it wasn't a whole lot of costs coming in, and it was not a sign that things are actually starting to move in the wrong direction. It was literally a number of many small items, some timing issues, a few small one-offs, a little bit extra negative from currencies, few restructuring things, you know, spread out evenly in the countries and of course, also a bit of additional investments, which is fine.
I would say, when I look at it, I would actually think about it as the, you know, spread it out throughout the year, and then it actually is not something that we worry about. We follow, of course, our cost extremely closely. I mean, we could even sort of get the suspicion that somebody has been trying to say: "Okay, let's clean up, see what we've got in the corners." I don't know if that's what's happened. Nobody will admit to that anyways. With regards to our financial expenses, you're right. There's quite a bit from FX this year, and that's, of course, the flip side of the what we're getting on the top and the bottom line in terms of benefits from FX and what should we expect going forward.
Of course, depending on what happens to FX. Yes, I would say it is half reasonable. Yeah, that's probably a reasonable number to look at.
Just to understand, your financial expense was DKK 342 million for 2012. If one were to divide that into about 170, makes good sense?
I actually, I mean, the what you have in terms of exchange rates is almost DKK 200. We would not, about DKK 150, DKK 100, DKK 200. Yeah. Yes. About the half of that, I think is close enough for what we can see. It also depends on what happened, the DKK 40 million I just mentioned, but early on, when we were on a half, of course, needs to be taken into account also.
Great.
About half.
Thanks so much, Lene. Appreciate it.
Your next question comes from Kristofer Liljeberg. Please ask your question and announce your company name.
Yeah, good evening, Kristofer Liljeberg from Carnegie. I also have three questions. First of all, coming back to the margin, the gross margin was down some 1 percentage point in the fourth quarter versus the third quarter. Is this mainly explained by currencies or also the raw material effect you mentioned?
Sorry, could you repeat that question? I didn't quite get it. Could you please repeat it?
Yep. If I do the calculations correct, since the gross margin was 1 percentage point lower in the fourth quarter versus the third quarter, if you could explain the reason for that, if it's due to currency effects, sequential currency effects, or if also the raw material effect?
It's mainly currency effect. If you clean out for currencies, then the difference between the two quarters is minimal.
Great, thank you. The second question is the lower provision for bad debt in the quarter.
Yes.
Do you see things getting better? Also, is there any possibility now moving into the next year that we could see reversal of previous provisions, and what have you assumed in the guidance?
We don't see things getting better. The fact that we haven't provided more is that we see things staying as they are, and I'd love to be able to take some of that back if everything starts going well in Southern Europe, but we need to see some real improvements there first.
Guidance includes no more bad debt?
You know, Kristofer, we can't really add that into the guidance because if we feel there's a need to take a provision for bad debt, then we need to take it immediately. Therefore, you know, by nature, there can't be in the guidance a further provision for bad debt, because we need to-
Okay.
...Take what we feel is right at the moment. We are covered with what we feel is right as we are today. If things deteriorate, that's a different situation, then, of course, we'll need to provide more. If they stay as they are, we don't need to provide more. If they improve, that, you know, significantly improve, then there, of course, there is the possibility at some point to write something back.
Yeah, that's a fair point. Finally, if you could update us on what you see with potential price cuts in Italy and France. Anything news there?
Not actually any news. We're still waiting to hear more news, so, no news on that one.
Okay, thank you.
Your next question comes from Claes Madsen from Handelsbanken. Please ask your question.
Yes, hello, it's Claes Madsen here. Just one question on your smaller business divisions. The urology business delivers really nice growth in the quarter. Do you see that as sustainable into 2012/ 2013, as the European business has rebounded, and there's also a rebound here of the elective surgical activity?
It's a little bit hard to be very bullish on that, because we also feel that the situation around domestic division is a bit a soft one for us. We had a nice quarter. We also expect the business to still improve in the year that we are entering. I don't think that we should just expect to see a continuation of this, because we also have kind of a favorable base to compare against in last year's Q, our fiscal Q4.
A similar question on Wound Care.
Yeah.
Should we expect operationally or, given your increased exposure or increased ambitions in emerging markets, that growth will materially accelerate in 2012/ 2013?
We expect the wound care business to do better in this new fiscal year than it did last year. We have done a number of things to improve. We have continued to invest in China, and we continue to build our base, a very strong base, in China. We have invested, as I talked about in Brazil. That means something, of course, for our confidence. We have confidence that we can grow since we do, since we're doing this. We have actually invested in taking our leased sales force in France in-house.
We expect that those are some of the bigger initiatives that will help us improve the performance in the year that we're in now.
The insourcing of the leased sales force, will that in any way affect costs?
Yes, it will also because we have actually increased our sales price in France. That will include more costs.
Thank you very much.
Welcome.
Your next question comes from Yi-De Wang from Deutsche Bank. Please ask your question.
One clarification question. I think, looking back at my notes, you said-
It's very hard to hear you.
Can you hear me now?
Yes, that's better.
Better. Okay. Just looked back at the notes I tapped out quickly while you were doing your presentation. I think you said that, you don't expect much impact from healthcare reforms this year, but you still expect that to be, to negatively impact your top line by about 1% over the medium-ish term.
Mm-hmm.
Can we understand then, given that your growth last year was about 6% organically, and you had a 1% negative impact from reimbursement issues, then the pickup, the acceleration in the top line is really that you don't have that pressure or as much of that pressure this year. How, how should we interpret that relative to the, you know, the improvements that you've outlined in the various parts of your business? Are you, yeah, how should we think about the dynamics there? Thank you.
Yi-De, I think what I actually said, was that we had had less than 1% in the year, that we've just been, we've just reported on.
Yeah.
That we also net expect to have less than 1% this year. That is to a large extent due to the fact that our pricing project, that I know we've talked about a few times, has been able to counter some impact, some of the impact that was seen from the normal, if you can say so, expected price pressure of about 1% per year.
Right. Given that you've got improvements there, and you've got improvements from a stronger product line, and it sounds operationally, you're also doing better in a lot of other areas of your business, just somewhat surprised that we wouldn't see stronger top-line guidance than what you have given. I thought it would be a bit stronger, you know, in line of all of these things.
What did you think it would be?
I thought, I was thinking that, you know, you might go for 8% this year.
Wow! Okay. I think we are quite comfortable with the, you know, giving the guidance we have given of 6%-7%.
Okay.
We feel that's a reasonable guidance with everything we see.
Right. Okay. Thank you.
Your next question comes from Niels Granholm-Leth from SEB. Please ask your question.
Yes, good evening. Essentially, all my questions have already been answered, but, I just have one last question here. That is, so the number of outstanding shares, I presume the reason why the number of outstanding shares have actually increased by the end of this year in comparison to end of last year, is due to the fact that you have allocated more shares to the management group than you have bought back.
Well, it is actually because we have bought some shares back, but at the same time, we have also had some of the management group exercise options. The combination of buying back shares, we actually could say, bought back fewer shares than what came out through the exercise of share options. We've also had some programs where employees could buy some Coloplast shares. The combination of exercising of option and employees buying Coloplast shares has given net more to the market, even though we have bought back shares.
Okay, thank you.
Your next question comes from David Adlington, from JPMorgan. Please ask your question.
Evening, guys. Thank you for the question. Just two very quick ones, really. Just on your R&D spend, just wondered how you expect that to evolve. You, you have the absolute level, or should we expect to see a little bit of upside pressure there, either absolute or as a percent of sales? Secondly, just to follow up on the expected financial expense, just so we're all kind of on the same page, just an actual number that you're kind of happy with as guiding and including models for financial expenses for overall financial net expenses for this year. Thank you.
Let me start off with the R&D. David, we actually spend what we think we need to spend in order to be competitive on the R&D side, and therefore, we cannot really guide on it. We might be in a situation where we find solutions that will help us gain market shares in the market that we go and buy. In that instance, you will see that our R&D to sales will go up.
We have with the current guidance, we are containing what we think that we'll use in the, in the year that we're in now, but don't see R&D as something which is always very stable over time, because we have a system by which we are defining the products that we want to launch, whether we have the competencies to do that or to create the products inside of the house or not, because it's a very market-driven process, and therefore, you have to see the nature of the of the R&D spend to be more fluctuating than you maybe think about it in, in other contexts. Therefore, therefore, I can't give you any firmer guidance on this.
We think for this year, we, you know, we can do what we want to do within the overall guidance of the company that we have.
Now, with regards to what you should put in your model for financial items, I don't know exactly where it'll end up, but if you put in somewhere between DKK 100 and DKK 150, I think you should definitely be on the safe side.
Great, thank you very much.
Your next question comes from Michael Friis from APM. Please ask your question.
Yeah, hi. I was wondering whether you could remind me, the U.S. tax, which might hit you, that will only be on the urology business, or I know it's still an open question, but I think.
Yeah.
You have stated that before.
It is still an open question.
We simply don't know.
No.
Okay. The second question, you know, you wanted to accelerate your sales cost. How should we see that line this year? Can you keep the ratio to revenue stable, or could you even lower that? Can you keep this accelerated sales cost in the revenue growth?
We expect that we can still be around 29%, so we should be able to get in with that guideline. 28%-29%, something like that.
Okay.
Your next question comes from Kristofer Liljeberg, from Carnegie. Please ask your question.
Yeah, hi again. One follow-up, if that's okay. Ostomy had a better growth in the fourth quarter, and you're mentioning better performance in the emerging market. My question is also, is the launch of Brava having any meaningful impact on the growth rate for this segment yet?
Yes, very much so. The launch of Brava has been very successful. It continues to pick up growth. As you know, this is also the, a new market that we have started to work on. We think that we have around 10% of that market. Now we address it, and that's also why it has been included in the market size, in the update of the market size this year, for Ostomy. Absolutely, that's a good question.
Thank you.
Your next question comes from Scott Bardo from Berenberg Bank. Please ask your question.
Thanks for the follow-up. Just a quick one on, could you give us a sense of the rationale for the stock split that you announced, please? Also, thank you that you now include accessories within your definition for Ostomy. Also would be very helpful then, now that this is part of your growth strategy for you to quantify what the growth was for you in Ostomy bags in 2012, and what it was in accessories. Also, perhaps to ask, if I'm pushing my luck, you would share some thoughts on your NPD involvement in or evolution in some European countries, where you're succeeding or where you're less successful, that'd be helpful.
I think while Lars thinks about whether he'll say anything about NPD or not, then I can say that the reason for the stock split is mainly for the retail, including, of course, our own employees and other private, you know, individuals, being able to purchase a low number of shares, and that's why we made this the split, because there was a request for that.
At least the way that we look at the accessories right now, we see it as a pretty small market, even though it's of course a meaningful addendum to the, to the real Ostomy markets. To start guiding on both the bags and then on the accessories, we find that maybe to be a bit excessive. On the, on the NPD, well, you tried to push your luck, and it's late in the night. This is really, these are really informations that we, that we, you know, that we invest to have. Where we, where we don't feel that we are doing any favor to anybody by releasing them, other than some of our competitors maybe can triangulate where they are themselves.
NPD is very important to us. We are following it meticulously, and we do a number of activities to get a high NPD rate. We, by what we do with Coloplast Care, of course, also find meaningful ways to address the target population, which we cannot address by the NPD activities that we do in the company.
Very helpful. Just put another way, maybe Lars, your growth in Ostomy, would you say that half of that is coming from accessories, or most of it is coming from accessories? Just some sense of perspective at least, would be helpful.
Well, we have, we actually have, both, the, new Mio in the market, and we also have accessories in the market, and both of them are performing better than the forecast that we had when we launched them.
Thanks very much indeed.
Your next question comes from Oliver Metzger from Commerzbank. Please ask your question.
Hey, good evening. Just, some final questions. Firstly, it's about the growth rates of your employees, which has increased from last year. Do you think, looking forward, can you utilize your existing workforce, or do you need to increase your workforce to realize further organic growth? That's my first question. My second question is for the market shares in the United States, in the Ostomy segment. I think you said in the past that there is a big gap between the market shares in hospitals and also communities. Do you think there's currently a trend which shows an improvement? Finally, modeling question. Your depreciation has decreased for the second year in a row, I assume, due to lower investment. Is an increase of 5% also fair to assume for the next year?
That were all my questions.
On the employee side, what we have been very vocal about is that we want to increase our sales pressure. When you're looking at the increase of number of staff, it's primarily due to two things. One is that we need more people in our factories. You know, we have finished the moving out of our manufacturing to low-cost countries. That means that we are now over the last year, we became the number of people that we needed. We didn't need any extra people on board in order to do the transfer of production. Now you see the base starts to grow more or less, maybe in line with the growth or the volume growth of the company.
You should expect going forward to see that as we are expanding the number of, or the volume of the company, we of course, also need more hands in order to produce the products, because it is still to a certain extent, a manual process to manufacture the products that we do have. Then you should also expect to see growth on the number of people that we have in the company to sell. That might be direct sales force, but it might also be sales force in our direct-to-consumer arm. So, i.e., that's people who are in the call centers.
Yes, you clearly see in the numbers that we have started to invest in further sales pressure. Regarding the U.S. and the market shares between hospital and community, what we have spent most of the time on over the last 24 months is really to make sure that the. Well, we have worked, we have worked on winning the GPO contracts, because that's very important longer term, to be on the right GPO contracts. But we have also worked very hard to fix the process chain, where you are able to transfer the new patients that you get to the dealers with whom you have contracts. And that is what we name as referrals or leads.
That is a process which today is working significantly better than it did just 24 months ago. That also, that's also part of why we are seeing an increased growth rate in the U.S.
With regards to depreciations, I mean, we have over the years been able to optimize the way that we utilize our asset base, and that you have been able to see in a relatively in a lower CapEx spent than what you used to see from Coloplast historically. That means that we will still have some years where depreciations will decline a bit, because there's still depreciation stemming from the time when we simply had higher spends on CapEx. Yes, there will still be a downward trend on that.
Yeah. All right. I think we are in for the last question now.
There are no further questions, sir, so please continue.
All right. Well, then we would just like to thank all of you for participating. Looking forward to meeting a lot of you over the next weeks. Thank you, and have a nice evening.
That does conclude our conference for today. Thank you for participating. You may all disconnect.