Good afternoon, ladies and gentlemen, and welcome to the Coloplast Full Year 2010/ 2011 Financial Statements Conference Call. At this time, all participants are in listen-only mode until we conduct a question and answer session, and instructions will be given at that time. If anybody should require operator assistance during the conference, please press star followed by zero on your telephone. Just to remind you all that this conference call is being recorded. I would now like to hand over to the Chairperson, Mr. Lars Rasmussen. Please begin your meeting and I will be standing by.
Thank you very much. Good evening, welcome to this fiscal year 2010/2011 conference call. I'm Lars Rasmussen, CEO of Coloplast, and I'm joined by CFO, Lene Skole, and our investor relations team. Lene and I will start with a short presentation, then we open up for questions. Please turn to Slide 3. We realized a 6% growth organically and 7% in Danish krone in 2010-2011, passing DKK 10 billion in annual sales. Growth continues to be driven by strong performance within our chronic care business. The organic growth for the quarter was 4%, which was not satisfactory, and I will revert to this later in the presentation. We can report a solid EBIT margin of 25% for the year and 29% for Q4 in isolation.
Despite the lower than desired growth in Q4, I am pleased with the results. Overall, we continue to grow more than the markets in our chronic care business. Our margins continued to improve, bringing us closer to our long-term targets of having profitability in line with the best performing medical device companies. At our annual general meeting in December, the board of directors will propose a dividend of DKK 14 per share, corresponding to a payout ratio of 32%, or an increase of 40% per share. The board of directors has also decided to initiate a new share buyback program of DKK 1 billion, running over the next two fiscal years. Furthermore, Coloplast's long-term ambition has been reviewed and I will remain unchanged, aiming for growth above the market growth and margins in line with the best performing medtech companies in the world.
For 2011-2012, we expect to continue to grow both organically and in Danish krone, by around 6% based on current exchange rates. We expect a significant improvement of the EBIT margin to around 27% in both Danish krone and local currencies based on current exchange rates. Lene will talk to that later. Please turn to Slide 4. In Danish krone, revenues were up by 7% to DKK 10.2 billion, and the organic growth was 6% in line with our guidance to the markets. Within Ostomy Care, we continue to see strong organic sales growth of 7%.
The biggest growth driver remains the SenSura product line in the European markets. Also emerging markets continue to contribute nicely to the growth. The growth in the quarter was 5% and was impacted by lower growth in a number of European markets, especially Spain, where we had some unfavorable comparisons to last year. We continue to roll out SenSura Mio. It has now been launched in 11 markets this fiscal year, including France, Germany, and U.K. We are still pleased with the sales performance from Mio. In Continence Care, organic growth was 8% in 2010-2011, while organic growth was 7% in the quarter. Growth over the year was driven by intermittent catheter sales in Europe and the U.S. Furthermore, Conveen bags, UriSheath and Peristeen performed well during the year.
Growth in the quarter, amongst other things, was, amongst other things, impacted by large distributor swings between quarters in the U.S. In total, our chronic care businesses, which constitute 75% of the total revenue, grew by 7% for the year and 6% for the quarter. Although growth in Q4 was below the full year growth, it was still above the market growth, and we are very happy with that. In Urology Care, organic growth was 4% in 2010-2011, while organic growth was flat in the quarter. Growth continues to be negatively affected by declining sales of female slings. Sales of mesh for pelvic floor repair remain satisfying. Sales growth of penile implants was again flat this quarter due to the combination of postponements of procedures and direct cancellations.
Sales of penile implants have proved to be sensitive to the economic developments. Until the U.S. financial sentiments improve, we must expect low growth within this segment. The European urology business, on the other hand, saw very satisfactory performance in 2010-2011, especially sales within instruments for the removal of kidney stones were satisfying. Our wound and skincare saw organic growth of -1% in 2010-2011, and -5% in Q4. During the year, we have worked hard to reestablish our wound care business in the market. In December also, Spain will be included under the Wound Care SBU. This will bring the total number of countries to 12 under the SBU. We can see signs of improvement, especially in markets like Germany, where we are growing at healthy rates.
We do remain disappointed that it takes longer than we expected to reach a better sales momentum. We are not helped by the adverse market conditions in many European markets, especially Spain and Greece, impacted negatively. Also France contributed negatively as the local market was impacted by recently implemented price reductions. In Q4, growth for Wound Care in isolation was -3%. This was disappointing and was due to lower sales in Southern Europe. We turn to the geographical split of the total sales, Europe experienced an organic growth of 4% for the year and 4% for the quarter. Growth continues to be driven by Continence Care. Also Ostomy contributed to growth, whereas Wound Care impacted growth negatively. Organic revenue growth in the Americas was 8% for the full year and 1% in the quarter.
South America saw a very satisfying performance this year, particularly within Ostomy Care, whereas the U.S. saw growth below expectations. The new U.S. management, installed over the summer of 2011, are now executing on our plan to increase sales growth in the U.S. Revenues in the rest of the world improved by 11% organically, only 5% in the quarter. We saw a strong performance in China during the year, whereas Japan had large quarterly swings, first related to the earthquake earlier this year, and in Q4, due to the distributor order patterns. Emerging markets generally grow at a more erratic pace than the mature markets. As we increase relatively our sales in emerging markets, we will enjoy both the generally higher growth rates but also the more erratic nature of the markets.
Finally, we have changed our combined market growth estimate to a range of 4%-5% against previously, around 5%. The adjustment is a result of the intense competition in the European wound care markets, leading to a price and volume erosion and the depressed macroeconomic situation in the U.S., which has impacted elective surgery negatively. For the Ostomy Care and Continence Care businesses, market growth is estimated to be unchanged. That concludes my part of the presentation. Lene will now provide more details inside in the financials. Please turn to Slide 5.
Thank you, Lars. Gross profit amounted to DKK 6.6 billion, equal to a gross margin of 65%. This is an improvement of 4 percentage points compared to the same period last year. Increased efficiency in the production economy and lower salary expenses from transfer of production, were key drivers in this positive gross margin development. Q4 gross margin was 66% and was impacted positively by 1 percentage point from settling miscellaneous accruals and provisions following the finalization of the transfer of production out of Denmark. The SGA to sales ratio was unchanged at 35%, even though the SGA includes increased capacity cost of DKK 90 million to increase sales activities in wound care and in China, as well as costs of almost DKK 40 million related to restructuring.
Accordingly, the underlying cost improvements have been sufficiently strong to allow us to invest in additional growth and efficiency initiatives without deteriorating the margin. For the quarter, SGA to sales was 34%, impacted positively by a general low level of spending, partly offset by an increased provision of DKK 27 million for bad debts in Southern Europe. The R&D to sales came in at 4%, in line with previous spend, but Q4 in isolation was lower due to lower activity this quarter, coinciding with the Lean and Agile project. We have now largely completed the Lean and Agile headquarter project. All in all, this results in a reported EBIT margin of 25%, compared with the 21% last year. Net of currency impact, the EBIT margin was also 25%.
Our net profit increased with 46% to DKK 1.8 billion, corresponding to an earnings per share of DKK 42.6, compared with DKK 29.1 last year. Free cash flow was DKK 1.8 billion, compared with DKK 1.5 billion last year. The increased cash flow compared with last year, was due to increased earnings, offset by higher tax payments and the acquisition of Mpathy Medical Devices. Lower interest payments and net gain on currency hedging contracts compared with the net loss last year, had a positive impact on the free cash flow. During the first three quarters of the year, we saw our receivables increasing more than justified by the revenue growth.
The additional increase was caused by a general delay in payments in Southern Europe, which was the reason behind our increased provision for bad debt in Q4. Q4 has shown an improvement in outstandings and receivables, decreasing the total receivable by DKK 107 million compared to the beginning of the quarter. Receivables at the end of the year amounted to 65 days sales outstanding, which is unchanged from the beginning of the year. Working capital to sales thus ended at 23%, which was unchanged from last year. Net interest-bearing debt to EBITDA ended at 0.2 against 0.6 for the same period last year. Our net debt to EBITDA target range remains suspended as we continue to look for suitable investment opportunities into 2012.
As we have mentioned earlier, we do not aim to have excess cash on our balance sheet, but as we remain focused on investing in our business and on participating in the consolidation of our markets, we will, in an interim period, accumulate cash. CapEx amounted to DKK 250 million, corresponding to a CapEx to sales ratio of 2%, reflecting continued lower spend. Now, please turn to Slide 6. For 2011-2012, we expect to continue to grow, both organically and in Danish krone, by around 6% at the current currency exchange rates. Our growth expectations are built on the assumptions that performance will improve in our U.S. business, primarily within chronic care, but also slightly in surgical urology, as our new mini sling is expected to be launched mid-2012.
Despite tough market conditions, we also assume a certain pickup of our Wound Care business as we continue to execute on our plans within this business. We expect an EBIT margin of around 27% for 2011-2012. This is a significant improvement compared with the 25% in 2010-2011, but lower than the 29% we realized in Q4. Please bear in mind, however, that Q4 costs were unusually low, as I explained earlier. The 27% assumes 6% organic growth, a slight improvement in gross margin from last year, and improvements in OpEx related to efficiency gains from the implementation of the Lean and Agile headquarter in 2010-2011. Our CapEx guidance for 2010-2012 is expected at around DKK 300 million, corresponding to 3% of sales.
Our effective tax rate is expected to be 25%-26%, which is slightly lower than last year due to more profit being taxed in Denmark under the 25% statutory corporate tax rate in Denmark. The board of directors has reviewed our long-term ambition. Our ambition remain unchanged. In 2010-2011, we continued to outgrow the market. Profitability-wise, we ended up above the median. We are now on our way towards the upper quartile of our peer group. This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Thank you. Ladies and gentlemen, if you do have a question at this time, please press star followed by a one on your telephone keypad and the hash or pound key to cancel. Once again, that's star followed by a one to register a question and the hash or pound key to cancel. There will be a short silence while questions are being registered. Our first question comes from the line of Carl Rachal . Please go ahead. Your line is open.
Hi there. Thanks for taking my questions. I've got three questions. Firstly, on your guidance, you mentioned the 2012 guidance of 6% top line growth and 27% EBIT margins, is dependent on execution of the business plan in the U.S., and also on the Wound Care business. Can you give us a sense of what your guidance would be if these improvements don't materialize? That's my first question. The second question, again, in terms of your margin improvements for next year, can you give us a sense of the proportion that will be contributed by improvements to gross margins, and where the remaining improvements will come from? Finally, my last question is in terms of the surgical mesh market. Have you had any conversations with the FDA following their recommendations on surgical mesh? Thanks a lot.
Let me start off with the first question, Carl. We get questions when we discuss our guidance for next year, where people say, "W hat do you base this on?" Of course, we have had a negative development this year in the US compared to what we wanted, and we have not had a very nice development on wound care also. We cannot make the growth numbers if we don't succeed in those areas. I don't believe that the EBIT margin is that hinted on these two specific issues. It's much, much more broader range we're talking about. I mean, it's very hard for us to give you another guidance. How many different guidances would you like us to come up with?
In that sense, I think it's fair to say that we have a pretty good understanding of the things that we're implementing in both U.S. and wound care and the rest of the organization, for that matter. We feel that we have given a realistic guidance on both the top line and on the bottom line, and that's really as much as we can say about it. Moving on to question number two, I think maybe, Lene, you would take a stab on that?
Yes, Carl, obviously, when we look at the guidance, how much is coming from gross margin, how much is coming from elsewhere, there are clearly a lot of moving parts. If we could sum it all up and say, sort of, broadly speaking, you could say of the 2 percentage points increase, approximately half of that, i.e, 1 percentage point, I would expect to come from the gross margin, and the other percentage point I would expect to come from other costs, mainly from the benefits from our headquarter restructuring, the Lean and Agile project.
When it comes to further contact with the FDA, no, we have not had further contacts with the FDA. I think the outcome of the panel that have been together have been pretty clear, and we don't have the full overview of everything that we have to do in this context, but I think we understand the sort of the boundaries of what this outcome is trying or what it is that the outcome tries to get to. In that sense, I think we don't need, at this point in time, to have further dialogue with the FDA. We need to understand exactly what it means for our business.
That's great. Just one follow-up question. I mean, it's early days yet, but clearly the surgical market, sorry, the surgical mesh market dynamics have kind of changed. I just wonder if you foresee any impairment related to your Mentor or your Mpathy Medical acquisitions in the future if this market doesn't pick up again?
Yes, clearly, if the market doesn't pick up, it's a very different situation. I would like to stress also that the mesh that we have in the market right now is actually the lightest weight mesh which is there, and it might help us going forward. You also have to bear in mind that we are only having a sales of approximately DKK 40 million in 2011 of the mesh. It's a very small fraction of the sales that we have.
Okay, great. Thanks very much for taking the questions.
Our next question comes from the line of Martin Wales. Please go ahead. Your line is open.
Good evening. Firstly, could you update us on where you are in terms of SKUs, in terms of how many you've reduced, with your planned increase in 2012? Also, well, what impact is it having on your top line and your bottom line?
Right. Maybe I can start, and you can add, Lars. What we have said to you earlier on about the SKUs was that we were going to reduce more or less as the cleanup, where before it comes into just normal operation, something to the tune of affected revenue of a total of DKK 200 million, of which DKK 50 million revenue affected would be in the year that had just passed, and approximately DKK 150 million in the year we are in now. That's revenue affected. That's not the net amount, because we obviously expect that there will be a good retention rate. It is practically impossible to measure this precisely, but we would certainly expect that we would have a retention rate of somewhere around 75% or something like that.
It's tough to measure, but thus far, you've got no reason to change that guidance from the sound of things.
No, that is included in our guidance, and still, as we have said earlier on, it's included in our guidance, and once we've done that, then we are into normal operation, where we will make sure we just continue to clean up in product units as we introduce new products.
Okay. also in terms of the margin improvement story, you've been looking to reduce the standard delivery time from 24 hours to 72 hours. Have you seen any negative impacts on your business from doing so?
I don't think that we have implemented that as we speak.
All right. Okay. I lost the power on that one. Hello?
Yes .
Sorry, we were just waiting for each other here.
Yes.
Of course, our global operation has a new plan that they are just starting to execute. It will be a part of that plan, and it is too early to say exactly when the various elements will be implemented, but this is part of the initiatives that they are looking at.
Okay. We'll wait and see. Thank you very much.
You're welcome.
Our next question comes from the line of Jesper Knudsen. Please go ahead. Your line is open.
Yes, hi. Good afternoon. It's Jesper here. A couple of questions to the sales guidance of 6%. First, the changes you're expecting or pick up in growth you're expecting in the U.S., should we expect that to come in the beginning of the year, or will that be back-end loaded? That's the first question. The urology business, I think you mentioned for the full year, 4% organic growth, but we say the growth during the quarter came down from 8%, 6%, 4%, and down to 0% in the Q4.
Do you expect to grow in line with the market growth in urology for this coming year, or should we expect the first couple of quarters to be in line with what we saw in Q4? Finally, on the wound skincare business, you mentioned that the market growth is now down to a couple of percent . Does that include the negative pressure part of the market, or is it only the moist wound healing part of the market?
When it comes to the U.S. I think we should expect to see that the growth in the chronic part of the business will be better than last year throughout the year. I don't believe that that will be that back-end loaded, whereas if we're looking at the surgical urology business, it's very probable that it will stay low in the first couple of quarters. Wound care is moist wound healing. It's not including negative pressure.
Okay. On the ostomy business, you mentioned that the primary driver for growth was the new markets, also mentioned that SenSura is a growth driver. I don't guess the SenSura Mio is out on the new markets yet.
That's right.
Does that mean that SenSura Mio is cannibalizing from the old products in the portfolio?
Yes, it is. The whole idea about having a new product in the market is very much that you would like to obtain new patient discharges. O f course, as soon as you launch a new product in, for example, ostomy, and as soon as it's in the country, they stop sell the old version of that product, and they start selling only the new version. In that sense, with the all the new patients that get out of hospital, they are immediately on the new products, so there the cannibalization, so to speak, is 100%.
Then once you are covering that part of the chain, you start to search for other patients that you would like to get on board, because as you know, when people are on a product that is the newest version, they might also stay more loyal to you. Please also bear in mind that once people are very well into the use of a product, they do not tend to change that often. In that sense, it's more people who are new in or in the first phase of them being an ostomy patient, that you can make these switches. The loyalties tends to be bigger and bigger over time.
Okay. Thanks a lot.
Our next question comes from the line of Martin Parkhøi. Please go ahead. Your line is open.
Yes, hello, Martin Parkhøi from Danske Bank. A couple of questions. Firstly, respect to a couple of questions on your long-term guidance. You still state that you expect to have a CapEx to sales level of 4% on long-term ambition. The last two years, it has been around 3%. What you're guiding for 2011-2012 is also around 3%. When should we expect the 4% level actually to come? The second thing, you guide that you expect to be on par with the best of the class in your peer group with respect to your margin.
If you look at the environment right now, how do you actually expect the peer group to move if you look at the initiative from different governments? I'm not finished. I also have respect to ... I've talked to Lene Skole about it earlier today, but respect to receivables, now you have to making a provision of DKK 27 million in Southern Europe, but how big a part of your provisions are actually coming from Southern Europe, in order for us to see what the risk could be? Coming back to your guidance, with the 27% that you guide for the full year.
Of course, you had a much better margin in Q4, and you have various reasons for why it should be lower next year. I think that I've heard that before, because the last two years, you also had a very good end to the year with a very high Q4 margin, and there were rare reasons for why it should not be better than the year after, and it happened, and it was much, much better. Is it that you're about just a little bit conservative with respect to your 27%?
Martin, thank you for your questions. You almost make me feel like I have to apologize for the margin which is delivered. I don't think we are conservative. We have tried, as we usually do, our very best to see what we believe we can deliver, and it is the 27%, and I think we've also been able to explain where it is that we see the improvements, a bit from the gross margin, where we get the full year effect of the transfer of production and the remaining part from efficiency improvements on Lean and Agile.
I also know we have had additional costs this year, and you could start stripping all those out and find out that we can deliver a lot more this year. I think experience shows us that every year, there is some costs you need to take. There are some investments that you want to make in sale and so on. We actually feel that the guidance of 27% is a realistic guidance that, takes, all the things that we can see into account. You ask about the guidance for CapEx, and you are absolutely right. I always say that the 3%, and the low level we are at now is not sustainable.
We've had that situation for a couple of years now. My best guess is that for the next couple of years, we will remain lower than the around 4% that I would see as a more sustainable, long-term CapEx. That is because that's really the impact of initially the transfer of production, where we have had some additional cost or extra capacity that has given us the opportunity to wait and not invest immediately, but having that capacity we can utilize. It is also now the impact of the new Global Operation plan that is working very much with becoming even more efficient in the production.
I think for this year or next year, we are probably going to be below this long-term, more sustainable CapEx. With regards to where we are compared to our peers, it is correct that with the guidance of 27%, we are obviously compared to where they are today and their latest reported numbers, getting a lot closer. I don't know, I will not comment on where I think they might move over the next year or so. This is the relative target, and we will continue to improve to see if we can get to that upper quartile.
Y ou're right, we talked earlier on today about our provisions, I have promised to check how much we can tell you. I can't give you the exact split or the split between how much of our provisions is for Southern Europe and how much of our outstandings are for Southern Europe. I can tell you that when we look at our exposure to Portugal, Ireland, Italy, Greece and Spain, the PIIGS countries, we have approximately 11% of our sales in those countries, we actually have approximately 25% of our outstanding receivables from those countries. That just goes to show that our focus on Southern Europe and our additional provision is a reasonable and a justified provision to make.
Okay, thank you very much.
Our next question comes from the line of Hans Møller. Please go ahead, your line is open.
Good evening, this is Hans Møller with DNB NOR. A couple of questions. First starting off, if it's possible with, or to quantify the positive impact you've had on the gross margin from the decline in the Hungarian forint versus the krone? Secondly, if you have noticed any more competitors to the SenSura Mio after the launch of Softima by B. Braun, and what you think will come ahead there? Finally, also, I wonder how the absence of growth within Wound Care has affected your profitability within that area. Thank you.
Start with the gross margin.
Yes, we can start with the gross margin. In terms of what I will just give you here is, I'll just tell you the sensitivity that we have towards the Hungarian forint, that on an annual basis, with a 10% change, that will impact our EBIT. That's the primarily, obviously, our gross margin, because that's where we have the cost by about DKK 40 million. That gives you the sensitivity that we have had there.
When it comes to B. Braun's Softima and Flexima products, they have launched a one-piece open and one-piece closed bag. It is also a flexible product like the one we have. It should not really be my task to talk about the competitor's products. I would rather like to talk about our own. It is our observation that they have problems with making the adhesive last long enough. There is this old conflict of durability versus flexibility, and I think we have a better solution in the market than the competitors have at this point in time. Could you please repeat the last question you had? Because I can't remember the Wound Care question.
It was just in terms of profitability in Wound Care, given that now are not seeing much growth there, how has that affected profitability?
Okay. L ike we said at an earlier occasion, that we have improved our EBIT margin by 15 percentage points since we started the turnaround. A s you can see, we have been pretty good at dealing with costs. Even though we are not really seeing growth, we don't see a decline in the profitability as far as at this point in time.
That should actually be seen in light of the fact that we have also invested in additional sales.
Sure.
We have staff in Wound Care. We've been able to do that and still have a nice double digit.
Okay, expanding margins, including sales force expansion and slowing top line?
Yes, it's obvious that going forward, we need the top line growth in order to get profitable growth in the business.
Understood. Thank you very much.
Our next question comes from the line of Christoph Gretler. Please go ahead, your line is open.
Yes. Hi, good evening. I have actually still four questions left . The first relates to your global operations plan. I think you mentioned it already a few times on this call. Could you actually elaborate on that a nd what it consists of and what kind of expectation you are having for that plan? I think you highlighted that at the capital market day. Second question relates to your balance sheet. I saw that you've been basically investing in new mortgage bonds. I was wondering what's the background of that?
The third question with respect to the contract manufacturing, I was just wondering strategically, and looking at a couple of years now in your annual report, this contract manufacturing has not grown, and I guess now it's also now in terms of margin, somewhat dilutive. I was wondering how you see the prospect now of that business in the mid to longer run, and how that would impact your business if you were to separate it? The last question was on the new patient discharge . I heard that you actually or know better, your competition is having some problems there. I was wondering, on your end, how you see the development there, and how satisfied you are in this respect. T hat would be all.
Yes, that would be nice if we could answer all of these. It is true that we do invest in NPD gains. That's very important in a business like this. It's also a number which we do not publish because we don't know to what extent our competitors invest in it. It's also for sure that if we publish a number, then we would then they would need to invest less to get the full picture, because then they could only go for the rest of the market than to figure out what the NPD numbers are.
I think it's fair to say that all of the activities or many of the activities that we are doing in this business area is really to increase NPD. This is not something that you can do in a very short while. It's something that takes a long time. You don't make sudden jumps, but you are working on this in the long- term. That's a long-term business that we are part of. That's also why you see the stability in the business as you experience. We will not give you a number. I'm sorry for that. When it comes to the contract manufacturing, I think you're talking about Compeed.
We used to own this business area, and then we sold it off to Johnson & Johnson, and we still do the on contract, the R&D for them, or the innovation for this product line for them, and we also do the manufacturing for them. We cannot measure this business on the same line as we are measuring the other parts of the business. We actually measure it on economic profit. We do make sure that we have growth in economic profit year- by- year, and that we have negotiations on the contract to make sure that we do this.
If we are in a situation where we find that this is diluting the economic profit expansion that we need year- on- year, then we will not keep this business area, that's for sure. We are here to make business, not to produce. When it comes to the GO Plan, it's very clear that we have been spending most of our time on moving out manufacturing for a very long period of time, and now we have a manufacturing footprint, which we are very happy with. Where we have the bulk of our manufacturing out of Hungary, and then the second big piece out of China, and then a little bit, 10% to be specific, in Denmark, and only 5% in outside of these three areas. We are very happy with the footprint.
Now we have a chance to start working more on the footprint that we have now gotten into. There are a number of things that we can work on. I think the most important one is what we call redesign for manufacturing, which is that we don't just have new products in our product line. We actually have a lot of old products, and we are redesigning them to make sure that we get a better gross margin on each of them. There are many things we can do to reduce waste.
There are also many things we can do just by changing materials, so that we don't use materials that are quite as exotic as we used to do when we invented these products years back. We can do still a lot in Lean. Lean is a very big part of the way that we are manufacturing. We can also look at the distribution. One of the people who asked before, asked about our 72-hour de livery service, which, today we have 24 hours in most of the world. A number of our customers are actually happy to have deliveries every week. Some are happy with just three days, and we start to become more specific and advanced in the way that we set up our the way that people pay for our services and also the delivery times that goes with that.
That also means that we can save something on the distribution. T hat's a part of this also. There are a number of different activities there. There are actually a little bit more than what I just mentioned, but those are the most important ones. You also had a question about the balance.
Yes, exactly.
I didn't note it down.
Why we are investing in the mortgage bonds. We have some long-term mortgage loans in our buildings in Denmark. We have chosen to invest in the bonds that match those loans. The reason we have done it that way, instead of just repaying the loans, that when you take mortgage loans in Denmark, you have a relatively steep stamp duty and other fees upfront that you pay, which means that it is actually a cheaper way, so to speak, of repaying them to buy the underlying bonds than to actually repay the loan, in particular, if you want to maintain the option of taking up new loans. That's why we have the mortgage bonds on our balance sheet.
Okay, there is no risk in this sense?
No, because they're actually matching the loans.
The liability. Okay. T hank you. Have a good evening.
You're welcome. Thank you.
Thanks.
Our next question comes from the line of Jacob Hung. Please go ahead. Your line is open.
Good evening, Jacob Hung from S&P Capital IQ, here. I guess most of my questions have been answered. Just a small question on the wound and skincare business. Although it looks like it's particularly weak in Q4, is there any trend in this, or is this a blip, given that the three preceding quarters have been fairly flat year-on-year? Is it possible for you to add a little color to what kind of activities we should be expecting in wound and skincare in the coming year? Just a quick question on the other credit institutions that has gone up a bit. Is that mostly from the Mpathy Medical acquisition or that big change in the balance sheet there? If you could just explain that to me, I'd be very happy. Thank you very much.
Okay. When it comes to Wound Care and skincare, I think it's a little bit the old suspects that we are talking about. Southern Europe is impacting negatively quite a lot, especially Spain. For this year, France have been also very, I would say in a sense, there's been a quite dramatic price decline in France. We actually see underlying that we are not performing that badly in France. Once we see the price decline stops, we actually expect to see a quite positive momentum going forward. We have in Q4, a one-off situation in the U.S., where we, because of this, have very unfavorable numbers to match up against last year.
That is really what is impacting us. A ctually, in the SBU countries, as we call them, the countries that we first started to carve out of the chronic care business and to start investing in with a setup where we have an extra sales channel, in the community to go to market. We continue to see an improvement in the numbers, that is also what makes us quite confident that we will see growth going forward. We remain confident about the wound care business. We think that there are explanations that we also fully understand, which are impacting Q4, relatively .
With regards to the other credit institutions and the increase there, is not as such really related to the Mpathy. This was because we early on in the year, we took a loan from the European Investment Bank that we got on some quite attractive terms. That's the reason for the increase in that part of the balance sheet.
All right. Just a follow-up, Lars. This is , let's call it one-off, a solitary event in the U.S. If we add that back, what number are we then looking for? Now you're specifying this.
I think I cannot be more specific on it. I f you take it as an overall take on this business, we just finished our third year of the turnaround. It's the first year where we started to invest in growth. It's a year where we have seen quite significant downward price pressure in a number of our biggest markets. It's a business where we are very exposed to Europe and where we are seeing a very nice growth outside of Europe, that part is starting to fill more space in that business. If you take all of this together, we see approximately a -1%. With the movement that we see in the business, we do believe that that will bring us into positive territory. I'm not talking about that you will see us coming out with double-digit growth rates in the year that we go into.
All right. Just a quick follow-up, if I may. The R&D cost ratio, obviously, I understand that Q4 was exceptionally low. Should we expect that the level in the coming year will be at the level what we saw the first nine months of this year just closed?
Yes. It's the same question or the same answer as we have been giving you a number of time on this. The way that we are set up today, we have a much more flexible cost base on the R&D. That means that we are also buying more stuff outside of the company. That means that you will see big swings in this business or in this function. You will have quarters where we are spending a lot, you will have quarters where we are spending less. Therefore, it's very hard for us to guide on it. What I can say, what I think is the most important part of this is we know exactly what we're going to launch when, over the next 24 months.
We always do that. I really like the product portfolio that we have in our pipeline. I think it's really strong. It's the best that I can remember that we have ever had.
All right. Thank you very much.
Our next question comes from the line of Carsten Lønborg Madsen. Please go ahead, your line is open.
Hello, it's Klaus Madsen from Handelsbanken. My first question relates to organic growth in Q4, and whether you've seen any destocking at the distributors, due to cyclicality, probably, that is impacting your organic growth overall. I was wondering if you can start to shed some more light on the key initiatives in your attempt to rejuvenate growth in the US? Finally, when looking at the growth in the rest of the world region, it is very low in Q4. Is there any particular reason why some of the strongest growing markets are trailing off in Q4? Just one final one.
Now you in 2010-2011, delivered 6% organic growth with a very modest growth in headcount, just below 2%. Is it possible to repeat that exercise into 2011-2012 and continue to grow with a very under proportionate growth in headcount? Those are my questions.
The headcount's growth number is a very difficult one to predict. I think the best way to answer this is to say that, despite the fact that we today is, we are running a very profitable business, where you would believe that, the financial discipline would be different than what it really is in the company. As it is today, you can rehire blue collar workers. You can also employ blue collar workers, when you are running a factory. You can also rehire salespeople if you run a sales subsidiary, but everybody else also rehires, they have to speak to Lene and myself.
We are keeping a very tight handle on the number of heads, because we do understand fully that heads are driving costs. Having said that, we have invested in any decent growth initiative that we have seen. We have invested quite heavily in the year that we just came out of, in sales reps in Asia. We have invested quite heavily in wound care. When you don't see a higher growth number on the total headcount, it's also due to the fact that many of the positions that we are closing down, we are transferring it from being admin people into being salespeople.
If you take the last three years and look at what happened in Coloplast, you will see that today we have more or less the same number of people that we were three years ago. If you look at the type of people we have on board, we have much more salespeople today than we had at that point in time. In these numbers, you also have to bear in mind that we, of course, had more people on board when we were doing the move out than we have now that we have finished it. Because you need extra people on board when you are training people to receive the machines that we have been moving out of Denmark. That have also impacted positively the number. We don't do any budgets on future headcounts.
We simply discuss it from business case to business case, if we want to employ new people. That's the way that we are running that, and therefore, I'm unable to give you any guidance on what we believe will be the case going forward. We have a more efficient company next year than the company that we have this year. You can see that in the numbers. I would not like to really discuss key initiatives in the U.K. yet, in details.
In the U.S.
Sorry, in the U.S. What did I say?
The U.K.
U.K.? U.S. Sorry, I was in the right direction, but just not final. It was in the U.S., and of course, we have not a very elaborate plan, I would say. We have a very, very simple plan. It does include, amongst other things, the fact that we are stepping up or already have stepped up significantly on getting DPO contracts. It does include the product portfolio that we bring to markets, where we'll be much more competitive in a number of the areas that we are competing in.
Actually, I could maybe also say that it might be that you should understand, because on an earlier occasion, we said that we did not have any DPO contracts on Ostomy Care. We actually do have that now. We are on Ostomy Care with MedAssets and Broadlane, which is one of the biggest DPOs in the U.S. By the way, it's a full line we have there. We are also in Amerinet until 2014 with Wound Care and Skincare. We are on 16 of the member IDNs with Ostomy, Skincare, and Continence Care. We are also getting or have got access to what is called the Yankee Alliance, which is a part of Premier, Inc. We're actually already making progress on that.
Those are just a few of the headlines that we are looking into, but there are a number of things ongoing, and we are very confident with what we see that the management team is doing there. We are even on TV commercials in the U.S. now with our products, which we have never been before. You had a question to Q4 growth rates in the rest of the world. We do actually see that China is growing very well, and as I think I mentioned in my presentation, we have been impacted in Q4 by low numbers in Japan. That is due to some distributor order patterns, because they have been quite erratic this year due to the earthquake. Japan is value-wise, still a big proportion of the Asia or rest of world parts, so therefore they impact the numbers.
Right. Just on destocking, if you in general see, maybe smaller elements of destocking with your distributors throughout the world?
Yes. It's really hard for us to answer that question. I think that if you compare the business we have today to the business we had 5 years ago, we see much more swings in the order patterns with the larger distribution chains than what we used to see. I cannot explain to you why, but that's a fact.
Right. Thank you.
Our next question comes from the line of Veronika Dubajova. Please go ahead. Your line is open.
Yes, good evening, Veronika Dubajova here from Goldman Sachs. Two questions, if I can. One, I was wondering if you could give us an update on how the price negotiations in France are progressing, and whether your fiscal year 2012 guidance assumes any impact from the price reductions scheduled in France as of January 1st. The second one, just, maybe you can talk a little bit about the decision to continue with the buyback, giving your focus on your potential acquisitions. Should we therefore expect the buyback to be more back-end loaded versus front-loaded? Thank you.
Okay, Veronica. The price negotiation in France, not a lot of update to give there. We are obviously following it very closely, doing whatever we can. As we don't expect to see anything in this financial year, it's not included in our guidance. With regards to our buyback, the way that we manage buyback programs, we actually don't do it ourselves. We get it done by a bank through the safe harbor rules, which means that we split it, so we have half of it, half a billion in this financial year and another half billion the next financial year. We go to a bank or get them to bid for that business.
They will actually then do the buyback program for us, which means we don't have any influence on when it is done. We do that because we want to make absolutely certain that we don't end up in situations where anyone can, say that we have done something with insider knowledge or anything like that. That also means that when we started, we don't sort of have the option really of stopping it unless something very dramatic happens.
Okay.
I hope that answers your question.
That's very helpful, thank you for that. Can I just ask a follow-up, maybe on the France pricing question? Have you seen any other countries in the past two or three months where you are worried about what pricing might look like into next year? Is it still fair to assume that your 6% guidance assumes that 1% pricing, negative pricing impact?
It is fair to assume that our guidance includes anything we expect to see on the pricing front, and anything that we have knowledge of is included in that.
Okay. Would that be in the - 1% range?
That would be more or less in that range as well, yes.
Okay. That's helpful. Thank you.
Yes.
Our next question comes from the line of David Adlington. Please go ahead. Your line is open.
Evening, chaps. Thanks. Take a question. Most of them have been asked already. just maybe just on the buyback and then the read-through to your interest line. Firstly, just at what point in terms of your M&A activity, would you feel comfortable increasing that buyback? That's the first question. Secondly, how should we be thinking about the interest line this year?
Right. In terms of the buyback, I assume that I understand your question correctly, at what point would we go out and do more than DKK 1 billion we have announced?
Yes.
In other words, you are asking, at what point, do we say, "Okay, we don't actually expect we'll do any big M&A, and we will then increase the payout, to the shareholders?" The way that we look at it is that, we would, want to, stick to what we have said, for, we said, this financial year, and next. That brings us both in a position where if we see something on the M&A front, that we can actually act.
It also brings us in the situation that the loans that we have maturing in 2013, we have a US private placement maturing there, loans that under other circumstances, that I would be starting to look at renewing already now simply because of the credit market. We are not doing that because we want to be in a position that if credit markets are difficult at that time, then we want to be able to repay them without renewing them. You should see this as being our policy for this year and the next. In terms of interest line, you should continue to see that one decreasing as our net bearing debt decreases.
Included in financial items, obviously, you also have adjustment for fair value of options, which we don't know how which direction that will go, because that depends on the development of the share price, and it's actually a relatively big part of that line. If we disregard that one, then you should see it become gradually more positive.
Cool. Thank you.
Yes. I think that we have spent the time. Operator, I think we will close the meeting by now.
Thank you, ladies and gentlemen. Thank you for your participation. This concludes today's conference, and you may now disconnect your lines. Thank you.