Good day. Welcome to the Coloplast H1 2017/18 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lars Rasmussen, CEO. Please go ahead, sir.
Good afternoon, welcome to our Q2 2017-2018 conference call. My name is Lars Rasmussen. I'm CEO of Coloplast, and I'm joined by CFO Anders Lonning-Skovgaard, and our investor relations team. We will start off with a short presentation by Anders and myself, then we'll open up for questions. Please turn to slide number three. Today, for the fourth consecutive quarter, Coloplast delivered 8% organic growth, and I'm very pleased to see continued strong underlying performance across the business. Based on improved momentum in emerging markets and a revised expectation of the impact of the patent expiry from DKK 100 million to DKK 50 million, we have upgraded our organic growth guidance for the year from around 7% to 7%-8%. Consequently, our guidance in Danish kroner is now around 6% from previously 5%-6%.
Our EBIT margin guidance is unchanged, fixed currency is at 31%-32%, and in DKK at around 31%. In Q2 was a busy quarter in the U.S.. We have just launched SpeediCath Flex Coudé Pro, which is a redesigned version of our flex catheter, specifically developed for the U.S. market. I'm excited to be launching this innovative product into the fastest growing catheter segment in the U.S.. In Ostomy Care, we have secured a sole source contract with Cleveland Clinic. Cleveland Clinic is one of the largest and most well-renowned hospitals in the U.S., known for its focus on clinical excellence. Cleveland Clinic selected Coloplast after conducting a clinical evaluation on the SenSura Mio portfolio that demonstrated leakage reduction.
In Wound Care, according to plan, we have just launched the full Biatain Silicone portfolio in the U.S. for treatment and prevention purposes, which is a key milestone for our U.S. Wound Care strategy. The quarter has also seen organizational changes in the U.S.. We now have new management in place in Chronic Care in the U.S. to lead our organization as we invest to accelerate growth in this important region. Manu Varma joins us from Philips Healthcare in the U.S., where he served as General Manager of Philips' Global Enterprise Telehealth business, with a main focus on the U.S. Ed Veome takes on a new role as VP of Sales for the Chronic Care in North America. In emerging markets, the increase in momentum is broad-based across the region.
We see sustained healthy growth in key markets like China, Russia, and Argentina, as well as improving momentum in the Middle East and Brazil. We have also invested in several smaller markets and that are delivering a healthy return on investments. EBIT in the first half of the year declined by 3%, and our EBIT margin came in at 30%. This development was expected and reflects FX headwinds and the planned initiation of incremental innovation and commercial investments across the business in Q1. I am excited about our plans to build on current momentum and drive long-term growth in revenues and earnings. Today, the board of directors approved an interim dividend of DKK 5 per share, corresponding to a total interim dividend payout of approximately DKK 1 billion. Please turn to slide number four.
Year to date, our revenues grew 8% organically and 5% in Danish kroner, and amounted to DKK 8 billion. The acquisition of Comfort Medical and LL contributed approximately 1 percentage point to reported growth. In Ostomy Care, organic growth was 10%, and growth in Danish kroner was 6%. For Q2, in isolation, organic growth was also 10%. Growth continues to be driven by our SenSura Mio and Brava accessories portfolios in larger markets like the U.K., Germany, and U.S. SenSura Mio Convex continues to contribute strongly to growth. Our Assura Alterna portfolio growth was driven by satisfactory performance in markets like China, Russia, and Argentina. Growth continues to be negatively impacted by the Greek price reform. On a positive note, our distributor has welcomed aboard many new ostomy users after one of our competitors left the market last quarter.
In the initial months of the pre-marketing, we have received positive feedback from healthcare professionals and users who have trialed our new ostomy appliance, SenSura Mio Concave. We have now secured reimbursement and launched the product in seven countries. In Continence Care, organic growth was 9%, and growth in DKK was 7%. For Q2 in isolation, organic growth was 8%. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact versions performed well. In the compact segment, we saw strong growth in the U.S., U.K. and France. We continue to see healthy growth rates in Japan, Australia, and South Korea, where reimbursement for intermittent catheters was introduced one to two years ago. Far, we have seen a limited impact on the expiry of the SpeediCath standards ready-to-use patent.
Growth continues to be negatively impacted by the price reform in Greece. SpeediCath Flex has now been launched in 16 markets and continues to contribute to growth in key markets like the U.K. and Germany. Our Conveen collecting device portfolio posted positive growth due to satisfactory growth in France and emerging markets. Finally, sales growth for Peristeen products remains satisfactory. In Urology Care, organic growth was 10%, and growth in DKK was 4%. For Q2 in isolation, organic growth was 9%. The growth was primarily driven by sales of Titan penile implants in the U.S. We made large investments into the U.S. implant business last year and continue to invest this year. Our Endourology business saw satisfactory growth in especially France and Saudi Arabia. In wound and skincare, organic growth was negative 1%, and growth in DKK was negative 5%.
Organic growth for Wound Care in isolation was 0%. For Q2, organic growth for the total business was 3%, and for Wound Care in isolation, it was 8%. The stronger growth in Q2 in Wound Care was driven by China, which rebounded after a weak Q1, and France, partly due to price reforms in the baseline. The growth in the first half of the year was negatively impacted by price reforms in Wound Care in Greece. This negative development was reinforced by a strong Q1 last year due to inventory build-up at our Greek distributors because of price reforms. On a positive note, the Biatain Silicone portfolio continues to post double-digit growth, driven by Europe and the launch of Biatain Silicone sizes and shapes.
The U.S. skincare markets, skincare business contributed to growth in the quarter and grew in line with market growth of 4%-6%. Contract manufacturing of Complete contributed negative extra growth by DKK 30 million year-to-date, due to inventory reductions in connection with the sale of the Complete brand from Johnson & Johnson to HRA Pharma. We expect a pickup in momentum over the next quarters. Turning to our geographical segments, we saw organic growth of 4% year-to-date and 5% in Q2 in our European markets. The growth continues to be satisfactory across the portfolio of countries, and in particular, in key markets like the U.K. and France. Organic revenue growth in other developed markets was 13% year-to-date, and 8% in Q2. The underlying growth in the U.S. Chronic Care business remains satisfactory, and we continue to take market share.
Growth rates in Japan and Australia remain satisfactory. Growth in the U.S. year-to-date was positively impacted by inventory reductions of DKK 70 million in Q1 last year. Revenue in emerging markets grew organically by 16% year-to-date and 21% in Q2. Markets like China and Argentina canontinued to deliver very satisfactory performance. We also saw high tender activity in Russia and in Brazil. New tenders were opened and delivered on. In addition, we delivered on a tender win in Algeria. Growth year-to-date was negatively impacted by the Greek price reform. As expected, growth in Wound Care in China rebounded in Q2 after a weak start to the year due to hospital budget constraints. With this, I'll now give the word to Anders, and please turn to slide five.
Thank you, Lars, and good afternoon, everyone. Reported revenue increased by DKK 354 million, or 5% compared to the same period last year. Most of the growth was driven by organic growth, which contributed DKK 598 million, or 8% to reported revenue. Acquisitions contributed DKK 82 million, or 1 percentage point, to reported revenue. Foreign exchange rate had a significant negative impact of DKK 326 million, or 4 percentage point, on reported revenue, primarily due to the depreciation of the U.S. dollar and dollar-related currencies against the Danish kroner. Please turn to slide 6. Gross profit was up by 3% to around DKK 5.4 billion. This equals a gross margin of 67%, compared to 68% last year.
FX had a significant negative impact of 60 basis points on the gross margin. In constant currencies, the gross margin was 68%, compared to 68% last year. The gross margin was positively impacted by improvements in production efficiency at our volume sites and the relocation of SenSura Mio to Hungary. The gross margin was negatively impacted by product mix due to the launch of new products, where the production economy is not yet fully optimized. Increased depreciation levels also had a negative impact on the gross margin. In Q2, DKK 5 million in restructuring costs have been included, related to the reduction of production employees in Denmark. The distribution to sales ratio came in at 29%, compared to 28% last year.
The 10% increase is in line with our long-term guidance of increased investments to drive further growth over the next couple of years. The clear majority of new incremental investment cases for this financial year were approved in Q1 across our business areas and regions. Overall, all our new investments are on track, and we can already see, in particular, investments into emerging markets translating into accelerated growth. The admin to sales ratio came in at 4% of sales, on par with the recent trend. The R&D to sales ratio came in at 4% of sales, in line with last year. The 11% increase in R&D costs reflects a higher general activity level. Other operating income and expenses amounted to DKK 29 million, compared to DKK 5 million last year.
The increase was mainly due to a non-recurring income from a patent settlement in Urology Care in Q1. Overall, this resulted in an increase in operating profit in fixed currencies of 4% and a decline of 3% in actual currencies, corresponding to an EBIT margin of 31% in fixed currencies and 30% in actual currencies. Operating cash flow amounted to DKK 1.4 billion, compared with DKK 558 million last year. The increase is primarily explained by higher MS payments last year compared to this year. Total MS payments year-to-date amount to DKK 0.4 billion. Total MS payments today now amount to DKK 4.6 billion. Cash flow from investing activities was impacted by the site expansion in Nyírbátor in Hungary and capacity expansion in machines to produce new and existing products.
Investments in intangible assets and property, plant, and equipment amounted to DKK 327 million year to date, up DKK 65 million compared to last year. Adjusted for payments made in connection with the mesh litigation and acquisitions, including Comfort Medical and Lilial, the free cash flow amount to approximately DKK 1.4 billion, compared to DKK 1.3 billion last year. The increase is mainly due to improved working capital management. Our cash conversion in Q2, calculated as twelve-month trailing average, was 101%. With respect to the mesh litigation in the U.S., we have settled more than 95% of the known cases. We still view the provision as sufficient. We are in the final phase of the mesh litigation.
In 2017/18, we now expect to pay out DKK 700 million of the remaining DKK 1 billion of the total DKK 5.25 billion provision. Finally, the first half of the approved share buyback program of, in total, DKK 1 billion was initiated in the second quarter and is on track. Please turn to slide 7. Our organic revenue guidance for 2017/18 is now an organic growth of 7%-8%. Our reported growth in Danish kroner is now expected to be around 6% from previously 5%-6%. Acquisitions are expected to contribute approximately 1.3 percentage point to reported growth.
As Lars mentioned earlier, we have upgraded our full year guidance for organic and reported growth due to a broad-based improvement in momentum in emerging markets. We have reduced the expected impact from the patent expiry from around DKK 100 million to around DKK 50 million. We continue to expect a negative pricing pressure of more than 1 percentage point on our top line due to healthcare reforms in Greece. In October, price cuts of around 25% were implemented for Ostomy Care, Continence Care, and Wound Care at the distributor level. Since then, we have appealed to the Ministry of Health, but the actual reform outcome and impact remains uncertain. We continue to assume an impact of DKK 100 million in our guidance. In Q2, we sold products to our distributor to meet market demand.
We have lowered our prices to our distributor, the final prices are still undetermined. We still expect Wound Care to deliver full year growth in line with market growth of 2%-4%. Due to timing effects, the complete contract manufacturing business were negatively impacted by DKK 30 million in the first half of the year. The growth in the contract manufacturing is expected to rebound in the second half of the year. The guidance in Danish kroner is significantly impacted by the depreciation of the U.S. dollar, as well as the dollar-related currencies against the Danish kroner. The currency impact is based on spot rates as of April 30th. For 2017-2018, we continue to expect an EBIT margin of 31%-32% in constant currencies and around 31% in Danish kroner.
The EBIT margin guidance includes the impact of our assumptions around the SpeediCath patent expiry and healthcare reforms in Greece, as well as acquisitions. Our guidance assumes a proportionally higher absolute EBIT in the second half of the year compared to the first half. This will be a function of higher nominal sales and leverage effects on fixed costs, as well as broadly stable trends on our operating expenses. Hence, the EBIT margin in fixed currencies has bottomed out in Q2 and will improve over the next two quarters. Higher growth from our new product launches still means pressure on the gross margin, but as previously communicated, we continue to relocate manufacturing out of Denmark to Hungary, and we are on track to reduce the number of production workers in Denmark by additional 100 people in 2017-2018.
We expect the benefits to be absorbed by the cost of relocation and restructuring cost of approximately DKK 20 million in 2017-2018. Of the DKK 20 million, DKK 5 million have been included in Q2. We expect high single-digit wage inflation in Hungary in 2017-2018. We also expect depreciations to increase at the same level as last year because of the last couple of years' increase in CapEx. Overall, our expectation is that the gross margin in fixed currencies will be in line with last year at around 68%. We now expect our net financials to end the financial year 2017-2018 at around DKK 0 million, primarily due to hedging gains on the U.S. dollar, offset by expected currency translation losses on Argentinian pesos and Brazilian real.
CapEx guidance for 2017-2018 is expected to be around DKK 700 million and is driven by investments in more capacity for new and existing products, as well as the Nyírbátor expansion, which is expected to be operational during Q3. A key event in the quarter was the decision to locate our next volume factories in Costa Rica. We have purchased land, which is included in this year's CapEx, and we expect the first volume factory to be operational by the end of 2020. Finally, our effective tax rate is expected to be around 23%.
This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question. Our first question comes from Martin Parkhøi from Danske Bank.
Hello, Martin Parkhøi at Danske Bank. I'll just ask two questions, maybe three. Firstly, can you elaborate a little bit more on the Cleveland Clinic that you have won? Of course, I guess this will have . .significant positive impact on your new patient charge in U.S., but will it also demand some additional investments in the beginning in order to set up programs to make sure that these patients actually also stay on Coloplast after they have left the clinic? When can you give comment on when we should see a financial impact from this? Secondly, on the emerging market growth, which picked up quite nicely in the second quarter.
How much of that pick up do you ascribe to the investments you have done in new initiatives? Could we even expect, like, acceleration in the second half?
The Cleveland Clinic is a win that we are really happy with, because Cleveland Clinic is kind of that's one of the poster, institutions in the US, and they have, around 5% of all ostomy surgeries in the U.S.. It's. We are particularly proud of it because they decided to do a clinical trial to figure out which company to go with. The combination of our products and our services meant that we basically were reducing readmission to the hospitals. Based on that, we ended up in a situation where we are now a sole source for Cleveland Clinic, and we are not part of the program before in Cleveland Clinic.
We think that's a major win. We also, in a sense, feel that that is a kind of showing showing to other institutions, what kind of quality we are having, because it's not any organization that have chosen to do this move. That part of it, we are quite happy with. Now, we are going to implement, of course, and that means that for every single hospital, we have to train the staff. We have to make sure that our products are in the computers across the board. We also have to make sure that our products are available all over the place.
In that sense, it's part of the long-term plan for the U.S.. We are already growing double digits in the U.S.. This is just underpinning that. I can't say how much it's going to kick in at what point in time. This is significant to us for many different reasons, as I think that you'll appreciate. On the emerging market side, we talked about the investments that we have done, and we have done that quite consistently over the last quarters. We see, as I also mentioned earlier on, we see this is broad-based.
It's, there's a number of countries where we have invested, and we really see that we get effect from the investments that we have done. We have said early on that we are expecting high growth out of the emerging markets going forward. That is in the level of of 15%-20% at least. That is what we are seeing here. We, of course, China means a lot, Russia means a lot, Argentina also, as I mentioned, means a lot in this area. We also have a number of smaller markets that we invested in that we now see impact from.
Mind you, it's many different sources for the sales growth, but we have really good momentum also in emerging markets.
Just a little follow-up, and just because I'm a little bit curious. The clinical documentation that Cleveland has done comparing your products with the competitors, is this something that you are allowed to share and use?
No, it's the evaluation. It is their evaluation. They have shared it with us. They have shared why it is that they have chosen to go sole source with us, but it's not our property.
Okay. Thank you.
All right.
Our next question comes from Annette Lykke, from Handelsbanken.
Thank you so much. I have two questions, one on the new products and another one on China. On the new products, could you maybe, at this stage, elaborate a little bit more than you did last time on how much you see Concave ostomy bags to be of the market and how much of sales you will see for, and now you have launched in seven different markets? Then also on new products in respect to your Compeed Flex Coudé, and congrats with the, with that approval. How much of market will this be? I'm trying to sort of figure out if these two new products are capable of moving the needle as such. In respect to China.
Can we take them first, Annette, and then come back to China?
Yes.
On Concave, now we have launched in seven markets, and we have been able to get on average, a 50% uplift in the price compared to what we have on the standard products. We have said that we think that this new category will have the opportunity to grow to the same size as Convex is, and that is approximately 30% of the value of the market. We had a very large launch event in Denmark only a couple of weeks ago, where we had more than 800 people gathered here who are inside of Ostomy Care.
It's definitely my impression after that our assumptions that this have the potential to become at least same size as Convex, that's for real. This is a problem for a lot of people, and the product really works. We think that that's definitely doable. It's quite. It's many years ago since we established a new category in the market, and therefore, I don't know how fast the uptick will be. I don't have a history sort of to back any quotes on that up. But what we see is a very large interest.
We also see a lot of the people who try it out, who basically swap, whether they are from using Coloplast products or competitor products, they're interested in getting on this new product. We are quite positive on that. On the new Flex Coude, it's today, we have a 20% share of this category, and the Flex Coude Pro, the dealers are very enthusiastic about this. It's also because it's a financial incentive, of course, for them to go for that. It's 40% of the total market, so it's a very meaningful category in the U.S. to us.
I think, and also, if you look at it's growing by 10%-15% per year, as we see today. The category. Of course, we did not have really in the numbers for the first year, we don't have a lot of Concave sales because we just launched, and we didn't have any Coudé sales at all. The strong growth that we had in the 1st half will then be helped in the 2nd half by the fact that we have these two categories, even underpinning the strong growth that we're having. We feel that we're in a very strong position.
Okay. Just very shortly on China.
Mm-hmm.
It's just that, as you alluded to, Q1 was a weak or soft quarter for Wound Care in China.
Yeah.
Now, it looks much better.
Yeah.
How stable is this? I mean, it's been up and down, I think, for quite some quarters now. What's your view on that Lars?
When we talk about China and stability, I think that we have to distinguish between the two different product areas that we have there. I think that we have a very, very strong and stable growth on Ostomy Care, and we have a market position to die for. It's we are the market in China when it comes to Ostomy Care. Where we see fluctuations is in Wound Care. The difference between these two areas is that on Ostomy Care, it's a community business by far, and Wound Care is a hospital business for us in China. That's how we are driving it.
What we saw last quarter was that there was spend limitations in the hospitals, so they basically did not purchase in the last period up to New Year. They started purchase again in our first quarter, so after January, and that is what we see coming back now. It is a bit more volatile in that sense, and we have less visibility on it than what we have on Ostomy Care for good reasons. As we are coming back as we're also expecting when we talked last time.
Okay. Thank you very much.
Our next question comes from Sebastian Walker, from UBS.
Hi there, Sebastian Walker from UBS. Two questions, if I could. One on the EBIT margin guidance. You've delivered around 30% in the first half. What gives you confidence that you can regain that in H2? I mean, it's quite an aggressive step up there. Then the second question is on the rollouts of Comfort. I was wondering if we could get an update there. How's that coming along? Do you feel that you'll need to make further acquisitions in the U.S. distribution? Thanks very much.
In terms of the EBIT margin, I expect a higher absolute EBIT margin in the second half, and that is due to higher sales in the second half. That will give me a leverage effect on the fixed cost, and that will be both on the production side, but also on the distribution and admin. The investments we have initiated, we have already allocated that from our first quarter, and I don't expect that we will allocate further investments in the second half. Overall, I expect that our EBIT in the second half will be, absolute EBIT will be, higher than in the first half.
On the U.S. side, you asked specifically about Comfort, I'd like to maybe take it one click up and then talk a little bit about what it is that we are doing in the U.S. because, as we have also explained in our release, and .as I also mentioned during the opening, we are strengthening our organization in the U.S.. We do that because we are stepping up the game in the U.S. quite significantly and especially on the service side.
The reason why we were buying ourselves into Comfort was to get much closer to the payers and to get a much better fix on what is how does the market works seen from a dealer point of view. We think that we will be in a position and what we try to drive ourselves into is a position where we can offer a significantly stronger service in the U.S. than what we have today. That is why Manu Varma have joined the company. He comes with a lot of experience with payers from what the work that he has been doing with Philips Healthcare in the U.S..
He will be leading the company in the U.S. going forward, taking us from being a very strong supplier of products in the market to also be a very strong supplier of services in the market. That is what we are investing for. We don't have any plans at this point in time to further invest in dealers in the U.S., but we have plans to invest significantly to step up our service offering in the U.S..
Very clear. Thanks very much.
Our next question comes from Veronika Dubajova from Goldman Sachs.
Good afternoon, gentlemen. Thank you for taking my questions. I have two, please. my first one is actually on the gross margin, Anders. If I look now, we struggled around this, or we've been stuck around the 68% for quite a long time. I know there are moving parts, but I'm just wondering, do you still believe in the algorithm that you've communicated a while ago that, you know, you should be able to get roughly 50 basis points of gross margin expansion every year? I've just not seen you deliver that. I know you're having a great problem, which is your new products are growing very fast and driving growth, but I'm just wondering what your confidence is on the gross margin progression, not just this year, but beyond it into the medium term.
My second question is congratulations on the very strong organic revenue growth. If I go back to November, when you revised your guidance, you were talking about this 100 to 200 basis points of incremental spend. It looks like you've only about spent 100 basis points. You've already seen growth accelerate to 8%. I'm wondering why you're not maybe going towards the 200 basis points of spend and seeing even more growth. Is it that you lack the capacity, or is that maybe something that we'll see next year? Thank you.
Okay. Thanks, Veronika. On the gross margin, yes, as you know, we are impacted negatively on the gross margin due to the mix because we are having higher growth on the new launches. We are, however, working on optimizing our production further. As you know, we have launched our innovation excellence program in Denmark, where we are working on bringing down the number of production FTEs from 700 to 400 by the end of this year, and we are on track of doing that. Secondly, we have initiated our Global Operations, the Plan 4, which will drive further EBIT margin improvements of up to 150 basis points in 2021.
That program will includes a number of activities, and one activity is that we are going to consolidate our innovation factories in Denmark. Secondly, we are also believing that we will improve our efficiency in our volume sites, especially in Hungary. Thirdly, we are also working on optimizing our procurement of raw material even further. I am expecting that we are going to deliver on that plan by 2021, and the majority of that impact will improve our gross margin. As we have been talking about over the last couple of years, we are negatively impacted by the launches of new products. We are on track with the programs we are working on, both for this year and also for the coming years.
If you look at what we are spending on growing more, Veronika, it's what we're saying is that it's 1%-2% of sales that we want to spend, and not just 1%. If you take what we are spending on R&D, and then also what we do on distribution and sales, then we are at that level. It's not only investing in new sales people and in digitalizing the service experience and so on, it is also on innovation, we have stepped up quite considerably on innovation.
As we have spoken about, well, we do a lot of great launches right now, but we have a pipeline of launches coming up, which is, you know, that comes with products that can do significantly more than the products that exist in the market today, and we are investing in that as we are speaking. That is also part of what we are investing in.
Okay, that's very clear. Do you see scope, because if you were to invest more, I'm sure you have lots of projects that you have identified. Is the limiting factor, the PNL, or is the limiting factor just management capacity and capability at this stage?
it's, I, then I would have to say it's management capacity because of course, you need to have a great local management, but you also need to be able to follow up on all of the investments that we're doing. It's not one place that we do it's more places. For example, if you look at the U.S. right now, it's, I think, it's a very good example to use today. then we have basically invested in new competencies with Manu coming on board.
And we also expect that with Manu in the U.S., we will also be able to launch new investment initiatives in the U.S. that we could not launch before, basically, because we have a different competency level, and that is what we're building in that part of the organization. In that sense, you need to be ready because otherwise you will just be spending the money without getting the results that you desire. I think that we have found a reasonable balance. We are investing more, and I think that's very obvious when you look at the numbers, and we are bottoming out this year, as Anders is saying. We're also getting already now more growth.
I think it's a reasonable balance that we are getting.
Okay, that's very clear. A quick follow-up for Anders on the gross margin. Just to recap what you said, you are confident in your ability to improve gross margin on a 3-year view towards the 70% mark? I guess, when would we see the inflection? Is it next year, or is it closer to 2021?
What I'm saying is that, with the plans that we have initiated, Innovation Excellence One, and now the Global Operations Plan 4, I expect that we will see an improvement from that over the years, and it will start with around 100 basis points in 1920, and then 150 basis points in 2021. That is what we are focusing on.
Very clear. Thank you both very much.
Our next question comes from Alex Gibson, from Morgan Stanley.
Hi, thanks for taking the question. I have two, please. The first one on the SpeediCath patent expiry. For the decrease in the anticipated impact from that, is that an extrapolation of the impact you've seen so far, or is that an anticipation for the impact for the rest of the year? Just some color around what you're seeing in the market to date would be useful. I have a second after.
Okay. we don't see much activity in the market. Of course, we are very much following what what is being launched. we had expected that there would be products ready from the date that the patent was expiring, and we have not seen that, and that is then we say, okay, the first half year, the DKK 50 million that we have set aside for that, we have not seen. Of course, we keep it for the second half year. Let's see how that goes.
Okay. Yeah, very clear. The second one is on Ostomy growth in the quarter. It was a nice improvement in comp adjusted growth. Has any of the improvement that you've seen been driven by competitive wins against those who have had supply disruptions? As a whole, for the year, do you think it's plausible to achieve double-digit growth for Ostomy in 2018?
It's very hard to answer actually both of the questions that you have there, because we don't know when we sell products, if it's because of back orders or quality issues with one of our competitors. You tend to know your own issues on delivery and quality, and so on, but you never hear about it from the competitors, unless you are in a situation where something is being shut down. There's a complete lack of supply from one of the competitors.
I couldn't answer that because we hear more about it when the competitors are reporting what kind of issues they have than what we see ourselves in the market or what we hear, at least, in the market. I would be very careful trying to answer the last part of your question because then suddenly I have given a guidance for Ostomy Care for the rest of the year. We have changed our guidance, but that's for the group.
Okay, sure. If I could just follow up on the first one. You have the DKK 50 million impact for the remainder of the year. Are you gonna keep that DKK 100 million in totality just rolling forward, until you're certain that there's no products either coming out there to Compeed? For example, could we see that roll into 2019?
No, I don't expect that.
Okay. Thank you.
Our next question comes from Yi-Dan Wang, from Deutsche Bank.
Oh, thank you very much. very good set of numbers. What took you so long?
Yeah, now you say it.
We hope for better numbers to come still, anyway. Just a question on the EBIT margin and the sensitivity of that to your top line. I mean, you said earlier on that the 100 to 200 basis points of investment is a good balance, but that leaves us with a question that should the top line do better than what you anticipate, what we should expect to see for your EBIT margin, if you don't have the management capacity to invest that? The second question is on the Wound Care business. Clearly, the other three divisions are doing extremely well, but Wound Care continues to fall short of it.
Your target for Wound Care to double its market share, initially, I think by 2020, but then it got pushed out by a couple of years.
Mm-hmm.
Even the new timeline seems unachievable at this stage, given what we have seen in that you deliver. What are your thoughts there? When could we expect some new targets, some more realistic targets being issued for that division? Yes, we'll start with those. Thank you.
I actually think it's a very difficult question that you start out with on the EBIT margin, where it's hard to sort of give you a one-liner. What we said when we changed our guidance, our long-term guidance, was that we felt that we were sitting in a situation where we were saying, "No, thank you," to very good investment opportunities, things that would really make us or put us in a position where we were taking market shares at a higher rate. We had some EBIT margin targets that were maybe too hard for the innovativeness of the company. With the current guidance, I think we have a good balance.
We are in a position where we are able to fund the initiatives that we have at the table, and where we think it's, there's a very good balance on what we invest and what we get out of it. This is, of course, we learn every day, and what we think now is that our EBIT margin have bottomed out, and we are also able to grow more. Right as we speak, we are investing in the next set of new products that we think will move the needle even more than what the products are that we have right now. We think this is sufficient.
It's hard for me to give you a different answer to what you asked about, because we have a good balance right now, and I think that we are delivering on the investments that we are doing. There's a very good payback on what we are doing already now. As long as we see that, we are happy, and we will continue to work within this frame. I don't know if that answers what you were after, but for us, it's all about that we're able to really go for the opportunities that we think are, that you would always go for if you own the company.
Right. Basically what I'm saying is, if the framework that you've built, is that from memory, that wasn't just for this year, right? That was going up to 2020-
No, that's right.
A medium term.
That's correct. That's correct, yes.
All the new products, like the Concave product, the Flex product that you're launching, the investments required for those are incorporated in this 100-200 basis points.
Yes
of investment that you plan to make.
Yes.
Looking at your numbers now.
Also, what, you know, we are having this whole new portfolio where you haven't seen much, but maybe we'll talk a little bit more about it at the Capital Market Day. You know, developing that portfolio and making that ready to start launching from 2020, that is also in what we're investing right now.
Right. Right, exactly. Looking at the numbers that you've printed and, you know, fast-forward a few quarters, you could end up with top line that's growing, maybe, you know, somewhat faster than what you've guided for. If you don't have the need to invest more, should we expect to see that margin fall through, is the question?
Yeah. You're right. If we don't invest more, of course, the margin will go up. We have, with the guidance we have, we have the opportunity to invest in viable business cases that are being brought forward to us.
Right. If your top line goes 7%-9% and you exceed 9%, 7%-9%-
We are very happy, and we have some very different issues to discuss.
Okay. We'll discuss then. Wound Care.
On Wound Care, first of all, I think it's, please allow me to say that we actually do have a very nice growth in Wound Care in this quarter. What, we, you know, we report a number of things together when we report, and we also had minus DKK 30 million from Compeed in the numbers. If you look at Wound Care in isolation, it is actually growing 7%-8%. It's coming back, and it is China that is helping it up. You know, we have this healthcare reform in Greece that have hit us massively because we have such a big market share in Greece on this.
The numbers that we are coming up with are very good. I think that what have also tricked us a little bit from when we set the original targets is that we see everybody are reporting weak numbers, so the market growth is somewhat lower than what we anticipated when we set out the numbers. You are right. Compared to what we want to do, we are somewhat behind our plan. We will talk in details about that when we meet at the Capital Market Day.
Okay, great. Thank you.
Having said that, actually, I'd like to then add to it that we see quite nice growth across the board. We also see that our pipeline is much better than it was last time we had a Capital Market Day. I think that we are in a better position than for a very long time in Wound Care.
I was gonna say, you haven't launched a significant new wound care product for a while, so more to come.
We just launched the sizes and shapes and Silicone in the U.S..
Okay.
Our next question comes from Carsten Madsen, from SEB.
Yeah, thank you very much. Two questions. Firstly, in the U.S. market, where you now launched the Cuday Pro product, what will actually happen with the installed base, if you can say, on the old Cuday products? You say it will be replaced, but is this something where patients just will switch? Do you have the patients' names, et cetera?
Yeah.
So-
Yeah
... just to understand where you are running stuff.
The current Flex p.roduct will be phased out.
That one will be phased out.
In, yeah, in the U.S..
In the U.S., and patients will be put on the new one.
Yes.
Yes. Thanks. On the GOP4, you mentioned all the costs that you have included, that will also be, all the costs you'll take, and you'll pay for new development and new products, et cetera, and still expand the EBIT margin by 100 to 150 basis points. How about the contribution from these, all these new higher priced products that you have? Is it also a prerequisite that these products, perform well, or is that simply icing on the cake?
What we have been doing and is still doing, we are moving machines from Denmark to Hungary. We have the most recently completed the move out of our convex machines. The next phase is to move the concave machines also to Hungary. I am expecting that the production economy on those product categories will improve when they are in Hungary, then thereby also contribute to the targets we have in our Global Operations Plan 4.
Yeah, you say the Plan 4 is mainly cost exercise, but if you also have a better mix in terms of higher price products being launched, then that will contribute maybe even more.
No, no. The way I see it, the way we see it is that the Global Operations Plan 4, when that is completed, in 2021, it will add around these 150 basis points, as I talked to earlier. That's how I see it.
Are you talking about the clinical performance programme? When we are launching all of the new products.
Yes.
the products that have a significantly different per-performance than what we see today? you know, then we are out in, on the other side of 2020. We are launching in 2020, we think the first ones of them.
Okay.
That's of course, products where we are going for is, they have a much better clinical performance than what we have today, and we are going for a higher price. It's the same as we see now with the Concave, that we have to go market by market and establish a category for them, because these products will have their own separate category. That's the only way that they will get a place in the market where they, there will be a payment for the quality that the products are having. That's what we go for there. Of course, we do this in order to make sure that we create more value for the patients, but at the same point in time, we also try to create more value for us.
Yeah, I was thinking about the GoodDay Pro, the Convex and the Concave.
They are not at all. That is not the clinical performance programme. These are great products, what we talk about with the clinical performance programme, those are a completely different level of products that can do significantly different things and at a much higher level than what you see today.
Okay, thanks.
This is just a teaser.
Quite a large scale teaser.
Our next question.
Thank you.
Scott Bardo from Berenberg.
Yeah, thanks very much for taking my questions. First question, please, this relates to the historic growth of Coloplast, which has been excellent, but I think around 7% or so organic growth for the last 12 years. The question really is that: Is it too early to say that your investments are accelerating growth, given that the 8% organic growth in H1 was on the back of 6% organic growth in the prior year? I just wonder if that's more normalization effect or actually some evidence of some step change, if you like, in your growth profile. If you could just sort of share some thoughts there. Also, just a sort of technical question on drop through from margin.
I think there's always been excellent operational leverage in the business, and the fact that you've taken a slightly more optimistic top line for the full year, not changed your investment program or your gross margin expectations, bit confused why you haven't changed your EBIT margin expectation for the full year. Perhaps, again, if you could just talk through some of the moving parts there. Last question, please, just on SpeediCath, and just following up from a previous question, which I didn't quite understand. If the expectation was that competition will come in and will be impactful to your business to some degree, but that competition hasn't come in yet, what, why is it not that the can is being kicked down the road to another year, if that competition, you know, eventually materializes? Thanks a lot.
I think I'll take number one and number three of your questions. We now have eight, four quarters with 8% growth. That I don't think that means that we automatically will get 8% in the coming quarters, not at all. I think that we are fighting hard for every inch of the land that we are gaining, because we are gaining in the current environment, of course. I think that I think that we are having a strong product offering and also a stronger service offering than what we have had in the last few years.
We have been able to get 8% growth in the first half year, and as you said, in the first quarter, we had a positive impact from E-commerce in the U.S. due to stock issues the year before. We are, however, going into the next quarters with Concave, which is having a very nice reception in the market, and also with a better product offering than we have had for a very long time in the U.S.. We also have launched the sizes and shapes on Silicone in the U.S.. In Wound Care, we also launched the pressure injury prevention products in the U.S. within Wound Care.
That's, we have all of the investments that we have basically just kicked off that will also help us. I think that we have a number of initiatives that makes me feel good about the growth that we are looking into. We are guiding for the rest of the year and not for the longer term, but our ambition is to grow at the higher end of the 7%-9% in this planning period. That's what we are going for. That's what we're investing for.
Mm-hmm. Yeah.
When it comes to SpeediCath, the reason why we are setting aside an amount for this year was based on the fact that we have never been in this situation where we have been discussing for a very long time a patent expiration. We have patents that expires more or less every day. We have so many patents in the company. There are so many of our products that lose their patent protection year-over-year, and it's not been a big debate, but it's been a big debate on this one. Yes, SpeediCath standard is a very old product in our portfolio, and we launched a number of upgrades since then. We were uncertain.
We were unable to answer on the questions of what would the impact be, because we have no history on it, and we've been discussing this forth and back. Of course, everybody just today understands that there's no price differential of a patented product and a not patented product. We thought that it was prudent to flag something that was the worst-case scenario that we could come up with.
There will of course be competition going forward like there's always been, and but we just thought it was the natural thing to have it for the first year, and we don't think that we should carry it forward, because why should we not then carry forward, a sum when somebody comes with a competitor to concave or not, a new convex products and so on? We thought it would blur the picture, so this was a one-off for us. That was how we thought about it. The drop through on the margin, Anders?
In relation to our margin guidance for the year, for the first half, we delivered a margin of 31% in fixed currencies. Our guidance for the year is between 31%-32%. The change of the top-line guidance from 7%-8% is not, you can say, significant enough in order for me to change also our EBIT margin guidance. We still believe that we will, or we still expect to deliver an EBIT margin guidance in the level of 31%-32% in fixed currencies and in reported currency and EBIT margin of around 31%.
Understood. Thanks very much for the description, Lars. I guess the only sort of comeback from my side would be the difference perhaps is that SpeediCath is probably the largest single product, standard SpeediCath in the company, which is why I think there's been so much focus on that particular expiry. I just wondered whether that situation was different from some of the expiries you see in the other portfolio, which is why I asked the question. Maybe I'll just bolt one on to that follow-up.
Yeah, yeah, sure.
Very good news, very good news with the Cleveland Clinic clearly showing some good momentum and good quality of your offering and products. I just wanted to understand better, does this, in your opinion, automatically default you to a 5 percentage points more of the U.S. ostomy market? Are you still going to face the same legacy issues of having lots of forced conversion outside of new patient discharge in the U.S.? Can we talk through that?
Yeah
a little bit more, please?
Yeah. Yes. There's, there is no doubt that the market in the U.S. is more financially driven than clinically driven. Therefore, the, it's very important to get new patient discharges because you, of course, you also in that setting, have an opportunity to also work with dealers and dealer relationship between hospital and patient and the dealer. That is, it's not like in Europe, where if you, if you are the clinical choice, then you also very often become the choice afterwards. We have to be able to play in the whole value chain. In, in that sense, nothing has changed.
That is also why we want to step up our offering, because there is no doubt that being a healthcare consumer in the U.S. is at least when you're inside of Ostomy and Continence Care, it's tricky, and it's a place where people, they could actually. We can offer them a better service, and that's what we're investing to give them. We have to work on it. It's not just coming automatically. We don't anticipate that at all.
Great. Thanks very much, guys.
Thanks. I think we should take the last question if we are past the hour now.
Our last question comes from Niels Leth from Carnegie.
Good afternoon, two questions. Could you just briefly comment on the sales contribution from IncoCare, which you recently acquired? Also just perhaps comment on how sales is progressing regarding the Isiris Urology product. Thank you.
I think that what you should say about IncoCare is that it's negligible. I can't even say it. You should not even think about it. Yeah, it's so small that it's not, it's not in that sense, something that means anything to the group. It's more local play. And we think it's a high quality organization that we would like to build on, and that helps us give a little bit better numbers. I think that it's maybe more visible than what Lilial is doing because we are quite happy with that acquisition that we did in France. It gives us access to the payers.
It gives us an opportunity to speak to the other dealers in the association and thereby also bring to the table the opinions and perspectives from another manufacturer. I think that that is that's probably more relevant for us to speak about. We are very happy with the implementation and the speed of that we're seeing. With regard to Isiris, things are going according to plan. Please mind you that we are addressing sort of a niche segment with this product.
There is demand for these type of products. We are progressing quite well on it.
Okay, thank you. Could you just talk about how the new distribution companies, Comfort Medical, Lilial, I presume that all of these assets are growing well above the group average?
Yeah, that's correct. It's, they are growing at a higher speed, but with a lower profitability. For us, the most important thing about it is that we get a much stronger understanding of how we tailor our service offerings so that it becomes really relevant to both other dealers, but also to the patients. That is, that setup is not a uniform setup across the globe. It is different from the U.S. to France and to Germany and to the U.K., by the way. In that sense, we need to be present in the chain to really have this in-depth understanding.
I think we have that by now, or getting that by now.
Okay, thank you.
Thank you very much. Thank you very much, everybody, and we're looking forward to seeing you in the coming weeks. Have a great evening.
This concludes today's call. Thank you for your participation. You may now disconnect.