Good day, welcome to the Q3 Report 2016/2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Lars Rasmussen, CEO. Please go ahead.
Thank you very much. Good afternoon, welcome to our Q3 2016-2017 conference call. My name is Lars Rasmussen. I'm CEO of Coloplast. I have with me today CFO Anders Lønning-Skovgaard, and our investor relations team. We will start out with the usual presentation by Anders and myself. We will open up for questions. Please turn to slide number three. In Q3, we delivered a solid 8% organic growth, which I'm pleased with.
The growth was driven by good performance in many of our markets, a positive impact from new products launches, including SenSura Mio Convex, SpeediCath Flex, and Brava Protective Seal. In Q3, the U.S . reported double-digit growth within chronic care. This quarter, Coloplast won a single source contract within ostomy care with one of the largest home health organizations in the U.S.
We are also experiencing tailwind from market share gains in the U.S. urology business. With respect to the mesh litigation, further progress was made this summer when Judge Goodwin issued a court order stating that plaintiffs may no longer file claims against Coloplast in the ongoing MDL. This is a further step towards closure and full resolution of the MDL. Performance in wound and skin care was disappointing due to a large negative impact from pricing reforms in Greece and France, which reduced our wound care growth from in Q3 by 6 percentage points.
In addition, the rebound in skin care did not materialize to the expected level due to contract losses in the U.S. On a positive note, I am pleased to see continued market share gains in Europe and double-digit growth in the Chinese wound care business again. Our reported revenue in the third quarter has been reduced by DKK 90 million due to a non-recurring revenue adjustment related to an incorrectly managed contract with the U.S . Veterans Affairs from 2009. Coloplast have proactively reached out to Veterans Affairs to resolve the matter. We are now in a dialogue to determine the final amount.
Our contract with Veterans Affairs has been renewed. We have strengthened our internal processes and organization around contract compliance. Together with an external audit company, we have been through all of our U.S. contracts to ensure that they have been, and are, correctly managed. Year to date, we delivered 7% organic growth, which is in line with our expectations.
Our EBIT increased 9% in fixed currencies before the one-off adjustment for Veterans Affairs, and our EBIT margin in fixed currencies came at 33% for the first nine months before the one-off adjustments for Veterans Affairs. Our organic revenue guidance for 2016-2017 is unchanged at 7%-8%. We expect to deliver in the lower end of the range, mainly due to weaker performance in wound and skin care. The organic revenue guidance is not impacted by the one-off adjustment related to the U.S. Veterans Affairs. Our reported growth is now expected 6% from previously 7%-8%.
The difference is mainly related to the DKK 90 million one-off adjustment for Veterans Affairs and exchange rate developments. In particular, the fall in the U.S. dollar and the British pound against Danish . Our EBIT margin guidance in fixed currencies is unchanged at 33%-34%. We expect to deliver in the lower end of the range. Our EBIT margin in DKK is now expected at around 32%. Please turn to slide number four.
Year to date, our revenues grew 7% organically. Reported growth was 6% and amounted to DKK 11.5 billion. In Ostomy Care, organic growth was 7%, and reported growth was 6%. For Q3, in isolation, organic growth was 7%. Growth continues to be driven by our SenSura and Brava portfolios, especially in the larger markets like the U.K., Germany, and China. SenSura Mio Convex has now been relaunched in 16 markets and contributed significantly to the growth in the quarter. Our Assura portfolio saw satisfactory growth driven by China and Russia.
In continence care, organic growth was 8% and reported growth was 7%. In Q3, the organic growth was 10%. The SpeediCath ready-to-use intermittent catheters continue to drive growth, and especially the compact category performs well. In the compact segment, we continue to see strong performance in markets like the U.S., France, and U.K. SpeediCath Flex has been launched in 14 markets and contributed strongly to growth in the quarter. Performance in our Conveen collecting device portfolio remains challenged by higher competitive pressure.
Finally, we remain satisfied with sales growth for our PST products. In urology care, organic growth was 11%, and reported growth was 12%. In Q3, the organic growth was 10%. The growth was mainly driven by sales of female pelvic health products, a segment in which we have gained market share after our last competitor, Laffe, left the market more than a year ago. We also continue to see satisfactory growth in sales of the Titan range of inflatable penile implant devices. Our end urology business saw satisfactory growth in Europe, in particular in France.
In wound and skin care, organic growth was 0%, and reported growth was 1%. Organic growth for wound care in isolation was 3%. In Q3, the organic growth for the total business area was 1%, and for wound care, it was -1%. The growth was driven by Biatain sales, in particular Biatain Silicone in European markets like the U.K. and Germany. In wound care, the growth was challenged by price reforms in France and Greece, as well as a weaker momentum in a number of emerging markets, including Brazil.
On a positive note, the Chinese wound care business has returned to double-digit growth. The skin care business reported double-digit growth on an easy comparator last year. Contract manufacturing of Compeed impacted growth negatively. Turning to our geographical segments, we saw organic growth of 5% year to date, and 4% in Q3 in our European markets. The growth was primarily driven by U.K., Germany and France. Organic revenue growth in other developed markets was 9% year to date, and 14% in Q3.
The strong performance in the U.S. was primarily driven by strong demands for hydrophilic catheters. We are also experiencing tailwind from market share gains in the U.S. royalty business. Growth rates in Australia and Japan remain satisfactory. Revenue in emerging markets grew organically by 10% year to date, and 14% in Q3. Year to date, we saw strong growth in markets like Russia and Argentina. In China, Ostomy Care posted strong growth, and we saw improving momentum in the Chinese wound care business.
Negative growth in Greece following healthcare reforms detracted from performance. I would now like to hand you over to Anders, and please turn to slide number five.
Thank you, Lars. Good afternoon, everyone. Gross profit was up by 5% to DKK 7.9 billion. This equals a gross margin of 68%. We continue to see improvements in production efficiency at our volume sites, in particular, a positive impact from the relocation of SenSura Mio and Compeed to Hungary, which compensates for the negative gross profit impact from the launch of new products, where the production economy is not yet fully optimized.
The gross profit was negatively impacted by wage inflation in Hungary, increasing depreciation levels and costs associated with relocation of production to Hungary. In addition, the gross profit was negatively impacted by DKK 16 million in restructuring costs related to the reduction in the number of production employees in Denmark. The distribution to sales ratio came in at 28%, on par with the last year. The ratio was impacted by incremental sales investments in primarily the U.S. and wound care.
The admin to sales ratio came in at 4% of sales and up DKK 45 million compared to last year. The increase is related to patent litigation costs, as well as DKK 7 million in transaction costs related to the acquisition of Comfort Medical. The R&D to sales ratio came in at 4% of sales, compared to 3% for the same period last year. The 15% increase reflects higher activity levels. Overall, this resulted in an increase in operating profit of 4% and 7% in fixed currencies, which corresponds to an EBIT margin of 32% in both fixed and actual currencies.
In Q3, in isolation, the EBIT margin came in at 32% in both fixed and actual currencies. Excluding the DKK 90 million one-off adjustment related to the U.S. Department of Veterans Affairs contract, the EBIT margin in actual and fixed currencies was 33% for the first nine months and 33% for Q3. Operating cash flow amounted to almost DKK 1.7 billion and was down 2% compared with last year. The positive impact from higher absolute earnings was offset by payments on escrow accounts to settle mesh claims.
Year to date, mesh payments total DKK 1.7 billion, and total mesh payments to date now amount to DKK 4.1 billion. Cash flow from investing activities was impacted by the acquisition of Comfort Medical for approximately DKK 1.1 billion, and capacity expansion in machines for the production of existing and new products, and the site expansion in Tatabánya in Hungary. Investments in intangible assets and property, plant and equipment amounted to DKK 423 million year to date. Sale of bonds provided DKK 167 million cash contribution.
Adjusted for payments made in connection with the mesh litigation and the acquisition of Comfort Medical, the free cash flow amounted to approximately DKK 2.5 billion, compared to DKK 2.9 billion last year. The difference is explained by lower tax payments last year, which means that the underlying cash flow is in line with last year. Finally, the second half of the share buyback program of, in total, DKK 1 billion, was finalized at the end of July. Please turn to slide six. Our organic growth guidance for 2016, 2017 is unchanged at 7%-8%.
As mentioned previously, we expect to end the year in the lower end of this range, primarily due to weaker performance in wound and skin care. We expect a strong fourth quarter due to continued stable growth rates in Europe and strong growth rates in North America. We expect a continued acceleration in emerging markets, growth driven by China. Our guidance assumes a positive impact from recent product launches. Our growth expectation for wound and skin care for the year is now low single-digit. The impact of price reforms in France and Greece is larger than previously anticipated.
The rebound in skin care will not materialize to the expected level due to contract losses in the U.S. Our reported growth is now expected at around 6% from previously 7%-8%. The change in our reported growth guidance is explained by the DKK 90 million one-off adjustment for Veterans Affairs and exchange rate developments. The currency impact is based on spot rates as of 14 August 2017. The negative impact compared to last quarter is mainly a result of the depreciation of the U.S. dollar and the British pound against the Danish Krone.
The acquisition of Comfort Medical is still expected to contribute 1.5 percentage points to our reported growth. We continue to expect a negative pricing pressure of around 1 percentage point on our top line. Year to date, we have seen moderate pressure from pricing reforms within wound care in France and Greece. For 2016-2017, we continue to expect an EBIT margin of 33%-34% in fixed currencies. We expect to end the year in the lower end of this range. We now expect around 32% in DKK from previously around 33%.
The change in EBIT margin guidance in Danish Kroner is explained by the adjustment for Veterans Affairs and exchange rate developments. Higher growth from our new product launches still means pressure on the gross margin. We continue to relocate manufacturing out of Denmark to Hungary and have reduced the number of production employees in Denmark by 100 in the first nine months of the year. We expect the benefits to be absorbed by the cost of relocation and restructuring costs in 2016, 2017.
We also expect depreciations to increase at the same level as last year as a consequence of the last couple of years' increasing CapEx. We now expect our net financials to end the financial year 2016, 2017 at around -DKK 75 million , impacted primarily by cash flow hedging gains on the British pound and U.S. dollar, partly offset by losses on the Brazilian real and Argentinian peso.
CapEx guidance for 2016, 2017 is still expected to be around DKK 700 million , is driven particularly by investments in more capacity for new and existing products, including SenSura Mio, Biatain Silicone, and SpeediCath Flex, as well as Nyírbátor expansion, which is expected to be operational during the first half of 2017, 2018, and a new distribution center, which is operational as of Q4. Finally, our effective tax rate is expected to stay 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're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll now take our first question from Annette Lykke from Handelsbanken. Please go ahead. Your line is open.
Thank you very much. I have two questions. First of all, Lars Rasmussen, you have increased the capacity for your SenSura Mio Convex bags, and have, according to own words, been capacity restricted until end of March this year. When will we see this more capacity materialize in increased growth rates for the ostomy area? My second question is on the wound and skin care. It is about a year ago, you announced an ambitious investment program for the division in the States. You're going to make a geographic expansion as well as increase your innovations or your investments in innovations.
You have, however, correct me if I'm wrong, at the patient said that the innovations you were looking for were more like filling in the gap or having the complete portfolio of products. Is this ambitious enough? Will you be able to follow market growth or take market shares if you don't have a superior portfolio?
Thank you, Annette. On the Ostomy Care, I actually think that we are seeing a pretty strong contribution. It takes a little while after you launch before you get full impact, and we also have a pretty strong base to compare up against last year. I think that if you take the market growth of Ostomy Care and then the growth that we are having, it's a very strong performance. I would not feel bad about the performance that we have now. I also think that there's a bit more to come, but yet, you know, I'm pretty happy with what we have.
When it comes to wound care, I think it's worth to mention that it is 6 percentage points that we are missing out on in this quarter simply because of two markets, Greece and France, due to healthcare reforms. So it also means that we have a number of markets where we are actually growing very strongly. You are right that we are coming from a situation where we do not have a lot of market shares. It's not a big nominal amount.
We need to grow a lot and or the opposite, in difference from what we had in baseline. As we are growing, we will need a better and better portfolio to base the growth on. We're also investing for that. So, if I look at what we're investing in R&D today, compared to what we invested, for example, three years ago, it's a completely different story.
How can you say that you think the current performance is good if you adjust for the situations in France and Greece? You were looking for growth rates 10%-15% a year ago.
Okay. Fair enough. We would still like to and need to have more growth to fulfill the ambition that we are having. That's fair enough. We are in a situation now where we are winning market shares again in most of the markets that we are in in Wound Care. Do we need more? Sure.
I didn't feel you answered my questions on what kind of products, because you have previously said that you were sort of expanding shapes and some areas more than going in for complete new innovations. Is this still your strategy here is to more fill in the gap rather than making leap innovations?
I think I'll have to come back to the answer that I gave before, which is that if you take what we are investing today in Wound Care, it's significantly more than it was before. We I think that we have not ruled out that we can come with new areas like, for example, in the P&P area, which is big in the U.S., or also going into antimicrobials. It's definitely. I don't think that we ruled that out...
Okay.
... If you, if what you say is that we would only come with smaller additions to what we already have, I think it's a misunderstanding. Of course, we will also have to bring other stuff to the market.
Okay, thank you so much.
We will now take our next question from Christian Ryom from Nordea Markets. Please go ahead. Your line is open.
Hi, this is Christian from Nordea. A couple of questions from me, both on the U.S. First of all, you say that you are seeing double-digit organic growth in the U.S. chronic care business. Can you confirm whether you're seeing organic double-digit organic growth in both continents and ostomy in this quarter? That's my first question. The second question is on Comfort Medical, and whether you are seeing a notable contribution to your organic growth from Comfort Medical through either a value upgrade of your sales through this channel or through increased share of wallet in the channel? Thank you.
Could you repeat the last question, please? Because there was some hiccup in the connection when you said that.
Sure. My second question is on Comfort Medical, and whether you are seeing a contribution to your organic sales growth in continence care from Comfort Medical, either through upgrading sales in terms of the technology that you have through this channel or through increased share of wallet in the channel?
When we are looking at our sales out numbers in both ostomy and continence care, they are double digits in the U.S. I can confirm that. When it comes to Comfort Medical, there's no doubt that we are seeing that Comfort Medical is contributing to our growth. I can also say that we're a little bit ahead of the plan that we had for Comfort Medical when we made the basis that we invested from. I think that that's very positive.
Thank you.
We will now take our next question from Sebastian Walker from UBS. Please go ahead. Your line is open.
Hi there. Thanks for taking my questions. I've got two, please. One, within ostomy, so are you seeing increased competitive or increased competition across any major territories? And if so, how are you responding there? Secondly, on the reimbursement cut to Flex, I'm surprised that the higher reimbursement level could be so easily overturned. Is this prompting any kind of change in strategy? I mean, how do you target the higher reimbursement codes and gain assurance that you can kind of remain there going forward? Thanks very much.
Yeah. I think that I'd like to say as, just as a statement, that we are in an area where there is, it's a competitive area that we're inside. Our competitors are global professional companies. We are always seeing a competitive pressure no matter what markets we are in. Have that changed significantly over the last couple of years? I don't think so. There is pressure on, it's not a walk in the park to keep growing more than the markets. We have to launch new products, which we are doing all the time, and we also have to be present in the chain vis-a-vis the customers.
We have an ambition, which is to to have the best products in the market and to have the best service level in the market. That's what we're striving for every day. No, I don't see a change in that. When it comes to Flex, in the U.S., we applied for for the A4352 code. We got into it. We have gained a lot of customers in this simply because it is a significantly better product than the other coudé products which are in the market. If you, I mean, pick the products up that you see out there and try to look at them, and then envision that you have to use them yourself.
I mean, it's, it's not as painful to use what we have compared to what is in the market today. It is a really good product and quite well supported. There was a filed a complaint from a competitor on this, and it was reviewed. The class that we were in were overturned, and I'm equally surprised that that was possible. We are in an appeal process, we keep the product in the market. We have an obligation with all the customers that we have now, and that's basically how it is. How we respond to this depends on the outcome of the appeal process, but we are going to respond to it.
Perfect. Is there any idea on timing of how long you would expect that appeal process to take?
No, I, we have not tried it before, to be honest, so I really don't know.
Perfect. Understood. Thank you.
We'll now take our next question from Chris Cooper from Jefferies. Please go ahead. Your line is open.
Hi, good afternoon. Thanks for taking my questions. Just firstly, on the VA overstatement, please. I'm just curious as to the, I guess, the process which uncovered this.
Yes.
I mean, what made the issue suddenly apparent eight years or seven or eight years after the fact?
Yeah.
How confident, I guess, are you that this was actually an isolated issue? Then just to follow up on the SpeediCath reimbursement please, in the U.S. Could you just provide, please, a sense of the proportion of the segment that Flex relates to, and what you believe, or just on the appeals process, what you believe the potential outcome is to be with that, please? Thank you.
I'm not sure I get the last part of your question. What is, do you like to have the percentage of what Flex is today of the sales that we have?
Yes, correct, in the U.S.
Oh, we're not going to give ... That's a little bit too detailed for us, but I think you have to...
I understand.
... You have to, you have to take note of the fact that it's not that many months ago since we launched it. It's, it's new to the market, but we have picked up rapidly. There's a limit to how fast it goes in these markets, so it's not a big proportion of the total sales of catheters in the U.S. The other part to, related to catheters, what was that?
Just on the appeals process itself, I mean, I, are we talking here about an expectation that we can get back onto the $6.60 reimbursement code? Or is it more likely that we have some kind of one-off payment as a kind of optimal scenario? Just your thinking on how that might go.
Yeah, I mean, I don't know. We have appealed to get the product back into the 5-2 class, and that's really what we go for.
And the...
With regards to the VA, it was in, actually it was when we were in the contract renewal process that we took a deep dive into the current contract. We could see that it was not in all cases, that we have been able to come with the lowest possible price. Maybe I should go out a little bit and explain what it is. When you have a contract with VA, you just have an obligation to offer to VA your products at the lowest price that you are offering this product to any other customer in the market.
We have many 100 product codes, we have also a number of different price points in the market. There have been a process in the way, an error in the way that this has been handled, we have accumulated, you could say, an error year-over-year since 2009, that is what is now summing up to this DKK 90 million. We could see that something was wrong, that's some months ago, we actually contacted Veterans Affairs and said to them that we can see that we have errors, we are working on it.
We hired an external audit company who together with us, made a full review of all the contracts that we're having. We think that this is to the tune of DKK 90 million, and this is what we have also now told Veterans Affairs. We have been through every single contract. We have reported this in good faith, and if you look at how this has been handled in other cases, we think that this is basically how it should be handled, and that's also why we put the number in the contract. The contract that we then were originally starting to review for has been renewed.
We have a new contract running with the VA, everything have sort of been worked on with VA in a straightforward and open manner.
Yeah, very clear. Thank you.
We will now take our next question from Michael Leuchten from Morgan Stanley. Please go ahead. Your line is open.
Great. Thank you. Good afternoon. I have three questions in relation to SpeediCath, please. Firstly, on SpeediCath patent, I think it's probably fair to say in the past, you stated that the patent expiry would not have a material impact on your business. Can you explain why you would launch litigation against MBH, OneMed, Hollister, and Teleflex, just for entering a few months before the expiry of the patent? If it doesn't matter, why even bother spending time on this?
Question number two is on SpeediCath patent. In the markets of Denmark and Germany, what has been the reception of the competitive products that had been launched, which you are now going for an injunction? Thirdly, the SpeediCath maximum impact from patent expiry. Previously, you guided for DKK 100 million as sort of a maximum headwind once the patent expires in September next month. Is that still the most relevant number that you have in mind? Thank you.
Thank you. Why do you take patents? You do that to protect your technology and to protect your business. It's very costly to take out a patent. Once you get them, and they are meaningful, I also think that we need to defend them all the way through. It's, it is both, I think, a good business behavior, but I also think it's a statement that we take patents seriously. We are in a situation where some of our competitors have been infringing our patents for years. Now that the verdict sort of went our way, there's no doubt that for many years, some of our competitors have been infringing our patents.
It also means that they have unrightful, in an unrightful manner, obtained a significant sales and margin based on that. We would like to be compensated for that. That is why we go for it right away, because this is basically what this is about. It's about protecting your rights. Whether it's big or small, whether it's not that many months or whatever it is, we go for it because that's also how you build your best possible case, once you need to get this resolved, because this will have to be resolved in the court. That's basically what it is.
I think when it comes to our expectation of the impact, we have evaluated that again, of course, and we still think it's to the tune of DKK 100 million , and that's our best, it's our best judgment.
Thank you. Can you comment on what you had seen in Denmark and Germany, where competitors did launch products that breached your patent? Did you?
They launched them eight years ago, some of them.
Okay. Then briefly on the DKK 100 million of headwind?
Michael, it's very important to understand, it's not just a few months, it's actually years of sales activities and business creation that have been sort of wrongful, and that's what we are seeking compensation for. That's, of course, also why we are reacting the way that we are reacting.
Thank you for the clarity. On the DKK 100 million of headwind to SpeediCath, when you guide for fiscal year or for your next fiscal year...
Yeah
... as part of the Q4 results, should we take DKK 100 million as the headwind to growth in that year? Is that the right way of looking about the DKK 100 million guidance for the SpeediCath?
It will be part of the of the guidance for next year, and it will be very specific as part of the guidance.
Great. Thank you.
I'll now take our next question from Carsten Madsen from SEB. Please go ahead. Your line is open.
Thanks a lot, Carsten Madsen, SEB. Just a follow-up question to Christian Ryom's question on the double-digit sales for Ostomy Care and continence in the U.S. market. Last you mentioned that sales out is double-digit positive for both segments. And I'm asking just because when I read your report, you're not, actually not mentioning U.S. on the Ostomy Care. So should I understand your answer in the way that there's still a rather big difference between sales out and what you actually report in organic growth for the quarter? Or did I misunderstand something?
I understand that you can always take small particles and divide them one more time. I think that what you should take note of when it comes to ostomy is that we have had a significant number of acute wins and also the biggest home health win that we had, one of the biggest ones that exist in the U.S. We have a very strong performance in the U.S. That's as far as I would go at this point in time.
Okay. Then maybe to Anders on sort of margin development. You have a really strong quarter in underlying terms and, but even when adjusting for the DKK 90 million and FX, et cetera, there's still very little margin development. It actually seem that, seems like it's sort of items below the gross margin, maybe, distribution costs that are impacting the net, the EBIT margin negatively compared to the impact you're seeing on the gross margin. Any comments here? You're still guiding quite optimistic for long-term margin development.
Yeah. Overall, our underlying EBIT margin is developing as we expect. If we exclude Veterans Affairs, our EBIT is actually increasing by 9% year to date. For the full year, we are expecting to deliver within our guidance of 33%-34%. I expect also a strong fourth quarter due to a high nominal revenue, also I expect that our gross margin will also improve in the fourth quarter, and we will continue to have a tight cost control also in the last quarter.
That combined, I expect that we will deliver within the guidance, also including the Veterans Affairs and DKK 90 million amount. That is my expectation for the remaining part of the year. In terms of your question around the cap cost, or our distribution cost, we have increased our R&D this year with 15%, and that is in alignment with our strategy that we announced last year, that we are willing to increase our activity levels within R&D, and that's also what we have done. We have in the admin, we have included cost related to the Comfort Medical acquisition that we made earlier this year.
We also have included the costs related to the patent litigation cases that Lars talked about earlier. The underlying EBIT before FX, we are, yeah, very satisfied with.
Okay, thanks.
We will now take our next question from Veronika Dubajova from Goldman Sachs. Please go ahead. Your line is open.
Good afternoon, gentlemen. Thank you for taking my questions. I have three, please. The first one is on the [inaudible] reimbursement issue. I just want to understand, you obviously have a pretty strong position in that market already with some of the historical products that you've been selling. If you are not able to get back to the $6.60 for the SpeediCath Flex, are you going to pull that product from the market and just resort back to selling your older portfolio?
I guess, I mean, just walk us through, you know, how you're thinking and what will you do if you do not get back to the $6.60 reimbursement rate? That I think would be very helpful.
My second question is just to push you a little bit on the SpeediCath patent DKK 100 million impact in next year. I think, you know, what you said previously is that's about 10%-15% of sales that you would see exposed. I mean, DKK 100 million would imply a very minimal decline in those revenues. Can you maybe give us a little bit more color as to what still gives you confidence in the DKK 100 million? My last question is just a financial one. Anders, I don't know if you have any guidance for the net financial impact for this year, given the hedging costs. Thanks.
All right. On the Q-code side, as we have actually, in a short while, obtained many customers on Flex in the U.S. We will keep the product in the market, no matter what. Will we then think about our position when it comes to how we position ourselves against the Q-code and whether we can do more to get into that category? Yes, of course, we'll do that. I mean, you being the market leader, having presented something to the market which is significantly over and above the experience that you can have with the current products in the category, of course, we go for it.
We don't pull the plug on that product, no matter what. On SpeediCath, the assumptions that are behind our the scenario that we have built is that in the vast majority of the markets where we play, people are using, first and foremost, a lot of the compact catheters, which are not impacted by this. Secondly, a lot of the, or most of the markets that we are in, are handled by prescriptions.
If you pick up a prescription and you use that to get your products from, most of the companies that are distributing these kind of products, will see the same reimbursement code, and thereby, no matter if it's a new product or an old product, they will be reimbursed the same. And they don't have a power to convert patients.
Where we see the risk is in markets where you have a dealer structure, where you have a direct business set up, where some dealers can get products that are similar to the current SpeediCath straight for a lower price, and thereby have a higher margin.
Of course, they will see what they can do to push it. This have, however, already happened in quite some markets because there are many products that are very, very close to the SpeediCath straight product, where you just have to push the product to break and then pull, and so on and so forth. A lot of that conversion have happened, and we have seen that play out for some years. That is why we believe that we then end down at a smaller number or limited the impact. That's. I have to say, that is our judgment.
It's not specific science. It's with all the insight that we have in the markets, market by market, where we're looking at how much have we already competitive pressure and so on. That's, of course, part of it. We keep the innovation going. That's part of it, is that we have all of the compact products. We have just launched the Flex product, which is a significant upgrade to first in the eyes of some people. In that sense, you know, I can't give you a very precise number. I'm much smarter when we are a year into this, but this is what we're basing it on.
That's very helpful color. Thank you for that, Lars.
Veronika, in terms of the net financials, based on the current exchange rates, I'm estimating a net financials for the full year of - DKK 75 million.
That's helpful. Anders, can I just ask, I know you've not guided for 2018, but if currency rates hold from here, is it fair to assume that you'll have another hit to margin next year from FX, or have I miscalculated something?
In terms of the net financials for next year?
No, I'm asking more about EBIT margin impact from currencies for next year. I'd, and I appreciate if you're not prepared to comment on it at this stage. I just, directionally, it seems to me that you should still have a pretty comparable headwind actually next year to profitability from currency as you're having this year.
Yeah, but I'm not going to comment on our guidance for 2017-2018. The guidance that we are going to base it on, that is the reported EBIT margin that we have guided for this year. We expect that the EBIT margin for this year, including the FX, is going to be around 32%. That will be the basis for next year's EBIT margin guidance.
Understood. Okay, thank you very much.
We will now take our next question from Patrick Wood from Citi. Please go ahead. Your line is open.
Perfect. Thank you very much. I have two, if I may. The first is on urology. Looking at the segmental margin, appears to have done pretty well year-on-year. I'm just wondering, is that a function of just the operating leverage from the strong growth, or have you seen any change in the underlying pricing dynamics, obviously, given the competitive landscape there is has changed a fair bit? The second one is similarly on the Continence Care and Ostomy combined division, the chronic care. The margin structure there, even if I add back the VA, seems a little bit light in Q3.
Is that purely a function of launch costs and really just driving SenSura Mio Convex? It'd be helpful to understand that. Thank you.
In terms of the second question around, the margin for Q3, it also, besides the increased cost related to the patent litigation that I spoke about earlier, we're also continuing our investment program, not only into R&D, as I talked about, but also into commercial investments across our business, especially into U.S., but also into wound care. That's one of the other reasons as well. The first question, can you just repeat that? That was related to the Urology Care?
Yeah, similarly for Urology Care, basically, the margin structure there looks like it's up quite a bit year-on-year. Is that a function of pricing dynamics from the competitor's exit, or is that operating leverage?
It's a combination of leverage. We have been growing quite decent, around double digits for quite some time. We are seeing quite a big leverage effect. That's one element, and we're also seeing an impact from mix in terms of, yeah, from our product portfolio. The combination of that is the main reasons for an improvement in our Urology Care margins.
Terrific. Thank you very much.
We'll now take our next question from Inês Silva from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi. Thank you very much for taking my questions. I think I only have one left, which is also on the margin. You round, I'm not being able to fully understand what was the impact on currency, sorry, of currency on the margin. Could you tell us what that was, or if it was negative or positive? I can't really understand.
For the year to date, our currency, or the currency impact is 0.3 of our EBIT margin . That's the impact so far. For the full year, we are seeing a currency impact, so the fixed currency EBIT margin guidance is, as I mentioned earlier, 33%-34%. In our reported EBIT margin guidance, including the VA amount, our reported EBIT margin guidance is around 32%.
Okay. Just on the guidance for the year, the 33%-34%, surely that was also impacted by this one-off? That has absolutely no impact in your guidance at constant rates, or would there be any comment that you would do?
In the fixed currency EBIT margin guidance for the year of 33%-34%, we have also included the one-off related to Veterans Affairs.
Okay, you don't want to specify what that does to the 33%-34% range?
No.
Okay, that's fair enough.
It's impacting the DKK 90 million. We are going to be in the lower end, as I talked to in the beginning of the meeting.
Okay. Okay, thank you very much. Sorry, can you just confirm the impact on the EBIT margin from FX in the quarter, please?
As I said earlier, for year to date, the negative impact from currency is 0.3, and in the Q3, the impact from currency is 0.2.
Thank you very much.
We will now take our next question from Scott Bardo with Berenberg. Please go ahead. Your line is open.
Yeah, thanks very much for taking my questions. I have a few, please. Firstly, some pushes and pulls with respect to contract wins. Sounds like some good news in U.S . Ostomy Home Care, but some more negative news in wound care contracts. I wonder, Lars, would you be kind enough to talk a little bit more about those and perhaps discussing those contracts that you've lost and that target that you have gained, please?
Just with respect to Flex, obviously that's a disappointing pricing development, given, you know, the significant R&D investment and launch costs and everything else that have been described. Just to understand or your comments or refine your comments further, Lars, is it an anticipation that you'll continue to launch this product at full steam, even if it's a less profitable product? Is it likely to be a less profitable product for Coloplast than the previous generation? Do you see any mitigating factors to improve profitability from that product? They're the first two. I have a follow-up, please.
Yeah. It's of course nice when I can be very specific on the, you know, what kind of contracts is it that we have won and so on. Now, I mentioned a big win on Ostomy Care and we will report later on who it is, but we are going to do that in a joint press release with the hospital chain or the home home health chain. It's, they just prefer to be the first ones to inform their members before we go out with it here. We just mention it because it is a significant win to us.
It is a fact that when you talk about skin care, it is a contract-driven business. You win some hospitals, you lose some, you always have this, you could say, contracts that are expiring and contracts that are either one or where we are starting up to service the organization that was buying it from us. What we're just saying here is that is, at this point in time, slightly negative. That's what we are talking about. It can be completely different in six months from now. Therefore, it's not like we had a lot that were falling away, and then we have nothing to fill the void. It's not that kind of situation that we are talking about.
It's more sharing a little bit more about how the nature is of these businesses. It's much more pronounced when you talk about Ostomy Care and continence care and so on, because in Ostomy Care and continence care, you're basically in hospitals to get the business, which is in community afterwards. Skin care is a hospital business solely. That means that when you are in an institution, that's where you're selling, but you don't sell to people when they're leaving the institution.
Therefore, we are much more relying on the contracts that we're winning. I hope that puts some lights on what it is and the differences when we talk about contracts in chronic care and contracts in skin care. With regards to Flex...
With respect to the profitability of Flex, are you willing to?...
Yeah.
Lower margin?
You know, we are in an appeals process with Flex, and I sort of made it very clear early on in the call that we are committed to stay no matter what the outcome is of the appeals process. I fully understand that that puts the company in a bit of a worse negotiation position because there are many people who are already using the product. We are committed to lead the market. We cannot have a discussion about whether we have a product in the market or not.
The product is in the market to stay, and people who are prescribing the product and people who are using the product, they can continue to buy it and feel confident that they'll also be served with this product in a year. That's why we talk to it like we do here. The product is currently, of course, not as profitable as the other products. It's also a more complex product, and that is why we need to look at how we can work with it, but it's not an unprofitable product. It's not just as profitable as the other ones.
As I said, depending on what's the outcome of the appeal processes, we think that we belong also in the 52 category with a modern product, and then we'll have to look at what does that then take to qualify for it. We are definitely going to follow a different process to make sure that we are that we are not experiencing a similar situation once we might be there. I hope that makes it clear.
Thank you. That's clear. Just one last question, please, Lars, and this really reflects back to the last capital markets day update, I think, a day before the Brexit vote. Since that time, obviously the wound care business has not been progressing quite to expectation. You also made the acquisition of Comfort Medical, which, if you like, is an exciting growth opportunity, but somewhat subscale.
I just wonder whether there is or whether you can share any thoughts as to these activities and market development since your last update triggers the requirement for more investment to realize the full potential of the company, both from a top line and from a market share position? I just wonder whether it's come to the point where are you willing to compromise margin a little bit to get growth back to where you seem acceptable?
I think it's an excellent question. I think we have prepared some extremely good answers for it, and it's very much what we are going to debate when we have the capital markets day in a couple of days. I'd rather sort of postpone the discussion on these topics until that, because there we will have not just me and others to talk about it, but we will have much more people to discuss this. And we think we have some very good answers to this. We also think that we have some pretty exciting stuff going on that we'd like to take a deeper dive on when we meet Friday. I'd like to postpone the answer to that because....
Fair enough.
.... you're right. It's, it's all about, what kind, what, you know, what the quality of your offerings to the market, both on a product side, but also on a service side. We are very well aware of that.
Understood. Just to be clear, for new financial targets, well, we shouldn't discount those come Friday?
Just to be 100% clear, the capital market day is about what actions that we are going to do in the coming years, to deliver on the promises that we have in the market.
Mm-hmm. Okay, all right, thanks very much.
It's not to set a new set of targets that we will then have a different set of activities for. It's a set of activities to deliver on the market, on what we have already promised.
Thank you. Thanks for taking my question. See you Friday.
Our next question comes from Martin Parkhøi from Danske Bank. Please go ahead. Your line is open.
Hello, Martin Parkhøi, Danske Bank. Actually, going back to the impact from the SpeediCath patent expiry, as Michael asked for earlier. I just wanted to confirm again. Previously you stated that even with the DKK 100 million decline in sales from SpeediCath patent expiry, you will still be able to deliver on your long-term targets of 7%-9%. Since you are, to be honest, in the very bottom of that level, do you still feel confident that you have a buffer to still deliver on your long-term targets despite this patent expiry?
Second question, just specifically on Q4, the pickup you expect in the fourth quarter, implied by your full year guidance, is that driven by improved per-performance, or is it driven by easier comps from Q4 last year?
When it comes to the 7%-9% growth expectation and the patent expiry, the answer to your question is yes, we expect to be able to deliver on our long-term guidance also with the patent expiry. So just to be very clear on that. Then in the last quarter, Well, we need at least 8% growth in Q4.
Yes.
The growth will come from stable growth rates in Europe. It will come from high single-digit growth rates in other developed markets. By the way, we have somewhat of a strong baseline that we're up against in Q4 in U.S. chronic. It will come from an acceleration in growth in emerging markets, that is sort of funded in a double-digit growth in China, and a strong momentum that we can see in a couple of tier two and three markets, including Argentina and Brazil. That's basically the underlying assumptions and expectations for Q4.
Okay, because as I recall it, there was also a one-off impact in Q4 last year in U.S. Ostomy franchise, where you had a back order of DKK 30 million...
Yeah
... urostomy. I guess that will serve as an easy comparison.
You have it there.
Now you, now...
That is also correct. That's also correct.
Okay, great. Thanks.
Our next question comes from Oliver Metzger, from Commerzbank. Please go ahead. Your line is open.
Hi. Thanks a lot for taking my questions. My first one is a more general question on SpeediCath Flex. You explicitly mentioned positive contribution to growth. Could you just give us an indication from your recent experience whether the SpeediCath Flex users are mainly generated from your existing patient base, or is it also a good opportunity to get new patients on board? My second question is on urology care. You continue to show a performance which is above historic average, also the case in H1.
Despite you name some positive impacts of some products, could you also describe the overall dynamic, whether you see, I would say, in general, an average higher demand for the product, apart from the Aris slings or the Titan implants?
My final question, just on this general slowdown in wound care, you specified to be mentioned Netherlands and France, but could you give us some color about the general volume growth? Is still at a similar rate than one year ago, or whether you see also there some slowdown effect? Thank you very much.
SpeediCath Flex, it's, I don't have with me here an exact split of how many comes from new patients and how many are changeovers. If I just take what I hear about it's more new than it is existing, that is changing over because it's a very different technology to use than when you use the kind of technology that we already have in the market. In that sense, it is, I think it's fair to say that it's more new than it is existing conversion of patients. That's also how we launch it.
We are very much aware that this is a product with a new technology, and therefore, utilizing our databases to reach out to people who today are using either similar technologies and or who have shown an interest in that early on in the conversations with us. Of course, we also have the injunction going on in markets where there is these type of products have been used beforehand. That's, of course, also new product, new customers to us.
With regards to wound care, it is, it's especially, Greece, and, France, where we have had healthcare, or price reforms, not healthcare reforms, but price reforms, and they are impacting very much, as I mentioned a couple of times, it's 6 percentage points, growth, negative, you could say, or that we would have had if we had not had those impacts. That implies that our growth in the U.K. is not as strong as it was last year, but it is still above the market growth. Our growth in China is significantly stronger than it was a year ago.
I think that overall, outside of these two markets that are very hard hit, we have a quite acceptable, actually pretty good performance. When it comes to urology, I think I missed out on what the question was.
Yeah, just you meant so about this general very good growth, which you presented over the last quarters. You specifically named that the growth is related to the Aris slings or also the Titan penile implants.
Yeah.
Could you also give a more deeper view into your portfolio, whether growth was mainly driven by these two products?
Yeah
... groups, or was it more for the whole portfolio to see some acceleration of growth?
No, it's primarily those two product groups that are driving it. That's also where we are primarily investing, and of course, especially in getting, let's say, a reasonable share of the female pelvic health area, because that's what have been up for grabs, you could say, after one of the competitors were leaving.
Yeah. Okay. That was very helpful. Thank you very much.
That is also what is impacting our profitability, because, we get much more scale on our business with what we're doing now.
Yeah.
Sales per rep is up significant, and that's what you see on the bottom line.
Yeah. Okay, great. Thank you very much.
I think we are ready for the last question. We are over time.
Take our final question from Maja Pataki, from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good afternoon. Thanks for giving me the last question. Lars, I'd like to come back to the reimbursement issue that we're seeing, and you've been very open about the profitability of the product also.
The reimbursement in, is that on what product?
The SpeediCath on, yeah, on the coudé, sorry, in the U.S.
Oh, the Flex. Okay, yes.
Yeah, sorry. What I'm trying to understand is how, yeah, how important was the product with regards to the growth that you were hoping to achieve in the U.S.? In other words, as long as we're at the $1,80, shall we think about your long-term growth guidance of 7%-9% remaining more at the bottom of that range? It would be very helpful if, apart from the profitability, you could also help us think....
Yeah
... how to think about growth.
Okay, okay. Flex is a very good product. It's not a product that I may be proved wrong, which is. I don't expect it to be a high volume product like the compact products are and like the straight products are, because they are, you could say, giving a stronger security to people who are using it, because if you have this fear of urinary tract infection, you feel more safe when you use it. It's also significantly different to use, and it takes more time to use than a normal product or a standard Coloplast product. In that sense, it's not been a basis for our 7%-9% guidance at all.
It is, as I said, not as profitable, of course, in the new category as it was in the other one. Are we able to expand our EBIT margin the way that we expected also with this category? Yes, we are. In that sense, it's not a product with the same kind of growth expectations as the SpeediCath convex or some of the other sort of high volume products that we're talking about. That's never been in the plans that we have. If it turns out to be, great, but that's not in the plans.
Thank you very much.
All right. I think that concludes our conference call for today. Thank you very much for your questions, and we are looking very much forward to see many of you Friday in London. Thank you for now.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.