Good day, ladies and gentlemen, and welcome to the H1 2016/2017 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lars Rasmussen, CEO. Please go ahead, sir.
Thank you. Good afternoon, welcome to our Q2 2016-2017 conference call. My name is Lars Rasmussen, I'm CEO of Coloplast, and I'm joined by CFO Anders Lønning-Skovgaard , and our investor relations team. We'll start with a short presentation by Anders and myself, we will open up for questions. Please turn to slide number three. Today, Coloplast delivered 7% organic growth for Q2, I'm very pleased to see continued strong performance in Europe across our business areas, and double-digit growth in the U.S. chronic care business, as well as improved momentum in the Chinese wound care business. The growth in Wound & Skin Care in Q2 was below our expectations. Due to timing effects, the U.S. skincare business was negatively impacted by DKK 30 million in the first half of the year.
The growth in U.S. Wound & Skin Care is expected to rebound in the second half of the year. The Wound Care business, in turn, was negatively impacted by price reforms in France and challenging dynamics in emerging markets. On a positive note, we continue to have a firm grip on our costs, and we delivered a 33% EBIT margin in fixed currencies for the first half-year, first half of the fiscal year. Today, the board of directors approved an interim dividend of DKK 4.5 per share, corresponding to a total interim dividend payout of almost DKK 1 billion. Our organic revenue guidance for 2016-2017 is unchanged at a growth of 7%, of 7% to 8%. Our guidance in DKK is also unchanged at 7% to 8%.
Our EBIT margin guidance is unchanged in fixed currencies at 33%-34%, and in Danish kroner, around 33%. Please turn to slide number four. Before we take a further look at the numbers, I would like to take this opportunity to give a brief update on our LEAD 20 strategy. Innovation continues to be the cornerstone of our company. I'm very pleased to currently have a strong range of new products in the market across all of our business areas. Since SenSura Mio Convex is currently being relaunched, now that we have expanded our production capacity to meet the strong demand in the market. SpeediCath Flex by 10 sizes and shapes, and our most recent accessories launch, Brava Protective Seal, have now been launched across all mature markets.
Within Ostomy Care, we continue to strengthen our SenSura Mio product offering with the launch of our new hospital assortment in this quarter. We have increased our activity level within innovation, and this is reflected in our R&D to sales ratio, which is currently 4% year to date. Our Coloplast Care enrollments are growing according to plan, and around 15% to 20% per year. We have now in excess of half a million users in Coloplast Care, and in excess of 1 million users in our database. Coloplast Care is fully rolled out in more than 20 countries, and we are continuously upgrading the offering to add value in each market, bearing in mind that market requirements are very different from market to market.
The integration of the acquisition of Comfort Medical is developing according to plan, I'm excited about the large opportunity that we have tapped into within Continence Care in the U.S. Finally, we are on track with our innovative excellence efforts. SpeediCath Flex, Brava Protective Seal, and the new SenSura Mio hospital assortment are examples of products launched, where production has been ramped up directly in Hungary and China. We have also reduced the number of production employees in Denmark by 100 in the first half of the year. Please turn to slide number five. Year to date, our revenues grew 6% organically and 5% in Danish kroner, and amounted to DKK 7.6 billion. The acquisition of Comfort Medical contributed DKK 67 billion, or approximately 1% to reported growth in Danish kroner.
In Ostomy Care, organic growth was 7%. Growth in DKK was 5%. For Q2, in isolation, organic growth was 7%. Growth continues to be driven by our SenSura and Brava accessories portfolio, in larger markets like U.K., Germany, U.S., and China. In particular, SenSura Mio Convex continues to contribute to growth. As mentioned above, the production capacity on Convex was increased significantly at the end of March. Growth in Q1 was negatively impacted by the anticipated inventory reductions at our largest distributors in the U.S. The inventory level is now fully normalized. In Q2 we saw double-digit organic growth in the U.S. Our Assura and Alterna portfolio growth was driven by satisfactory performance in China, Russia, and Argentina. In Continence Care, organic growth was 6%. Growth in DKK was 5%.
For Q2 in isolation, organic growth was 8%. The SpeediCath ready-to-use intermittent catheters continued to drive growth, especially the compact versions performed well. In the compact segment, we saw strong growth in the U.S., as well as satisfactory growth in the U.K. and France. Growth in Q1 was negatively impacted by inventory reductions at our largest distributors in the U.S. The inventory level is now fully normalized, in Q2, we saw double-digit organic growth in the U.S., driven by strong demand for hydrophilic catheters. Our Conveen collecting device portfolio posted slightly positive growth due to satisfactory growth in France and China. Finally, sales growth for our Peristeen products remains satisfactory, especially in the U.K., U.S., and France. SpeediCath Flex has now been launched in 13 markets, the feedback continues to be very positive, which is reflected in the sales performance in Q2.
In Urology Care, organic growth was 11%, and growth in DKK was 12%. For Q2, in isolation, organic growth was 14%. The growth was primarily driven by sales of female pelvic health products, a segment in which we have gained market share after a large competitor exited the market approximately one year ago. Our market share in female pelvic health in the U.S. has increased from an estimated 10% to 15%, to 15% to 20%. We also continue to see satisfactory growth in the sales of the Titan range of inflatable penile implant devices. Finally, our end urology business saw satisfactory growth in Europe, in particular, in France. In Wound & Skin Care, organic growth and growth in Danish kroner was 0%. Organic growth for wound care in isolation was 5%.
For Q2, organic growth for the total business area was -4%, and for wound care in isolation, it was 2%. The growth continues to be driven by Biatain sales, in particular Biatain Silicone in Europe and Biatain Super in Greece. As mentioned earlier, the skincare business was challenged by a high baseline last year. In wound care, the growth was challenged by price reforms in France and weaker momentum in a number of emerging markets, including Brazil and Greece. In Greece, performance in Q1 was lifted by stock building due to a shift to a new product portfolio as a result of healthcare reforms. The inventory was partially reduced in Q2, but the inventory reductions will continue throughout the year. In Q2, as mentioned earlier, China contributed to growth after a number of challenging quarters. Finally, contract manufacturing of Kerecis impacted growth negatively.
Turning to our geographical segments, we saw organic growth of 6% 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 the U.K., where Charter continues to take market share. The period also saw satisfactory growth in France and Southern Europe. Organic revenue growth in other developed markets was 6% year to date and 8% in Q2. As mentioned earlier, the improvements in Q2 reflects the fact that the inventory levels at our largest distributors are now normalized, we are seeing double-digit organic growth in our U.S. chronic care business, which now reflects the actual market demand. Our growth rates in Canada, Japan, and Australia all remained satisfactory. Revenue in emerging markets grew organically by 8% year to date and 10% in Q2.
The growth was primarily driven by China, Argentina, and Russia. China contributed to growth due to satisfactory growth within Ostomy Care. As mentioned earlier, the growth momentum in China within the wound care business has improved compared to last year, but it is not yet satisfactory. Finally, a lower tender value in Saudi Arabia had a significant impact on Q1. Brazil continues to be negatively impacted by funding challenges. With this, I'll now give the virtual to others. Please turn to slide number six.
Thank you, Lars, and good afternoon, everyone. Gross profit was up by 5% to around DKK 5.2 billion. This equals a gross margin of 68%, which is on par with last year. We continue to see improvements in our production efficiency at our volume sites, and in particular, a positive impact from the relocation of SenSura Mio and Conveen 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 also impacted by a 15% increase in the minimum wage level in Hungary, increasing depreciation levels and costs associated with the relocation of production to Hungary. Q2 was also impacted by DKK 13 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%, compared to 29% last year. The ratio was impacted by sales and marketing investments in the U.S. and within wound care. The admin to sales ratio came in at 4% of sales, on par with the recent trend. Q1 was impacted by 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 with 3% for the same period last year. The 17% increase in R&D cost reflects a higher general activity level. Overall, this resulted in an increase in operating profit in fixed currencies of 8% and of 5% in actual currencies, corresponding to an EBIT margin of 33% in fixed currencies and 32% in actual currencies.
Operating cash flow amounted to DKK 558 million, compared with DKK 1.094 billion last year. The positive impact from higher absolute earnings was offset by payments on escrow accounts to settle mesh claims. Year to date, mesh payment totaled DKK 1.5 billion, and total mesh payments to date now amount to DKK 3.9 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 Nyírbátor in Hungary. Investments in intangible assets and property, plant, and equipment amounted to DKK 262 million year to date.
The sale of bonds provided a DKK 155 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 1.3 billion, compared to DKK 1.8 billion last year. The difference is explained by lower tax payments than last year, which means that the underlying cash flow is in line with last year. With respect to the mesh litigation, Judge Goodwin stated last week that the MDL for Coloplast is in its final phase. We have settled more than 95% of the known cases against Coloplast, and at the end of this financial year, we expect to have paid out DKK 5 billion of the total provision of DKK 5.25 billion.
The second half of the approved share buyback program of, in total, DKK 1 billion was initiated in the second quarter, and at the end of the quarter, shares worth of DKK 137 million had been bought back. Please turn to slide number seven. Our organic revenue guides for 2016-2017 is unchanged at an organic growth of 7%-8%. Our reported growth in Danish kroner is also unchanged and expected at 7%-8%. The acquisition of Comfort Medical is expected to contribute 1.5 percentage points to the reported growth. Our guidance assumes stable growth rates in Europe and higher growth rates in North America in the second half of the year.
We also assume that emerging markets growth will be in the range of 10%-15%, which reflects an improved growth trajectory of China Wound Care. We also assume an improved outlook for Skin Care and contract manufacturing in the 2nd half of the year. Our guidance assume a positive impact for the remainder of the year from the relaunch of SenSura Mio Convex and the recent product launches, including SpeediCath Flex and Brava Protective Seal. We expect a negative price, pricing pressure of around 1 percentage point on our top line, this is reflected in our guidance. 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 and around 33% in Danish kroner.
Higher growth from our new product launches still means pressure on the gross margin, but 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 half 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 continue to expect our net financials to end the financial year 2016-2017 at around minus DKK 100 million, impacted primarily by cash flow hedge losses on the U.S. dollar, Brazilian real, and Argentinian peso, offset by hedging gains on the British pound.
CapEx guidance for 2016-2017 is expected to be around DKK 700 million and is driven in particular by investments in more capacity and for new and existing products, including SenSura Mio, Biatain Silicone, and SpeediCath Flex, as well as the Nyírbátor expansion, which is expected to be operational during the first half of 2017-2018. 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.
Okay, thank you. If you'd like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, to ask a question, please press star one. We will take our first question today from Chris Cooper from Jefferies. Please go ahead.
Hi, good afternoon. Thank you for taking my questions. I've got three, please. Firstly, just on manufacturing for ostomy, can you just confirm exactly when the additional capacity for SenSura Mio came on stream? I think some of us had been expecting a little bit more of a step up just due to the pent-up demand. I just wanted to make sure the 7% organic had met your own expectations, and also just how you expect that to trend through the rest of the second half. In the U.K., Charter seems to have taken share again. I know historically, it's not always been easy to sustain some of the share gains in that market. Can you just talk us through some of the drivers there and how you achieved that progress?
Lastly, I just wanted to know what your latest expectations were about the competitive bidding program in the U.S., please. I know previously the focus has been more on ostomy and urology, I just wanted to gather your thoughts on whether you see any risk that catheters are placed on this list, too, and also just whether the incoming administration makes the outcome more or less likely, in your opinion. Thank you.
Yeah. Thank you very much. For the manufacturing for the Convex, as you said, it came online end of March, that is end of March. It's not like from the 15th of March, in the end of the month. It is the end of March, meaning that it's fully present at the 1st of April. That's in line with what we have communicated, there's no effect from extra capacity in the quarter that we are just reporting. It is fully present from the beginning of this quarter.
For the U.K., could you give me a little bit more flavor on your question for what it is that we are doing? You want to understand what exactly we are doing to pick up more growth in the U.K.?
Yeah. I mean, you commented during the prepared remarks that, you know, this is another quarter where you've taken share with Charter, and I think that's reflected in the growth numbers. I just know historically, it's not been a, let's call it an easy market to sustain share gains over a period.
Yeah.
I just wanted to know what was happening in the market and why you were having such success in more recent times in taking share.
It is in a sense, the classic explanation. It is a combination of the products that we are offering. We have new products across the board for the time being, and then the service offering. We are selling Charter Healthcare with specific promises on what to expect when you are a patient in terms of response rate and delivery performance, and so on and so forth. Also a specific set of KPIs that we are selling in when it comes to the service level you can expect when you are a professional person, so meaning a nurse calling into Charter Healthcare to sign up a patient or to get or to ask questions or other things like that. In that sense, it's quite specific what we're offering.
We also use the channel, of course, to cross-sell, meaning that we are selling our Brava accessories products also in that segment. On the competitive bidding side, the Trump administration have not pursued that. You know, it was part of the list that Obama government was pushing for, but Trump have not pursued that.
In that sense, we actually consider it to be very far down on our risk list for the time being, also for catheters in the U.S., which is what you're asking for specifically.
Got it. Thank you. Perhaps, just two quick follow-ups. Just on the last one, I understood that the product had sort of remained on the revision. I know, the Trump administration's obviously shown no intention at this stage of progressing, but the fact is they're still back on that list. Can you just confirm my understanding there? Just a quick follow-up on the first one.
It's not, it's, to our understanding, it's not on the list.
It's no longer on the list. Okay. Thank you. That's helpful. And just on the first one, now the capacity is fully on stream. I mean, it, in your eyes, is there any reason why we shouldn't expect, you know, double digit, if not low teen, in terms of ostomy performance for the second half?
I'm not sure that I'm prepared to give you a guidance for ostomy growth in the second half. Of course, it's a fact that we have held back on pushing this product in our direct-to-consumer channel. We have not even launched the product in all places in the hospital channel. Of course, with such a long time where we have been out without sufficient capacity, we actually are not just bringing more new products online, we do a real relaunch of the whole portfolio to the market. We do expect, we certainly do expect added growth from this.
I can't go as far as to guide you on ostomy growth in the second half.
Very helpful. Thank you.
Thank you. Our next question today comes from Romain Zana, from Exane BNP Paribas.
Good afternoon, and thanks for taking my question. The first one will be on the margin side. It seems that the efficiency gains have been more or less partially offset by the wage inflation you mentioned in Hungary. I was wondering, to what extent the inflation you see it as a structural or something temporarily, and how do you intend to balance it? The second question is regarding the increased R&D activity you mentioned. Is it related to a specific business segment? Should we extrapolate this trend, I mean, the sales ratio looking forward, or is it more like 64? Forward.
In terms of the question related to our gross margin, we are seeing some tailwind from the fact that we are moving out machines from Denmark to Hungary. We have last year and also this year, been moving out a number of machines that we have established in Hungary. As part of our Innovation Excellence program, we have also established the production of some of our new products directly in Hungary. That is having a positive impact. On the negative side, we have in this quarter, the second quarter, included restructuring cost of DKK 13 million related to a reduction of employees, production employees in Denmark.
I also expect that we will see a positive impact from that rest of the year. On top of that, as you also are mentioning, we are seeing higher salary increase in Hungary, and we are also seeing higher depreciation levels due to the fact that we have a higher CapEx level than we have had previously.
For the first half, it is more or less balancing the efficiency gains out with some of the extra cost that we have had.
The inflation, was it something you were expecting or?
Right.
The inflation rate that we are seeing this year of around 15%, is something that was announced earlier this year. It is a bit higher than we originally expected.
If I can just add to what Anders said, then, I also mentioned it during my opening remarks. We actually have bought products now that we have ramped up directly in low-cost countries. That's part of this Innovation Excellence model that we are implementing. That means that, for example, a product like SpeediCath Flex is started directly in Hungary, where we have no, basically no sort of run-in curve, where we have higher costs, but we start more or less on cost by. It's a pretty big undertaking for us, and it seems as if we are succeeding with it. We are actually very, very, very happy with that, and that is also going forward, things that are helping us to improve on our gross margin.
When it comes to the increased R&D cost, I have said many times that we are willing to take on board the R&D spend, which is necessary to drive the top line growth. If we really see good projects, we'll also support them. We have just launched across the board new products, and we have a very compelling pipeline of new products to come. That's why we spent more money, we spend more money on that part, and the products that come are also pretty well documented. Like, for example, the Convex product that came out now with a clinical documentation that does reduce leakage. That cost a little bit more, but it's also having significant impact in the market.
That's right. If you look at the product portfolio we have, it is across the board. It's not just in Ostomy Care or just in Continence Care. It is across the board.
Would you rule out that the deflation of this ratio, looking forward?
Say that again, please.
I mean, do you rule out that the sales ratio on R&D would decrease looking forward?
What we are guiding to the market and have done for quite some years, is that we expect the R&D ratio to be around 3%-4% of sales. We have so much now in the pipeline that we are at the top end of this, and I consider it to be very positive because that's a key element in driving high top line growth also going forward.
Just the last question, very basic regarding the wound care in H2, the catch-up you are expecting, I mean, how confident are you to see this catch up? What kind of visibility do you have at this stage?
Yeah, we, I think, I think that if you look at Europe per se, it's very positive. It's only France that is standing out on a negative or in a negative way. In France, you know, there was a slight decrease of prices, but they also decreased the number of products in the boxes from 60 to 10. That means that when you have an ordering cycle where people normally they just order boxes, then they will figure out that they need to order more frequently, but when that kicks in, you get a negative impact. We have had that. I expect that France will be better in the second half.
We, then we have see that Wound Care is picking up quite well, and we expect that to continue into the second half. That will help us in that respect. Those are two of the big levers that will take it back. We also said that we had a little bit weaker sales in the U.K., but if you, they're actually public in market sales data in the U.K., there you can see that all companies are actually in the quarter we're just recording, having a negative impact. We have probably the least of a negative impact, so we just expect that to pick up again going into the second half of the year.
We feel quite confident that we will have a pickup. To top it off, of course, we have this very big negative one on Skin Care in the U.S., where we, this is now out of the books.
Okay, thank you very much.
Thank you. Our next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead.
Good afternoon, gentlemen, thank you for taking my questions. I have three, please. The first one is just looking to the balance of the year. Obviously, the organic revenue growth year to date is at 6%. The guidance is for 7%-8%. Lars, can you maybe talk about, would you feel comfortable right now at the lower or the upper end of that organic revenue growth guidance? What do you see as the biggest levers for the second half of the year? Just would be helpful for us to get an overview on that. My second question is a follow-up on the gross margin dynamic, for Anders. I think, Anders, last time when we caught up, your suggestion was you would expect to see some modest gross margin improvement this year.
With the wage inflation now being a headwind, should we instead assume that gross margins are flat? And any risk as you think about beyond the fiscal, beyond this fiscal year, that, you know, wage inflation remains a significant problem in Hungary? My last question is just on the Slovakia announcement and your thoughts behind-
What announcement?
On the plot that you bought in Slovakia for a new plant.
Oh, yes.
Just kind of your thoughts on, you adding another country into the network. Are you know, what's behind that, and how soon will you start investing into that plot? Thank you.
All right. If you take the balance of the, of the sales, well, I think that if you take, or my take on this is that in the first half, we had to reduce the stocks in the U.S., and that's to an amount of $10 million. Then we had the one-off on skincare, which is not coming back. So those two alone is DKK 100 million, which was headwind, you could say, in the first half, and they will not come back. Then going into the second half of the year, then we have a relaunch of Convex.
It's actually a quite big launch that we are doing there. We saw the pickup from the first part of it, so we expect to get an impact from that. We have Flex, which have been received really well in the market, even though it's early days, we are above the launch forecast for that. We have the Brava rings that actually are a very competitive product that we have brought to the market, and it's coming into the biggest single category which exists in the accessories markets. Where we have, I think, you could call it a low market share.
In that sense, we only have 15% market share in there. We think that we can take a significant part of the market there with the offering that we come with. Just to give you some flavor on this, rings alone is between 30%-40% of the total accessory market, so it's quite important. Those factors are the most important factors that we're looking at. Of course, to top it off, we have a positive growth now in the U.S., and a double-digit growth, and we see that the wound care growth in China is coming back.
I'm actually, I think it's very well, well-funded, what we talk about for the pickup in the second half. Let me take Slovakia now that I'm speaking. I think we are quite big in Hungary. We are growing as a company, so we need more manufacturing space and we're not yet ready to open up more manufacturing outside of Europe. The next place we talked about that also, will probably be somewhere in North America, but that's not by now.
We have chosen to go to Slovakia to spread the risk a little bit, and that is in a region which is pretty close to Hungary, so we have some similarities of the language, and we think we can cover a lot of what needs to be done in the initial phase from our setup that we have in Hungary at this point in time because of the geographical distance. That's the reason why it's Slovakia, and we will see something up and running there within the next couple of years.
Yes, Veronika, in terms of the gross margin question, overall, as you know, we have launched our Innovation Excellence program, where we are planning to reduce the number of FTEs, production FTEs in Denmark with around 300 people by the end of the next year. So far, since we introduced the program, we have reduced with around 200 FT. Overall, we are on track with this program, and I expect also that this program will contribute to the gross margin development in the second half of this year. Because that I have or we have included the majority of the restructuring costs related to the Innovation Excellence program in the second quarter.
We have some one-offs included in our second quarter that will not come in the second half of the year. My expectation is that the gross margin will also contribute for us to deliver on the EBIT margin guidance of 33%-34%.
Okay, thank you. That's very clear. Lars, if I can just follow up, we've asked a lot about ostomy, but I think continence, if you look sequentially, didn't seem to accelerate much, even though you had no destocking in the second quarter. Anything there that worries you or that might explain why the growth wasn't better in the second quarter?
I think, if you look at the organic growth of Continence Care, I think that's, that is showing some acceleration. We had 8% growth in Q2 and 6% for the first half, so I'm actually quite pleased with that.
Excellent. Very clear. Thank you both very much.
Our next question comes from Michael Jungling from Morgan Stanley. Please go ahead.
Hi, good afternoon. It's Alex Gibson instead. I have two questions. The first one's on gross margin and outlook more longer term. In the past, it seems as the expansion in EBIT margin has been driven in large part by improvement in gross margin. If we look at the last few quarters and years, there hasn't been much year-on-year improvement. What confidence do you have, and maybe guidance on what split the margin improvement for the midterm is going to be down to gross margin and/or operational? My second question is on China, I believe there was a meaningful sales force reduction or maybe just stabilization in the sales force in China. Can you comment on how much you're increasing sales force expansion in that market now?
Yeah. If I should talk to the gross margin, as you know, our overall financial guidance is improvement in our EBIT margin of 50 to 100 basis points in a fixed currency scenario. Our expectation is that the gross margin will also contribute overall in order for us to deliver on that financial ambition. We have seen a gross margin in the last two to three years that has been more or less flat. The reasons are, there are a couple reasons for that. One reason is that many of the new products we have been launching over the last couple of years, that they have been produced in Denmark.
That's also why we have initiated this Innovation Excellence program, where we are moving production of those new products to Hungary. That's one element. The other element, we have also been impacted a bit from the currency on our gross margin, especially from the sterling, that has dropped quite a bit last year after Brexit. We believe that with the Innovation Excellence program and the initiatives we are working on moving production of our new products, that that will improve the gross margin over time when we are finished with the Innovation Excellence program. We still expect that that will be finalized by the end of 2017, 2018, and we are expecting a saving at that point in time of DKK 80 million to DKK 100 million .
Overall, we are expecting that the gross margin development will contribute to our overall EBIT margin expansion. So that's how we see it.
When it comes to China and the sales force in China, it's correct that we have quite a sizable sales force in China. For some years we were expanding every year, also in a significant way, also inside of Wound Care. When we came into this change in the way that products are registered in the single hospitals in China a couple of years back, we stopped scaling our setup in China, simply to change the model that we're working with.
The model that we're working with currently is that we have to show that we are having a recurrent sale in the hospitals that we already are in, and that we are growing our business with the customers that we're already having. That is what is starting to show effect now. As we see that is being more and more successful, we'll start scaling again. Of course we would love to invest more, but we love to invest in a profitable way, and that was the problem that we ran into when we could not scale in a profitable way. That's what we are expecting to see out of the slight change of strategy that we have had in China.
Okay. Thank you very much. Great, thanks.
Thank you. Our next question comes from Ian Douglas-Pennant, from UBS. Please go ahead.
Hi there, Lars and Anders. Thanks for taking the question. Just a couple, one on the Wound Care division. You know, at the capital markets day, you talked about the ambition of doubling the size of that business. I mean, just thinking out, where do you stand on that? What levers do you need to pull? Is it certain geographies or product launches that will drive that? The second question is at more top level. Thinking about, I suppose, your EBIT margin guidance and the 50-100 basis points of ongoing improvement. I suppose for 2016 and 2017, we're at the bottom end of the sales growth in organic terms.
Does that mean you're more comfortable with the bottom of the EBIT margin range, or what are your thoughts there? Thanks.
On the Wound Care side, there are a couple of things that need to work for us to deliver the doubling of the business. We need to grow at a high pace in China, we are coming back to that now. That's of course, a prerequisite that we see that. We need to see that emerging markets are also working in a reasonable way. One of the big drivers in emerging markets for us have, over the years, been Greece. For the time being, there is a shift in Greece because the value per patient have been lower.
We have actually invested more in Greece in order to pick up a higher share in this turmoil which is going on. Of course, as we are switching from the former high-end portfolio of products to the now, you could say, more medium-range products, we see this transition coming in where we are basically replacing the whole stock that we have in Greece. We actually expect that to come back. Both Greece and also China have had a dip, but we see them come back now.
The third element that really needs to work when it comes to the sales organization, is that we need to see the U.S. start to contribute in a meaningful way, because we have never really invested in the U.S. In the U.S., we have split the organization, so it's now a separate organization reporting into Nicolai Buhl Andersen, who is heading the strategic business unit. We have the VP in place who is leading that, and we are building that as we're speaking. We are actually investing in the U.S., and we are on plan when it comes to our expectations for that drive. I think that part of it is.
This is basically what we do on the sales side. When it comes to the other part of it, the new product offering, we are investing what it takes and also have the progress in the pipeline of products that we bring to the market, to make sure that we have also an the pipeline behind us of products that we need in order to double the business that we are looking into. I think that we are on track across the board, but we have had a setback in China and also in Greece, and we are recovering from that.
We're a little bit behind on the plan, but still committed to deliver on the, on the doubling of the business. In terms of your question around our EBIT margin guidance, we have an EBIT margin guidance in a fixed currency scenario of 33%-34% for the year. After the first half, we had an EBIT margin of 32.7. We believe that with the higher sales, the higher absolute sales that we are expecting for the second half, it will generate more profits, that will also drive more margin. Combined with the gross margin element that I talked about earlier, and the good cost control across the board, we expect that we will deliver within the 33%-34% as we have guided.
Great, thanks. Very helpful. Just if one follow-up, if I may, on wound as well, more in the, in the near term. On the French reimbursement cut, could you give us some more detail there about what actually happened? Was it just a price reimbursement cut? Was it, you mentioned something about the quantity of products in each box they ordered?
Yeah.
Also, you know, how have you responded to that? Or how do you expect, or why do you expect the second half of the year to improve in terms of that? Thanks.
That's there is a small reduction of prices. It is primarily the fact that the government have lowered the quantity of products in the boxes that have a quite significant effect once it's coming in. Where they went from 16 products per box down to 10. It sounds a little bit crazy, but it does have this effect. It has the effect because the professionals are ordering a lot of boxes. They are not always ordering the number of the single products that are inside of the boxes. Therefore, you see this effect, and then it sort of normalizes afterwards when you just get a faster reordering again.
That's what we are seeing now, so that's why we expect the price to come back. We also have had a little bit of this price reduction, as I said. Anyways, this is what it is. If you look at the other markets in Europe, we see a pretty strong performance, not least in Germany, for example, where we are growing very at a very high speed, but also in other markets in Europe. Europe is actually on average doing better than what we expected in our long term plan.
Great. Thanks very much, guys. Very helpful.
Thank you. Our next question comes from Niels Granholm-Leth from Carnegie. Please go ahead.
Good afternoon. I have 2 questions. 1 question would be, would you expect any impact from the acquisition of Byram on the U.S. market that was announced yesterday? My second question is about the kind of more the long-term trend of the Ostomy Care market, because we have seen in the past couple of years, a number of new diagnostic tests coming to the market, and some of these claim that they can discover colon cancer at a much earlier stage. I'm obviously thinking about the Cologuard test, which seems to have gained enormous momentum in the past few quarters.
Are you looking into these diagnostic tests and, kind of, analyzing what kind of impact it will have to the long-term, growth of the Ostomy Care market and what kind of impact it's gonna have on your strategic planning?
Thank you, Niels. The Byram was acquired by Owens & Minor. It's another, it's one dealer buying another dealer, one distributor buying another distributor. We are making business with both of them already. In that sense, we think that, you know, we could talk about maybe an impact if Byram had been acquired by one of the other manufacturers. Since it is the same type of business it's been acquired into, we expect to continue to have a positive relationship with them, and we don't expect either a positive or a negative effect from this acquisition.
For the long term, it's quite rare that we're discussing this subject on these kind of calls. It's right that you're obviously correct that cancer screening have been on its rise for quite some years now. I think that the first time I was discussing a cancer screening program for a larger population was actually in Denmark back in the at the end of the 1990s. Denmark, plus a number of other countries, we have seen these these screenings in effect for many years now. That's maybe why we see that we continuously see that the number of the temporary stomas are growing.
For example, if you look at a colostomy, then 40% of stomas are permanent and 60% are temporary now. For ileostomies, it's actually only 20% of stomas that are permanent, and the other 80% being temporary. You have the effect that 15%-20% of all the initially temporary ostomies, they actually end up being permanent because people don't want to take the risk of having a, you know, a surgery to put everything back in to what it was before. And we are keeping a very close eye on this.
when we do that, the way, the only way we can see this is that even in a market like Denmark, where we have had this cancer screening now for many years, we still see both a volume and a value growth. It's very hard to figure out, you know, where, what is it coming from? Is it because people are detected earlier so that they are now living for a longer period of time with their ostomy, and is there a kink at that curve at some point in time?
What have happened is that the tests, they are now more advanced, and the Cologuard that you talked about, it also tests for human blood in the stool as the other ones are doing, but they also have nine DNA markers that comes from cancer or pre-cancer, so you can detect earlier on. They also have more false positives, so that's the downside with this one. It's been approved for it's received the FDA approval as the first one in the US, and it's priced pretty high. It's $500 per piece or per test, where it's $15-$25 for a standard test.
Medicare have decided to cover it, so, you can actually get Medicare coverage for a test every three years with Cologuard, and that's what's giving them the tailwind. It's adding to a movement that have been going on for many years. We are following it, as I'm saying. You know, I also think that implicit in your question is will this have a negative impact on Coloplast or a positive impact? Well, we can't figure it out, but we can see that our markets over the last 5 years consecutively have more or less the same growth rates, which, despite of this.
Would it make any sense at all for a company like yours to enter the testing market?
It's not, we have, as I said, looked into it, but at this point in time, I don't, we have not made a decision for that yet.
Okay, very helpful. Very helpful. Thank you.
Thank you. Our next question comes from Annette Lykke from Handelsbanken. Please go ahead.
Thank you very much. My question is more on the SpeediCath in Europe. As your patent expires here, and potential competitors like ConvaTec most likely will launch this area, should we expect some of the R&D spending you have made there is going to be like a new or upgraded versions of the SpeediCath or SpeediCath Compact?
We are, as you know, market leaders in a couple of business areas, globally, and whatever it takes to defend and build those positions, we do. That means the service offerings, and it means the product offerings. Of course we make sure that our portfolio is addressing the both the opportunities but also the challenges that we are seeing.
Okay. In the Wound Care segment, to me, when you are talking about capturing up or covering the gap you have compared to competitors, for me, there's two areas, including moisture healing, like the AQUACEL from ConvaTec, but also negative pressure wound therapy, single-use devices. Are you considering any of these areas, or are you still very reluctant to go into, for example, the single-use NPWT?
It's hard for me to be very specific on what we are bringing to market in both in the near future and also a little bit longer term. I think we have said very clearly, at least for the negative pressure wound therapy, that we are not having anything in the pipeline for that currently. With the plan, we have to double the business in this plan period, we don't think that it needs the negative pressure wound therapy.
Okay. Thank you very much.
Thank you. Our next question comes from Kristian Johansen from Nordea. Please go ahead.
Yes, hi, this is Kristian Johansen from Nordea Markets. Thank you for taking my questions. First, on the U.S. chronic care franchise, you're saying that you're seeing double-digit growth rates in this quarter. Can you elaborate a little bit about how this, how the underlying growth momentum has developed compared to the most recent quarters? As I believe you've also been saying that you've seen double-digit growth rates in the preceding quarters. Then secondly, for Anders, could you give us an update on what you expect in terms of financial, net financial costs for the full year? Thank you.
I think that the best way for me to comment on the first part of your question, that is that, yes, we have seen a double-digit underlying growth. We think that we are in a stronger position today than we were just a quarter ago, because we have capacity to really go for the Convex segment. We have there's a lot of users in the U.S. that are using accessories, and we have a fantastic offering with the ring product. That is going to be, or the seal product, but that is a ring which is going to which is now being launched in the U.S.
Not least, we have the Flex product, which is also approved in the Coude category, which is the very high value category. It is a product which is offering a significant benefit over other Coude products that are in the market currently. That's what we have to work with now. Yes, we have had a double-digit online growth, but I expect that to increase. Maybe to add to it, we are also still winning in acute. As you know, we have more access to new hospitals, under the changed GPO contracts that we had before.
That means that over the last, I would say just in this fiscal year, we have had more wins in acute hospitals than we have ever had before.
Thank you. That's very helpful.
Kristian, in terms of the net financials, my expectations for the full year with the currency rates we have today is around -DKK 100 million, and year-to-date, we had a minus of DKK 35 million.
Great. Thank you.
Thank you. Our next question comes from Oliver Metzger from Commerzbank. Please go ahead.
Yeah, hi. Thanks a lot for taking my question. The first one, just again, follow up on your performance of Wound Care. just what time frame do you expect that the business should, from a growth perspective, should normalize that would also correspond to mid-term ambition to you? You have already said something to what is needed, but what's your expectations regarding the time? The second question is, unless you commented on moderate price pressure? In general, your assumption is around 1% price pressure, and moderate sounds a little bit stronger than just 1%. Potentially, you can just give us some comment on that, please.
Finally, on the SpeediCath Flex, could you give us some indication about the pricing premium to your in traditional SpeediCath intermittent catheters, and also potentially an update how the SpeediCath Flex market share has developed in this advanced technology program in Medicare? I think you mentioned 40% in the last call. Thank you very much.
To take it from the other end, for Flex, we have market share. It's the, it's like the other high-end products that we're having. It's more, the specialty about this product is that it also works fantastic in people who use or who need a Coude product. The Coude category is priced at very different levels. In the U.S., it is priced at an attractive level, and that's where it, where it improves or approved for. I think that we have also given the normal price levels for those categories, but I think they're also publicly available.
You know, where it's the Coude category is priced at approximately $6.60, where a normal catheter is priced at $1.80 when it's Medicare who is reimbursing. That's a quite big difference in that sense. I don't know if that was what you're asking for.
Yeah, that's a good indication. Thank you.
For wound care, we will have a significantly better half, second half than the first half year. To, I can't give you a detailed guidance for next year for wound care, if that's what you are asking for.
Yep. Thank you.
Oliver, in terms of your question related to the price, we are expecting negative price pressure in the level of -1%. Year to date, it has been a bit lower, but we are seeing a price pressure, especially within the Wound & Skin Care area. We have talked earlier about France, and we're also seeing a negative price pressure in Greece due to the reimbursement reform that is going on in that market.
Just from my understanding, you say it was lower than minus 1%. That doesn't mean it was, let's say, worse than you had thought, or it still was a little better than you had thought?
It is more or less in line with the expectations that we had when we started the year.
lower is not 1.1, it's more like the 0.9.
Oh, okay.
Yeah.
Just for that.
Yeah.
Great. Thank you very much.
Thank you.
I think we are ready for the last question.
Okay, no problem. Our last question then comes from Yi-Dan Wang from Deutsche Bank. Please go ahead.
Well, I made it! Thank you very much for taking the question.
Is this you, Wang?
I have
Welcome back.
Thank you. Good to make the last question. What an entrance. Okay, I have several questions. The first question is on R&D. I mean, you said that there's a higher activity level, and I'm interested in whether we should expect to see a larger number of products coming out of that higher activity level? Or is the activity level really relating to the quality of the product? I think historically, you said that the amount of R&D you were investing were really for delivering two to three major products to the business a year. Some comments on that would be great. And then secondly, interested in your capacity for flex, relating to your comment that you said is doing better than you had expected.
Just wondering whether there is a risk that we run into the same sort of situation as your Convex, the product does so well, and you're short on capacity there. Yeah, we'll start with those, please. Thank you.
Yes. Okay. On R&D, what we have a large number of products, but I think that what is adding more cost to it is what you have also seen on the Convex product, it's the first product in the market, which is which has a clinical documentation that it does reduce leakages. It's a clinically relevant product. It's quite rare that we have that in our line of business. It's very hard to clinically prove that a product is doing one or the other, so therefore, it tends to be a little bit anecdotal, and then it's normally very clear to the users of the products that this is a better product than what they usually have.
Clinically, we have had a difficulty in putting products on the table where we can show clinically that this is reducing leakage or reducing cost or whatever. The portfolio that we're bringing to market, several of the products that we come with, will be what you can call clinically differentiated. That is new to the type of business that we're playing in. It has a cost. It also has some opportunities that we can talk at length about. When it comes to the capacity for Flex, we have added the capacity that we have imagination to believe that we need, plus some extra. If we are also selling that capacity out, we will be in...
We'll have some problems to deliver, of course, but we will also have to adjust positively our guidance and everything else. It's a lot of capacity that we have added online, so I don't think that we in any risk that we will that we'll sell it out.
Okay, follow up on the R&D. Did you say that you do have a larger number of products coming out?
Yes.
at the end of the process than you had anticipated?
We have a little bit more products than if you take the average for the last five years. That's not what is driving the cost, really. What is driving the cost is the clinically differentiation of the products, because we simply have to invest more in the clinical trials, and it takes a little bit longer to make those type of products.
During your, I think, 2014 capital markets day, you'd indicated that, you know, your R&D programs are set to deliver products where hopefully you could get higher reimbursements for. Have you managed to achieve that with these launches so far? Or, if not, when could we expect to see that?
That's the whole idea about the clinically differentiated products. It is, you could say, it is actually building on that statement because if you want to have a high reimbursement, you also need to be able to prove clinically that you are differentiated, that you are either saving money, or that you certainly have to show that you save money, either because people are using pure products or because they have less skin complications, or because they get back to work early on or, you know, whatever it is that you are able to prove. That's exactly the point of becoming a clinically differentiated product, that is, that we're able to claim a higher price for the product that we come.
Have you managed to get the higher prices yet?
No, we have not. We have, yes, but not on a consistent basis. The first product that we have launched, where we have a clinical proof, is the Convex product. That one, we could not wait to put to the market because we were not competitive, we thought, in the category. We needed simply to have something to work with. Now we have new products across the board. We have great products across the board. We can afford to put a product in the market now where we can also wait a little bit to get a better price, because, of course, time to market will be a little bit longer when you go for clinically differentiated product, where you need better clinical documentation to obtain a higher price.
Okay, thank you. Last question on urology. How much of the growth that we've seen in the last few quarters have come from Astora going out, meaning that they went out about a year ago, so should we expect the growth rate to slow down as that effect annualizes?
Yeah, it's. Of course we get a higher growth from the fact that they're going out. That's, of course, for us to get a fair share of what is out there. What we have done is that we have invested in surgery training last year, and that is what we are seeing the effect from now. It's hard to say what a normal momentum for us is, but maybe more around 10% than what we are seeing currently. When that is, when that comes out, I don't have a clear guidance on that.
Okay. Thank you very much.
You're welcome. All right, I just want to say to everybody who listened in, and thank you for your questions, and we'll see a lot of you in the coming periods. Thank you very much and have a great evening.
Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.